Friday Workout - Acceptable in the 80s; Constructively Dismissed; Pivot Tabled
Chris Haffenden
•12 min read
There was more than one update report this week creating a lot of nervousness and negative news headlines. While the incumbent at no.10 is staying put for now, Saipem management are feeling less secure, with a €1bn plus negative equity hole to plug (more later). Not only did Saipem bonds plunge into the 80s this week, but several names on our watchlist followed suit as market anxieties for more challenged credits intensified. We will drill into this and explore other wells of interest, in this week’s Friday Workout.
Those entering this decile this week included Talk Talk, Iceland, Consolis, Ideal Standard, Novafives, and Flora Foods. Time to assess which names might be acceptable in the 80s?
Whether this bifurcation of credit was driven by the troubles experienced in some of the racier deals last week, or related to the volatility in other risk assets, as HY spreads widened back to November 2020 levels is moot. Or are funds making room for a supermarket swoop?
While single-B deals are still being launched, their pricing is more at sixes and sevens, with more capital structure and cross-currency gymnastics needed to secure safe dismounts for lead arrangers.
Last week’s workout cautioned about the Covis Pharma variant, which proved particularly virulent for their arrangers, causing big headaches, sweats, and mass anxiety.
Our TLDR for the Apollo-owned pharma roll-up: aggressive EBITDA addbacks, generics and patent risks, room for value leakage, uncapped PIs, and in distressed scenarios bondholders could lose their collateral via an asset transfer. After publication, we learned late last Friday that the $475m SSNs were pulled in favour of the loans, then offered at a lowly (and loss making) 93 OID from 99, with the Barclays-led group stuck with $300m of the second lien.
Ion Group’s Andrea Pignataro will have to make do without a $100m dividend, after Ion Analytics $850m bond deal was pulled hours earlier (it was initially halved) citing poor capital market conditions. After upsetting CS, UBS is AP’s bank of choice. But unlike Barclays, UBS wasn’t caught out, it wasn’t backstopping the deal to part-fund Ion’s Backstop acquisition that concluded last December.
This makes it the fourth time that an ION deal has been pulled – as our CEO Steven Hunter quipped this time last year: “It’s ironic that a business so closely linked to capital markets has been unable to correctly gauge credit investors’ appetite in recent years.”
Constructively dismissed
I wonder what Andrea thinks about Saipem, would he have a PowerPoint Playbook?
It’s a business with long-standing relationships with key customers offering a wide range of services, including feasibility, drilling, pipelines and construction services for terminals and other oil & gas facilities. A one-stop drill shop for all the energy industry needs.
But as we all know, digitalisation, and the energy transition, are proving transformative for the O&G industry and are shaking up the old order of service providers.
A number of drillers such as Seadrill and Transocean went through restructurings in 2020 and 2021. But Saipem seemed immune, managing to get a seven-year EHY deal away at 3.125% last March, retaining an upper BB rating, despite a sharp slowdown in E&P activity and posting negative EBITDA, it had recorded €1.2bn for FY19.
Management unveiled their strategic plan in their capital markets day in late October. Despite widespread uncertainty whether E&P spending would recover, they projected 15% CAGR in revenues to 2025. One analyst suggested on the call this was “highly ambitious” and another said the €2.2bn FY22 net debt (from €1.7bn) “clearly raised a few eyebrows this morning.”
The strategic plan was full of FinTech playbook lingo - “towards the new Saipem…. what to leverage…what to change'' with management saying that “Saipem extraordinary potential is confirmed” building a “growing and cash generating Saipem in the low-carbon energy eco-system.”
While the jury is out whether the current management team has the tools and skills to execute this digital data-driven transformation, at the same time aggressively stripping costs out of the old, depleted ecosystem, the problems at the legacy business finally came to light this week.
On 31 January after a contract backlog review, Saipem withdrew its FY 21 outlook, and revised project margins down in its onshore and offshore wind farm developments. This shaved €1bn from both its H2 21 revenue and its adjusted EBITDA guidance, projecting €3.5bn of revenue and adjusted EBITDA likely to be just shy of negative €1bn.
Compounding this, Sapiem’s FY 21 financial statements are now expected to show a loss in excess of one third of the company’s equity value, meaning Article 2446 of the Italian Civil Code is triggered whereby a company is forced to reduce its share capital after posting losses (more here).
This means its banks can accelerate certain outstanding loans, the company admits. Banks had been in discussions with Saipem since July over a waiver of a year-end net leverage maintenance covenant test that the group has indicated it will not pass.
Saipem bonds sold-off in stages, as Hemmingway said, at first gradually, then suddenly, as news flow built, and the sheer amount of capital reportedly needed to plug the negative equity welled from €1bn initially to as much as €2.5bn. Another leg down after Rothschild was reportedly advising on its debt – our contacts there said they were unable to comment.
It’s clear from the price action, that the issues cannot be constructively dismissed. Bruised by Adler and other negative shocks of late, I can understand the price movement.
The lack of company response to the latest news reports, and their inability to present a funded solution alongside their release doesn’t bode well. Given the jurisdiction and sector, some foreign investors will not be constructive, remembering Astaldi in 2018, with greyer hairs shuddering at events at Impregilo (now rebranded as Webuild) a decade earlier.
The most pressing issue is securing a massive capital raise, but can they construct a book without agreement from the banks first?
Two of their shareholders (Eni and CDP Industria) have government stakes and given its importance to the Italian economy, will they be incentivised to underwrite this? Surely the government can lean on Italian banks to get the necessary waivers.
Assuming they can raise the equity, the next issue will be a €500m bond repayment due in April. There was €700m of unrestricted cash at the end September, with a fully undrawn €1bn RCF (access likely restricted due to covenant breach) and €1.3bn of restricted cash at JVs and at projects level.
So how did their outlook change so dramatically in less than three-months?
Many projects are awarded on fixed-price contracts and while there is some flexibility to pass on costs, higher material costs, logistics problems and delays in projects can affect lifetime assumptions and profitability with revenue recognised when various phases are completed.
If that wasn’t bad enough, one of its key projects, with TotalEnergies, has been on hold since last May after the French company called force majeure after rebels in northern Mozambique had attacked workers and facilities. According to S&P this has resulted in the loss of €200m-250m of EBITDA. It is hoped that work can resume later this year.
Showing the difficulties in moving into areas outside their original key competencies, €378m of negative EBITDA was posted in their offshore E&C division, mostly due to the NNF North Sea offshore wind project subject to significant cost overruns due to soil quality issues.
For a more in-depth summary and initial analysis, please read Emmet McNally’s recent report. If you are not a client but would like to request a copy, please complete your details here.
The 2.750% 2022s were recently seen at 87.5, while the longer dated 3.125% 2028s have dipped below 80 to ~77.2.
Audit Adds to Adler Anxieties
After some weeks of relative stability, Adler bonds are again under pressure, after the company said that due to the forensic investigation by KPMG into Viceroy’s allegations, the 2021 consolidated financial statements will not be able to be published on 31 March. It is unclear whether this could constitute a breach of covenants under the docs, however.
In addition, it said that bulwiengesa had confirmed the fair value of Adler Group’s Real Estate portfolio. “An in-depth portfolio plausibility check bulwiengesa calculates the fair value of ADLER Group’s yielding property portfolio as of end of June 2021 and confirms reported market value of ca. 8.87 billion EUR.” Not the in-depth valuation some holders might have hoped for, it just confirmed that CBRE had adhered to widely used and recognised valuation methods.
What Adler didn’t say was that he was also chairman of the audit committee…
Our interactive chart which allows you to plot price moves against news releases shows this perfectly if U understand me?
As this connection was discovered by journalists, they also found out that Goldman and JPMorgan traders (their DCM team arranged the bond deals) were short Adler and were playing the CDS. At least the banks’ Chinese walls are working!
I’m also aware of another auditor resigning in November for another high-yield and loan borrower for commercial reasons, saying in its filing: “as well as a breakdown in our relationship with management following difficulties in obtaining appropriate audit evidence, which we eventually obtained.”
An actionable opportunity for anyone who can guess the borrower.
Pivot Tabled
Last week I contrasted the differences in messaging from US Federal Reserve and the ECB:
“Interest rate expectations in US and Europe are wildly different, with some commentators talking about five hikes in the US this year, while Christine Lagarde continues to guide for none in the Eurozone, with markets pricing in just a 0.2% move in 2022.”
I added: “But it is worth remembering that less than six-months ago, economists were thinking of just 1-2 hikes in the US, starting in June 2022. Powell’s rhetoric has since changed dramatically as he shape shifted from dove to hawk. Admittedly, European dynamics are different, most notably wage growth, which is more subdued than the US, but it is a reminder that the consensus changes quickly.”
I wasn’t expecting that the consensus would change in less than a week!
* ECB POLICYMAKERS SEES FASTER TAPERING OF APP PURCHASES AS FIRST PORT OF CALL TO FIGHT HIGH INFLATION: SOURCES
* SEIZABLE MINORITY OF ECB POLICYMAKERS WANTED TO CHANGE POLICY AT THURSDAY'S MEETING: SOURCES
The Pivot has been Tabled.
Source: Trading Economics
Swaps are back in positive territory – biggest move in a day for over a decade!
Source: Market Ear
Deutsche commented that ``The hawks have won, a hike is coming in September”
“Today's meeting was not even remotely balanced, it was hawkish. The doves have thrown the towel. We change our ECB call: we now expect two deposit rate hikes in September and December 2022, each of 25bp.”
Yes, you read it right. Traders are now pricing in four hikes up from a tentative one, less than a week ago. The movement in government will add to the pressure on European HY, whose recent price movements and spread widening we predict will have a dramatic impact on refinancing activity.
That’s Morrisons priced
The market repricing got us thinking at 9finHQ on the fate of some of the jumbo underwritten HY deals, which LevFin banks decided to hold over into the New Year.
Earlier this week we examined the Morrisons deal – as it has a direct comp in ASDA – whose yields have now risen to the point where the cap rates for the banks on the bonds might be coming under threat.
Before we could put out an analysis piece, our colleagues at Bloomberg had a great scoop – £1.6bn of SUNs had been sold to funds – de-risking the banks. (A cynic might attribute some of the recent weakness in single-B names to funds selling paper to make room?)
That still leaves the SSNs and loans to place – widely rumoured to be launched next week – our suspicion is that loans will take most if not all of the strain (or should that be pain) here.
In brief
We released part one of our Blessed to be Stressed report this week – focusing on Olympic Entertainment and Takko – non-subscribers please see a copy here.
WiZink secured over 75% of lockups to its restructuring by last Friday’s deadline by its HoldCo PIK holders. We wait next steps on implementation, most likely via an English Scheme, for more details clients can see our Restructuring QuickTake. If you are not a client but would like to request a copy, please complete your details here.
Yell (yes it still exists!) finally announced an agreed debt restructuring with its holders late last week which will result in a write-off of around 70% of their claims. The remainder is exchanged for cash pay 2027 notes. In return for writing off their debt, they will receive 95% of the group’s equity. Leverage will reduce to around 1.8x (based on September 2021 LTM EBITDA of £26.6m). We’re struggling to find who advised on the deal - please let us know. If you are not a client, you can request a copy of our QuickTake here.
Hurtigruten braved the market to return with the €50m Green bond that it had pulled last year, after baulking at the pricing demanded by investors. It printed with an 11% coupon at 98 (lets us know how this compared to the book last year).
What are we reading/attending/thinking this week
Excuse my shameless plug for my colleague’s newsletter – but Owen Sanderson’s Excess Spread is a must read this week for those following Rizwan Hussain’s legal saga.
A taster: “This is…unorthodox — the point of a committal hearing is that one can be committed to prison, right there and then, and attendance is very much non-optional.”
Hat tip to Owen for spotting this in AMC’s bond docs:
And our senior legal analyst Brian Dearing for spotting you can grab AMC shareholder NFTs online without showing proof of share ownership. Better value than a $10 bag of popcorn.
Real estate agents have started selling property in the metaverse. Surely, it is only a matter of time that we will have security and assets in the virtual world? Perhaps shifting troublesome debt into a meta-holdco? I do remember one advisor saying in one restructuring that the Holdco was so far removed from the operating assets it might as well be registered in Mars!
