Imminent Eircom debt restructuring could impact CLOs

Moody's yesterday downgraded ERC Ireland Finance, the parent company of Eircom, as it expects Eircom to implement a debt restructuring exercise in the short term, after an anticipated covenant breach in the next quarter.

Any such debt restructuring could have a major impact on CLOs, as 68.5% of European CLOs hold debt from Eircom, according to CLO-i. 

Data from Markit Loan Research shows that Eircom's 8/06 second lien term loan D was one of the top decliners in the secondary loan market yesterday, falling 5.24% from 64.35 to 60.98.

Eircom reported full compliance with all its financial covenants as of 31 March, but the firm's management team publicly recognised that it is likely that the company will breach its financial covenants with its lenders within the next three months. Negotiations with shareholders are ongoing and Eircom also intends to hold discussions with its relevant lenders regarding any covenant breach, says Moody's.

Moody's states that it is unlikely that eircom will be able to avoid restructuring its balance sheet which could result in a loss for current debtholders, with any such debt restructuring being considered as a distressed exchange, and also being classified as a default under Moody's methodologies. Moody's has assigned a negative outlook on Eircom's rating, reflecting its view of Eircom's uncertain operating and financial prospects.