Brazil’s Tonon begins exchange offer for 9¼% notes to avoid insolvency

By Angela McDaniels

Tacoma, Wash., June 15 – Tonon Bioenergia SA subsidiary Tonon Luxembourg SA began an exchange offer for its $300 million 9¼% senior notes due 2020, and the parent company raised the possibility of a court-supervised insolvency proceeding should the offer fail.

Holders who tender prior to 11:59 p.m. ET on June 26, the early expiration date, or prior to 11:59 p.m. ET on July 13, the expiration date, and do not validly withdraw their tender prior to 11:59 p.m. ET on July 6, the withdrawal deadline, will receive $1,000 principal amount of new step-up senior notes due Jan. 24, 2020 in exchange for each $1,000 principal amount of existing notes.

The issuer will not pay accrued interest on the existing notes exchanged for new notes on the settlement date for the exchange offer; however, interest on the new notes will accrue from Jan. 24, 2015, according to a company news release.

The expiration date may be extended to a date that is no later than Aug. 24.

The new notes will have substantially the same terms as the existing notes except for interest payment terms and certain restricted payments covenants.

The new notes’ interest rate will be 7¼% from Jan. 24, 2015 through Jan. 23, 2017 and 9¼% from Jan. 24, 2017 through the maturity date.

The issuer will have the option to defer cash payments of interest on the new notes. Interest payments due on or prior to Jan. 24, 2017 will be deferrable at the issuer’s sole discretion. For payments due after Jan. 24, 2017, the issuer may defer the payments to the maturity date if, after giving effect to any such payment, the amount of cash on its balance sheet as of the last day of the fiscal quarter immediately preceding that interest payment date would be less than R$100 million.

The exchange offer is conditioned on, among other things, the receipt of tenders for at least 95% of the notes.

The company said the holders of more than 80% of the notes have entered into a lock-up agreement, committing to take part in the exchange offer.

The company said the failure to reach an acceptable threshold in the exchange offer would leave it in a “precarious liquidity posture,” potentially impacting operations and requiring a court-supervised insolvency proceeding.

Consent solicitation

The issuer is also soliciting consents to amend the existing notes and the indenture governing the existing notes.

The proposed amendments would eliminate or waive substantially all of the restrictive covenants, eliminate some events of default and modify or eliminate certain other provisions.

The proposed amendments require the consent of the holders of a majority of the outstanding notes.

Missed interest payment

Tonon Bioenergia said it intends to make the interest payment on its outstanding $230 million 10½% senior secured notes due 2024 that was due on May 14 prior to the expiration of the applicable grace period.

Loan

In connection with the exchange offer, the issuer will also borrow up to $70 million from some institutional investors and noteholders, including certain funds managed by Gramercy Funds Management, LLC.

The loan will be unconditionally guaranteed by Tonon Bioenergia and its parent Tonon Holding SA and secured by a fiduciary lien over the industrial equipment of the company’s Santa Candida and Vista Alegre mills and also a mortgage over the land of the Santa Candida and Vista Alegre mills.

The loan will bear 12% interest and mature on May 14, 2019.

The lenders will also enter into an agreement that will provide for a distribution of 20% of adjusted EBITDA in excess of R$475 million generated in any fiscal year beginning with the fiscal year ending March 31, 2016 and ending in 2019, if not terminated prior to such date.

The proceeds of the loan will be used to repay short-term debt and for general corporate purposes.

The information agent for the exchange offer is KCC (917 281-4800 for brokers and banks or 888 733-1431 for all others).

Tonon Bioenergia is a sugar, ethanol and energy producer based in Sao Paulo, Brazil.

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