Castle noteholders propose scheme to reduce Countrywide debt

By Caroline Salls

Pittsburgh, Feb. 17 - Countrywide plc would see fresh equity capital and a substantially reduced debt level under a scheme of arrangement proposal made by a group of Castle HoldCo 4, Ltd.'s senior secured notes and senior notes, according to a news release.

According to the release, Castle Holdco 4 took on £740 million of debt in connection with its acquisition of Countrywide in May 2007.

Since that point, Castle said Countrywide has been adversely affected by the unprecedented combination of falling house transaction volumes and the severe curtailment of mortgage lending.

Although Countrywide has implemented significant cost savings, the release said the noteholder group has concluded that the current capital structure, and in particular the level of debt, is no longer sustainable, and that a significant recapitalization of Castle's balance sheet is necessary to enable Countrywide to fulfill its potential.

The noteholder group said the scheme has been developed to deleverage the business and create a sustainable capital structure; to maximize recoveries for existing lenders and noteholders based on the seniority of their claims; and to position Countrywide to expand its operations by opportunistically acquiring attractive estate agency businesses that may become available given depressed industry conditions.

The scheme would result in £75 million of additional equity capital and a reduction of outstanding debt to £175 million, including the repayment in full of Castle's revolving credit facility and related hedging liabilities, according to the release.

The noteholder group has agreed to support the scheme and to contribute additional equity capital, and Castle has received agreements in principle to support the scheme from other holders of the senior secured notes and senior notes.

Specifically, Castle said holders of 56.7% of the total outstanding senior secured notes and 53.9% of the total outstanding senior notes have agreed to support the scheme.

"Countrywide enjoys a strong market position in a sector that has suffered tremendous volatility in the last 18 months," Caleb Kramer, portfolio manager at Oaktree and one of the lead scheme investors, said in the release.

"The company requires new funding and a less leveraged capital structure to prosper in a period of economic uncertainty."

Scheme specifics

Under the scheme:

• A new holding company of Castle Holdco 4 would be created, and it would be capitalized through a number of sources;

• Holders of senior secured floating-rate notes due 2014 would convert the debt owed to them by Castle Holdco 4 into 35% of the ordinary share capital in Holdco, and new 10% senior secured notes issued by Castle Holdco 4 with a total face value of £175 million and flexibility over the timing of interest payments;

• Holders of 9 7/8% senior notes due 2015 would convert the debt owed to them by Castle Holdco 4 into 5% of the ordinary share capital in Holdco;

• A group of existing investors in Castle would provide an equity injection of £75 million in cash in return for 60% of the ordinary share capital in Holdco; and

• The lenders under a £100 million revolving credit facility would be repaid in full.

Castle said the proceeds of the new equity, together with cash on balance sheet at closing of the scheme, would be used to fund the repayment of the revolver, associated hedging debts and the costs and expenses associated with the scheme, as well as to provide working capital to fund operations.

The new equity would be provided by funds managed by Apollo, Oaktree, Alchemy Special Opportunities and Polygon.

The scheme is expected to be filed in March and completed during the second quarter of 2009.

Also under the terms of the scheme, a coupon payment due Feb. 17 on Castle's senior secured notes would be waived. As a result, the company has requested approval to defer the coupon payment, taking advantage of a 30-day grace period.

Countrywide is a Witham, England-based real estate company.

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