Implications of Billabong study: breaking the break fee limit

It’s been a challenging 18 months for Billabong International. Since early 2012, Billabong has received various acquisition and restructuring proposals and has conducted a public sale/refinancing process without a final outcome. During this time, Billabong’s financial condition has deteriorated with a series of earnings downgrades. In July 2013, in urgent need of funds, Billabong announced that it had agreed to a financing proposal from a consortium advised by private equity firm Altamont and hedge fund GSO Capital.

However, the Altamont consortium proposal was challenged in the Takeovers Panel by hedge funds Centerbridge Partners and Oaktree Capital Management, who held the majority of Billabong’s senior debt. Centerbridge and Oaktree alleged that the Altamont consortium’s proposal contained lock-up devices which were coercive and anti-competitive, and therefore prevented the acquisition of control of Billabong taking place in an efficient, competitive and informed market.

Break fees within financing agreements

The Altamont consortium agreed to provide Billabong with a US$294 million bridge facility and a commitment letter for a replacement long-term facility, which contained a US$40 million tranche convertible – subject to Billabong shareholder approval – into redeemable preference shares (RPS) in Billabong. However, the financing package included the following terms which, among others, Oaktree and Centerbridge submitted were unacceptable:

Bridge facility termination fee. A termination fee of 20% of the principal amount of the bridge facility – amounting to approximately A$65 million, or US$61 million – payable if Billabong completed an alternative financing, or a change of control of Billabong occurred and the bridge was repaid;

Make-whole premium. A mandatory repayment of the long-term facility and payment of a significant “make-whole premium” upon a change of control of Billabong. The premium in the first two years was 10% of the principal amount of the loan, plus the interest that would have been payable during the first two years; and

Convertible tranche interest rate. A 35% interest rate on the convertible tranche of the long-term facility, which reduced to 12% if shareholder approval for conversion to RPS was obtained. The RPS would convert into ordinary shares representing 25% of the fully diluted capital, and consequently shareholder approval was required for issue (Australian Securities Exchange listing rule 7.1) and conversion into ordinary shares (takeovers threshold).

Marie McDonald is a partner, and Soon Chin Yeoh is a senior associate at Ashurst in Melbourne. The key contact for this column is Michael Sheng, a partner at Ashurst in Shanghai