The Realogy mess, explained

The latest blog from the paper I love to hate, The New York Times.

Realogy is the former real estate services arm of Cendant, and it owns such venerable real estate brands as Century 21. Of course, given the state of the housing market, the company is quite troubled and is probably now deeply insolvent. Mr. Icahn’s complaint alleges that, calculating back from the value of its debt, Realogy’s liabilities now exceed its assets by anywhere from $3 billion to as much as $7.3 billion. In addition, based on a comparable-company analysis, Realogy’s liabilities exceed its assets by anywhere from $3.3 billion to $6 billion.

Nonetheless, because of the covenant-lite nature of its debt and the pay-in-kind, or PIK, toggles on some of it, Realogy is not yet in a position where it must file for bankruptcy.

Caught in this trap, but still in control of Realogy, Apollo has launched a clever exchange offer. Realogy has senior secured debt under a credit agreement of approximately $4.445 billion. It also has $1.7 billion in principal aggregate amount of 10.15 percent senior cash notes; $875 million in principal aggregate amount of 12.375 percent senior subordinated notes; and $550 million in principal aggregate amount of so-called toggle notes. The senior notes and the toggle notes are unsecured and rank pari passu, while the other notes are unsecured senior subordinated notes, meaning they rank below the senior notes and toggle notes in priority.

On Nov. 13, Realogy announced an exchange offer open to all of these notes: Realogy would exchange second-lien notes in the amount of $500 million for up to $1.2 billion in the prior outstanding notes. The exchange offer is arguably coercive, since Realogy is offering 36 cents on the dollar for the senior subordinated notes, 50 cents on the dollar for the senior notes, and 47 cents on the dollar for the toggle notes. These amounts are significantly above (more than double) the value at which the notes are currently trading in the markets.

Moreover, the newly issued notes will rank in priority above the pre-existing notes. So the current holders are incentivized to tender or otherwise be moved down the hierarchy in payment for their notes. The new notes will mature on April 15, 2014, the same date as the toggle notes and the senior cash notes, but a year before the senior subordinated notes. Guess which notes Apollo owns? Yes, Apollo owns $69 million of the senior subordinated notes — the notes that stand to benefit the most from the exchange (at least according to Mr. Icahn).

Most importantly, according to the hierarchy of exchange, if enough of the senior subordinated notes and senior cash notes tender, then none of the toggle notes will be exchanged. High River holds the toggle notes and, not surprisingly, it is not happy about being moved down the payment chain.

As our own Floyd Norris detailed in his article last week, the noteholders here are a bit stuck – there are no fiduciary duties to debtholders under Delaware law, at least in the zone of insolvency. This leaves only contractual terms of the indenture for a claim. Mr. Icahn has sued claiming that the exchange is 1) a violation of the indenture for the toggle notes and 2) he has also claimed the exchange is a fraudulent transfer.

There’s more, obviously, so if you’re interested, read the whole thing. If not (he said, bowing to a few commentators on this blog) don’t.

1 Comment

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One response to “The Realogy mess, explained

  1. mdh

    I found it rather difficult to to follow the shannanigans discussed above, perhaps you could share with your readers this alternative explanation of the sub prime process….