In the world of credit investments, where you stand in the capital structure can greatly influence your claims to a company’s assets, especially if that company faces bankruptcy. This factor becomes even more crucial during out-of-court restructurings, as seen with the Swiss commodities giant Glencore stepping into the picture.
Take, for instance, Tullow Oil. This company’s market value has plummeted from £12 billion in 2012 to just £70 million recently. It’s facing a daunting challenge: it needs to pay $1.3 billion to its senior secured bondholders in six months, while analysts predict it will only have half of that amount available by the year’s end. As a result, Tullow’s secured bonds are trading significantly lower, at around 79 cents on the dollar.
Currently, Tullow is considering “alternative options” for its financial troubles. One possibility is an “amend and extend” strategy, where bondholders would agree to longer repayment terms in exchange for more favorable interest rates.
However, any agreement will likely require buy-in from Glencore, which has a $400 million loan set to mature in 2028. Bondholders would prefer that Glencore’s loan isn’t paid off before theirs, putting Glencore in a position of power in these negotiations.
Interestingly, while bondholders are looking for solutions to avoid Tullow’s bankruptcy, Glencore might not have the same urgency. Unlike the fund managers in London and New York managing senior bonds, Glencore has firsthand experience operating upstream assets, including marketing Tullow’s oil output. They could potentially even take over Tullow’s stake in its joint venture with the Ghanaian government if necessary.
While Glencore likely would prefer that Tullow doesn’t fall into bankruptcy, the company’s projected free cash flow of $2.4 billion this year gives it the flexibility to play hardball. In a scenario where negotiations turn tense, bondholders may find it challenging to oppose Glencore’s advantageous position, highlighting how control can shift unexpectedly among over-leveraged firms.