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Liquid assets

We like the availability of consumer credit around here but we also like the availability of strong drink, and therefore find it extremely gratifying that securitisation technology can be put to work in this regard.

Ferovinum, a unique business which provides working capital and inventory finance to the drinks industry, announced a $550m securitisation this week with Pollen Street Capital and an unnamed “leading investment bank”. Linklaters provided legal advice, with PWC also advising.

One wonders why the bank in question doesn’t want to be named — perhaps SPG doesn’t want a puritanical CEO to know they’re out there securitising alcohol? — but come forward! It’s a cool deal!

It’s not just a case of quirky underlying. It’s a genuinely complex and interesting structure, and transformational for the business — it replaces an existing UK asset-based lending facility with NatWest, Barclays, Shawbrook and BCI Capital, which was £109.5m committed (£94.5m senior plus £15m committed mezz).

BCI Capital, which typically backs early stage fintechs, was here from the early days, joined by the banks in 2023.

So it’s a massive step up in funding capacity, and it’s also a massive step up in jurisdictional scope and flexibility, which we will come on to.

Ferovinum co-founder and CEO Mitch Fowler is a former physical commodities trader and financier who’s worked at Macquarie, ICBC and a few other finance shops, and, at one level of abstraction, the business isn’t so different from the capital provided to finance, for example, shipments of crude oil — banks take physical ownership of inventories in transit, freeing up the capital of the commodity trading firms.

Apply this to the drinks industry, and the principles remain the same — take physical ownership of an asset as it moves from distributor or producer to ultimate offtaker — but the structure of the industry is very different, with a fragmented universe of small drinks producers and a more limited group of offtakers, for example supermarkets and pubcos.

Ferovinum’s self description says “our platform transforms supply chains and revolutionises inventory financing for innovative wine and spirit producers, distributors and merchants”.

These businesses may see a great deal of their capital tied up in stocks, but struggle to access inventory financing. The regional corporate relationship managers for High Street lenders probably aren’t pitching bespoke alcohol-backed asset-based lending agreements, let alone physical inventory financing.

So the structure of the new securitisation is both receivables-backed (the forward sale agreements to ultimate buyers) and physically-backed (Ferovinum owns the inventory itself through the funding structure).

Securitisation of physical inventory is doable, but it’s complicated, and alcohol attracts large tax issues — Irish securitisation law has a tax carve out for some kinds of physical asset, but wine is not included, for example. Inventories in this case are also often in transit, moving across jurisdictions and hard to enforce on if required.

This is a legit securitisation, non-recourse, compliant with the Securitisation Regulation (under the esoteric asset data templates!), risk retention and the rest, rather than a structured asset-based loan

Jurisdiction has also added a lot of complexity to the deal. The point, for Feronvinum, is to fund expansion to the US, EU and latterly Australia within the deal structure, meaning layers of SPVs and trusts across multiple geographies, and complex licensing and tax issues to navigate — even aside from the need to act as an owner, exporter or importer, alcohol sales are generally highly regulated wherever they take place and subject to bespoke tax regimes.

Another clear difference between the commodities world and the drinks business is valuation.

There are reasonable price benchmarks for a tanker full of crude or a truckload of soybeans, but it’s harder to value drinks. Those deep in the business have a ton of data — and Ferovinum is deep in the business — but it’s harder for your average credit investor to see what the price of a shipment of unwanted canned margaritas might be on the secondary market.

Ferovinum therefore provides pricing info to assess the borrowing base of the facility, checked regularly by an external appraiser — and has done test runs on enforcing and selling inventories to check the mechanics.

Step back, and this deal is very much about front-loading the hard work. Other capital solutions (add more ABL facilities country-by-country for example) may have been available, and easier individually, but this transaction reflects deep thinking about exactly which financing instrument is right for this business, and, because one didn’t exist yet, creating it from the ground up — in a format that can be expanded, retranched or syndicated more broadly in future.

For an early stage startup (Ferovinum did its series A last year) it’s a big commitment of time and management focus, even with the help of advisors to get something like this off the ground. But it’s also going to be a big help for the next equity round. “We’re poised for global expansion” is a nice thing to say, but it’s a lot more convincing with a $550m multi-currency multi-jurisdictional securitisation to back it up.

There aren’t a ton of businesses likely to replicate this particular structure or come through on the follow, but, as one participant in the process put it, “if you can securitise booze you can securitise anything”. Cheers to that!

Case for the defence

The hype is building for the defence industry, with financiers in all asset classes wondering how they can be helpful to and/or get a piece of the presumed boom to come in European armaments and defence spending — maybe it’s LBOs on defence contractors or their supply chain, project finance for airbases or docks, development lending for barracks or asset-based lending on machine tools.

This hoped-for boom comes just as one of the biggest privatised defence deals in European history is in the midst of an acrimonious unwind.

This is Annington Homes, possibly Guy Hands’ best trade (and one of the most expensive privatisations in UK history, the subject of two National Audit Office reports and a Parliamentary Committee).

The business came into being in 1996, with the privatisation of the Married Quarters Estate (the property portfolio, constituting more than 55k homes, where married soldiers were housed) for £1.662bn.

To be fair, neither Hands nor the MoD knew they were close to the beginning of epochal run-up in UK property prices, in which HPI more than quintupled over the 28-year period when Annington owned the estate, but in hindsight being levered long the UK property market in massive size turned out pretty good for Hands.

The merits and demerits of the whole thing are covered in exhaustive detail elsewhere (here is a good place to start), but we’re interested in what’s been happening since, at the end of a legal battle over the rent paid on the properties, the MoD bought the MQE back.

The MoD paid £6bn, substantially below the mark on Annington’s balance sheet, but this was still transformational for the Annington business, which was left with £325m of property outside the MQE and a promise of £55m transferred back by the MoD.

After the sale of the £6bn portfolio, Annington no longer needed more than £3bn in debt outstanding, so it redeemed two bonds, and launched a tender on several others, offering a reasonably attractive Gilt spread.

But this still translated into cash price of 63.721 for the 2051s, including early tender premium, and clearly some funds felt there was an angle to play here — if Annington’s sale of MQE could be construed as a cessation of business, then it might be possible to call an event of default and get par.

Annington specifically contemplated this risk, and provided a Q&A comment to noteholders laying out why it did not believe the MQE sale qualified, arguing that it wasn’t a cessation of business (because Annington was continuing as a property investor) and that the sale was not materially prejudicial to bondholders, a further condition required to trigger the event of default.

9fin’s Dodie Tinwell looks further at these claims here, and at broader cessation of business claims, including Essity, Solvay and Mobico here, but the gist is — the sale of MQE might well count as “substantially all” of the business, as the general assumption has been that the level is greater than 75% of existing business (though this hasn’t been tested in court).

Materially prejudicial, though, is much more challenging to claim — the bonds are still outstanding, Annington is very much still solvent, and indeed has £1.4bn of spare cash on balance sheet, more than enough to pay down the entire debt stack.

In any case, the bondholders formed an Ad Hoc Group with Milbank advising, and sought to replace the trustee, proposing GLAS, noted for its actions in contentious situations. But Annington countered that, if there was a trustee replacement to be voted on, it had a preferred candidate for replacing BoNYM, and it was Law Debenture Company.

Votes were arranged on this matter for Monday but, before the votes, Annington stated it did not regard the resolution of the noteholders as valid, and would therefore, irrespective of the outcome of the votes, not replace the trustee.

In other words, there’s a big fight brewing. It’s not clear to us how the trustee move from the bondholders would get over the question of material prejudice, but presumably Milbank has a few moves left, and some smart people (the FT names DE Shaw, Attestor and Sona) think there is an angle to play — and with nearly 40 points on the table, they’re going for it.

Is it always the receivables?

Since the collapse of Stenn there’s been a certain nervousness around receivables deals. Not from the banks that took a bath on Stenn necessarily — I imagine certain DD procedures have been reviewed, but there’s no evidence they’ve cut down their lending.

But still, when news broke this week that privately held UK energy group Prax had entered insolvency proceedings, some eyes were drawn to the group’s large receivables securitisation. I even had a broadsheet journalist reach out to me and use the word “Greensill-esque”.

That’s not such a great leap — some of Greensill’s worst lending was to Sanjeev Gupta’s GFG Alliance companies, a privately held collection of unloved industrial assets with a sprawling and complicated corporate structure, an individual owner and a penchant for rapid debt-funded acquisitions, just like Prax.

The Prax receivables securitisation was financed by HSBC, Citi, JP Morgan, Royal Bank of Canada and NordLB, according to the company’s accounts, and it was large — $518m-equivalent as of the last annual reporting date (February 2024), the biggest single wholesale debt line item on Prax Group’s balance sheet.

But not all receivables facilities are created equal. The buyers of wholesale oil-related products are somewhat different to the motley collection of import-export businesses (or imaginary businesses) in the Stenn facilities. Think supermarkets, fuel retailers, industrial customers.

When you’re buying petrol straight from the refinery, you’re probably a pretty serious player (and it’s a lot easier to spot check receivables quality with a small number of large customers).

The more plausible trigger for Prax’s difficulties is likely to be the corporate debt.

Prax approached the market for a high yield bond in 2022, which would have refinanced out some pricey loans from Sculptor and Nomura principal finance — there’s a piece for 9fin subscribers here.

But it was 2022, a different time, and even some pretty good deals struggled to get done. A first time energy issuer and an aggressively risk-off market was not a good combo, and after the roadshow the deal sank without trace.

The debt was eventually refinanced in 2023, via what Mayer Brown describes as a $300m private credit facility, what Prax describes variously as “secured bank debt” and “two term loan facilities with three international credit investors and a bank for £90m and €171m”.

Exploring Prax’s disclosures a little turns up some of the funds involved — Sona Asset Management, Orchard Global, Chimera Investment and NB Special Sits, as well as HSBC from the bank side. It’s hard to back out the terms of the debt from the available disclosures (we had a go) but the debt is roughly $275m and paying roughly $55m a year in interest for a simple 20%.

There are currency calculations, carrying values, potential amortisation and OID to consider but it’s probably in that ballpark. In other words, this is not “secured bank debt”, it is very much in special situations territory.

Prax used the cash for an acquisition spree.

In June 2023 it bought Hurricane Energy, a UK-based E&P firm, while in November 2023 it bought German retail distribution chain OIL! Tankstellen Gmbh, and in December 2023 it signed an agreement to buy a stake in Total’s 36.36% stake in National Petroleum Refiners of South Africa refinery.

Early in 2024, it signed an agreement late last year to acquire a 37.5% interest in the PCK Schwedt Refinery in Germany from Shell, and then in June 2024 it signed an agreement to buy TotalEnergies’s interests in the Greater Laggan area North Sea gas fields.

There are no public details of the covenants around this debt, but given the situation and the approximate rates, we’d assume security over anything that isn’t nailed down and a fulsome covenant package, probably including minimum liquidity requirements — which may have been the proximate trigger for the filings (liquidation for the Lindsey refinery entities under the supervision of FTI Group, administration for the group under Teneo).

As 9fin’s Bianca Boorer reports, everyone is getting lawyered up — the fund creditors, now an Ad Hoc Group have appointed Kirkland & Ellis, the securitisation banks Clifford Chance.

As with any administration, much more information should be coming out, with a statement of affairs and further info on the future of the business (the Lindsey refinery is a UK strategic asset, one of a handful of UK refineries keeping the nation driving).

But the situation looks much more like an age old tale of acquisitions funded by eyewateringly expensive debt, rather than a glitch in the securitisation.

Perhaps if Prax had got its bond away in 2022, we wouldn’t be facing this situation three years later — the loose covenants and tighter pricing would have given the company more headroom, and any creditor negotiations might have been earlier and more consensual, rather than a straight dive into administration.

But that’s markets for you. UK shopping centre group Intu was on the cusp of a rescue rights issue just before Covid; the deal collapsed, the company is gone, and the shopping centres are owned by bondholders. BC Partners pulled a loan refi for plastic shed group Keter around the same time as the Prax roadshow; senior creditors finally took the keys in early 2024. Older markets heads than me can probably cite many other stories of companies which could, in happier times, have escaped their ultimate fates.

Sometimes when syndicate and origination say “do the deal today” it’s self-serving advice, but sometimes that’s what makes the difference between survival and collapse.

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