Rackspace’s ($RXT) Coercive LME: The Art of Forcing Participation
Breaking Down the March 2024 LME and Post-Restructuring Debt Stack
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The current playbook for distressed credits is as follows: get a group of large lenders to back an aggressive priming transaction, offer them better terms, and force everyone else to fall in line.
Rackspace Technology, Inc. ($RXT) ran the playbook to perfection. Secure majority lender support, prime the rest, and leave holdouts with two options: take worse terms or get crammed down.
Management touts the headline wins: principal reduction, interest expense trimmed, better liquidity. But the market isn’t buying it. Just look at where the debt trades:
$1.6bn First Lien, Second Out (FLSO) Term Loan struggling in the 50s
Legacy “secured” debt effectively subordinated and left for dead
Yet, lost in the noise of this financial engineering, the core fundamental challenges remain. Sure, Rackspace still has scale: $2.8bn revenue, 117,000 customers, etc. The strategy of helping enterprises navigate multi-cloud complexity sounds compelling on paper.
But it’s not 2010 anymore. Enterprise IT teams who once needed hand-holding have either migrated to AWS or realized they don’t need Rackspace at all.
When you’re at ~10x leverage with a business in structural decline, creative liability management can only buy so much time. For credit investors and restructuring pros, the Rackspace transaction exemplifies how modern LMEs really work. The key questions now include:
Where’s the fulcrum security in this new stack?
Did the supporting lenders actually improve their position?
What’s the real value of this debt at current levels?
Let’s find out...