Aston Martin's bondholders had every vote, and nothing to vote on

On July 22nd, Aston Martin raised £450m of new senior secured debt from funds managed by HPS, with a £100m delayed draw, priced at SONIA plus 6.75% and maturing in July 2031, two years beyond the notes. A noteholder group holding more than half of the roughly $1.8bn-equivalent of notes had previously organized under a cooperation agreement, advised by Akin Gump. Then, on July 21st, a bondholder letter sent through Quinn Emanuel demanded the company stop the transaction within 48 hours; the company announced the financing as closed the next day.

Why didn’t the concerted efforts of holders halt the transaction? 

A cooperation agreement is a voting instrument. It binds its members to one another - to hold, to vote together, to decline side deals - and a group that controls enough of an issue can block anything that needs holder consent: an uptier, an exchange, a consent solicitation, a scheme. 

What it can't do is manufacture a vote where the documents don't require one. This transaction required none. There was no amendment and no consent solicitation, because nothing about the notes changed. The company raised new debt and granted new security using capacity the notes documentation already provided, and that isn't a decision holders are entitled to make - because they already agreed to the terms back when the notes were issued.

The difference between a share pledge and security over assets is a key aspect to understand. The notes keep their pledge over the shares in Aston Martin Lagonda Limited - the company has confirmed that. A pledge over shares is ownership of a company, not ownership of what's inside it. Enforce it and you take the shares, and everything beneath them, subject to every lien granted below. A new lender that takes security over assets a level down is paid from those first in an enforcement. 

What changed is what the pledge is worth, not whether it exists. You might get the keys to the business but the lenders with the mortgage over the real estate already changed the locks on the building.

Before you take comfort in a cooperation agreement, ask what the issuer can do without asking you. If the answer includes raising senior secured money against the assets of subsidiaries your pledge doesn't cover, the cooperation agreement protects nothing that's in play. 

Blockers are negotiated at issuance; cooperation agreements are organized in distress, and by then the capacity has already been priced into someone else's term sheet. 

These notes included a J.Crew blocker protecting Material Intellectual Property, but that only applies to block a certain type of asset transferred to a certain type of entity - it’s not a panacea. 

The two questions to consider for the rest of your portfolio: what is included in your collateral, and does the borrower have other assets it could pledge if it needed to? Depending on the answer, debt capacity could be the only thing standing between your borrower and a lifeline that sinks the value of your debt.

We’ve created a mini-course on the situation that describes the important concepts and distinctions from this situation: 

• The difference between an Unrestricted Subsidiary and a non-Guarantor Restricted Subsidiary;
• The difference between a Permitted Lien and a Permitted Collateral Lien;
• What the borrower is actually required to report to you - and what it isn’t.

To gain access, make a cup of tea, click this link, and get ready to spend just under an hour gaining clarity on this situation while also preparing for potential future situations just like it.