Northbridge Retail: new money, priming and a credit fund on the register
Northbridge Retail Group has a EUR 120m term loan maturing 2028, on which your bank holds EUR 38m, and a EUR 30m RCF maturing next September, fully drawn with your share at EUR 9m. The bank also has a EUR 5m FX forward showing EUR 1.8m mark-to-market against the company. EBITDA has fallen from EUR 38m to EUR 24.5m over two years, net debt is EUR 150m, the December covenant test is 4.5x, and EUR 15m of amortisation falls due in March with EUR 8m of cash on hand. Management proposes to sell and lease back two distribution centres for net proceeds of EUR 42m, the sponsor will inject EUR 10m of new equity, and the company asks for a EUR 15m super-senior new money facility, a covenant waiver and a two-year maturity extension. A credit fund has bought 25% of the term loan at 65 and is pushing for a liability management exercise. Four other banks hold a further 30%.
1. How do you approach classification and provisioning for this exposure, and what evidence drives the conclusion?
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Start with the default and forbearance definitions
- Days past due are not the issue; the question is whether the borrower is unlikely to pay without concessions. EUR 8m of cash against EUR 15m of March amortisation and a covenant test at 4.5x on 6.1x actual leverage is a strong indicator that a concession is needed.
- Any amendment granted because of financial difficulty is forbearance. Forbearance is a classification event in its own right, not a bookkeeping label applied after the fact.
Stage assessment
- Significant increase in credit risk is clearly present: leverage up from roughly 3.9x to 6.1x, EBITDA down 36%, RCF fully drawn, refinancing risk concentrated in the next twelve months. Stage 2 applies at minimum, and stage 3 applies if the conclusion is that the borrower cannot pay without the proposed restructuring.
- Do not let the sale and leaseback disguise the position. Proceeds of EUR 42m reduce debt, but the company becomes a tenant, adding rent of perhaps EUR 3m a year, which lowers EBITDA and adds a fixed obligation. On adjusted numbers the leverage improvement may be far smaller than the headline.
Build the ECL properly
- Probability-weighted scenarios: sale and leaseback completes plus equity injection plus new money; sale completes but equity does not; neither completes and enforcement follows. Assign probabilities and document the basis.
- Recovery analysis needs an independent valuation of the distribution centres, an enterprise value for the retail operation, costs of enforcement and the effect of the new super-senior debt priming the term loan. Our EUR 38m plus EUR 9m RCF plus EUR 1.8m forward exposure must be assessed together, including set-off and close-out rights under the ISDA.
- The FX forward should be marked and considered for termination and netting if default is likely; leaving an unhedged mark-to-market to grow is an avoidable loss.
Governance
- Present the case to the watchlist or special assets committee with a clear recommendation, the forbearance flag, the staging decision and the provision. Classify the RCF and term loan consistently unless there is a documented reason not to, and record the rationale for any difference.
2. Do you support the EUR 15m super-senior new money facility? What analysis and conditions drive your answer?
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Test whether new money is actually needed
- Build a 13-week cash flow and a twelve-month liquidity bridge. With EUR 8m cash, EUR 15m of March amortisation and negative free cash flow, the gap is real, but the question is how much: if the sale and leaseback and equity injection both land, the requirement may be EUR 5-8m rather than EUR 15m. Over-funding a distressed borrower is how lenders become equity holders by accident.
- Check what the new money pays for. If it funds restructuring costs, rent deposits and trade credit support, that is defensible. If it funds working capital leakage in a loss-making store estate, it buys time for a liquidation that the lenders will pay for twice.
Compare with the alternative
- Estimate recovery in enforcement today, including the value destroyed by a retail insolvency, versus recovery under the restructuring. If enforcement recovery is close to the restructured recovery, new money adds risk without reward.
- Assess priming: our EUR 38m and EUR 9m would be subordinated to EUR 15m of super-senior debt plus fees. That is acceptable only if the new money is the marginal amount that unlocks EUR 52m of deleveraging from the asset sale and equity, and if the sponsor money goes in first or simultaneously.
Conditions to attach
- Sponsor equity injected before or at the same time as the first new money drawdown, documented and irrevocable.
- Sale and leaseback contracted with a credible buyer, with proceeds swept to the term loan and not recycled into the business.
- New money sized to the tested liquidity gap, with a 3% arrangement fee, a roll-up or payment-in-kind option, security over unencumbered assets and a board observer or independent monitor.
- Milestones on store closures, rent renegotiations and cost savings, tested monthly by an independent business review; a cash sweep and restrictions on payments to shareholders and related parties.
- Clear intercreditor arrangements with the existing syndicate, including turnover and pro rata sharing so no lender can take the new money exclusively without sharing the benefit.
Recommendation
- Support new money only at a reduced size, with the sponsor money first and the priming clearly documented. Otherwise vote for the asset sale and equity injection without new money and let the maturity extension be earned by deleveraging.
3. The credit fund wants an aggressive liability management exercise. How do you protect the bank's position and what are your realistic options?
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Understand the threat
- A 25% holder cannot drag the syndicate on its own, but it can block a 66 2/3% consent, which gives it leverage to demand a discount or an uptier. The bigger risk is a priming or uptiering transaction executed with a majority that excludes us, leaving our EUR 38m subordinated without consent.
- Check the documentation now: consent thresholds for incurring super-senior debt, transferring assets, extending maturities, releasing guarantees and amending pro rata sharing. Identify which of our rights require unanimous consent, because those are the only real defences.
Options
- Join the negotiation early and shape the transaction rather than react to it. A single holder of 20% of the term loan, plus the RCF and hedging exposure, has real influence if it engages before the credit fund builds a blocking position.
- Build a blocking stake: buying EUR 15-20m at 70-75 would take us above one third of the term loan, depending on the final capital structure. That uses capital and concentration that credit must approve, and the price may rise once the fund knows we are buying.
- Sell: our EUR 38m at 65-70 would crystallise a loss but removes further downside and frees the single-name limit. Compare this with the expected recovery under the restructuring before deciding.
- Negotiate a protected position: new money or a partial cash pay-down in exchange for consenting to the extension, with anti-priming language and a most-favoured-nation clause protecting us if better terms are offered to others.
Conduct and controls
- Be careful with information. If we join a creditor group, impose confidential information protocols, do not trade on inside information and document every decision. Restrict the FX forward separately: consider terminating and netting rather than leaving it exposed to a restructured credit.
- Avoid signing a lock-up before the new money, asset sale and equity terms are fixed; lock-ups signed early are how lenders end up bound to terms they later regret.
Recommendation
- Engage immediately, seek a seat at the table, and set a formal deadline of 30 days. If no agreed restructuring emerges, sell the position rather than drift into an uncontrolled liability management outcome.