African telecom company Smile Telecoms is seeking lender approval for the provision of around $51 million of shareholder cash, asset sales, and an early maturity date for the senior ECA debt, under its restructuring plan, sources tell TXF. 

The maturity on the senior debt will be brought forward to 31 March, 2022 from 2024. The group, which is experiencing severe cash flow issues has already been provided some of the funds as an emergency measure. Smile has had a negative cash position since December 2020, with considerable amounts due and owed to trade and financial creditors and is expected to run out of cash completely in June.

The purpose of the plan is to enable the incurrence of new super senior funding to a group entity referred to as LuxCo in order for it to be lent on to stabilise the group’s financial and operational position. The plan, which comes under Part 26A of the Companies Act, would also enable the group to participate in a controlled asset disposal and sale process for stakeholders.

Group debt

The group’s existing debt structure includes senior facilities, which are English-law governed, comprising: 

• A $65 million Exportkreditnämnden, or EKN supported facility agreement from the African Export-Import Bank (Afreximbank); and 
• A $59 million Office national du ducroire or ONDD (Belgian export credit agency) supported facility.

There is also a $20 million term facility agreement with the IDC, a $50 million Development Bank of Southern Africa, or DBSA, term facility, a $14.3 million Government Employees Pension Fund, or GEPF, term facility and a $35.7 million convertible facility. The preference share subscription agreement with IDC allows a subscription of cumulative redeemable convertible preference shares at $1 each in the company for an amount of up to $40 million.

As of 15 February 2021, Smile had $262.32 million outstanding under the following facilities:

• Total ECA loans: $103,215,654.
• IDC loan: $31,420,172.
• DBSA Loan: $29,870,731.
• GEPF convertible facility: $55,408,703.
• GEPF term loan: $9,341,975.
• IDC preference share subscription agreement: $33,064,23.

Creditors will vote in three separate “classes” on 12 February. The three creditor classes consist of the shareholder as super senior lender, senior lenders (including Industrial Development Corp of South Africa, or IDC, in its capacity as senior lender), and IDC as the subordinated creditor in respect of its redemption rights under a preference share subscription agreement.

Senior lenders are understood to be supportive of the restructuring plan with the exception of IDC which is holding out against it. Crucially a Part 26A Plan allows for the cross-cram down of dissenting creditor classes if the threshold of 75% of lenders by value fail to give their consent.

The plan

The group’s Middle Eastern sponsor, Al Nahla, is already a lender to the group, having lent an interim amount of $16.7 million on a super senior basis. This forms part of the total consideration of $51 million. The debt has a maturity date of 31 December 2021, and the interest rate will be 9% payment in kind capitalised semi-annually.

In addition to this, the sponsor has made loans in the form of subordinated loans of up to $36.6 million between 2016 and 2020. Further urgent funding of $5.8 million was provided on an unsecured basis in December 2020. Under the proposal, and with creditor consent, this funding will become super senior debt, and will therefore rank senior to the ECA facilities.

The maturity date for the senior facilities is to be brought forward to March 31, 2022, and consents are sought to waive all existing breaches, actual and potential defaults, and mandatory redemption events under the senior facilities agreement and the IDC preference share subscription agreement necessary to approve the plan.

The plan also involves the immediate sale of the group’s assets in Tanzania, Uganda, and the DRC by April this year, and the sale of the more viable Nigerian business in the medium term. Analysis conducted by Grant Thornton indicates that if the plan is implemented, there would be a return to senior ECA lenders of around 93.4%.

The alternative to the plan is an insolvent liquidation. In a “low case” scenario there would be no return to the senior or super senior lenders. In a high case, there would be a full return to super senior creditors with just 4.8% to senior ECA creditors. If the company’s shares in Smile Nigeria were sold, this would realise $25.3 million for the company.

Company difficulties and lender negotiations 

Smile has been unable to make payment obligations under its senior facilities agreement since January 2018 and has also failed to perform under the share subscription agreement. The group is in a precarious position as it may soon lose regulatory licenses. 

The company was badly affected by the devaluation of Nigerian currency by 50% in 2016 causing the group to miss a dollar revenue milestone under the DBSA term facility agreement. This resulted in the suspension of services by counterparties, network shutdowns, and competitor pressure via aggressive price discounting. 

Following an unsuccessful request for the drawdown of funds to Afreximbank in 2017, the company then engaged with its lenders with a view to an amend and extend the terms of the senior facilities. In July 2019, a proposal in principle was agreed. This included amongst other things, extending the final maturity date of each of the senior facilities to 15 December 2026 and an agreement by shareholders to inject funds into the company or the borrowers under the senior facilities, by way of shareholder equity or subordinated loans, in an amount sufficient to cover the anticipated cashflow shortfall of up to $90 million in any financial year until 31 December 2025. 

However, the lack of a coordinated creditor committee and the long and complex administrative and credit committee approval processes of the lenders which are mainly development banks and a state-owned public investment fund meant that Smile’s financial position deteriorated before the terms of the proposal could be approved. Then on 27 July 2020, Afreximbank unilaterally served an acceleration notice as facility agent under the ECA Facilities Agreement.

Smile’s majority shareholder then decided to provide money throughout 2020 on a super senior basis as a matter of urgency, as described earlier. Further delays were caused by the resignation of the company’s financial advisor, TAP Advisors, in January owing to a disagreement over professional fees. However, the senior lenders finally formed a creditor’s committee the same month allowing the launch of the current restructuring plan.