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Chris Haffenden

After all the volatility in stocks and bonds earlier in May, markets were in consolidation mode this week, trying to regain some composure and lost ground. Their oversold condition amid defensive positioning should provide fuel for prices to move higher – bear market rallies can often be savage after all – as rate expectations are being tempered with economic indicators showing early signs of slowdown. This has helped rates of late.

As the dust settles from the disastrous credit events of 2022, is it time to survey the scene, assess the damage and try to find the strength and perseverance to rebuild?

But despite a 40bps improvement in the Crossover this week to 440bps (Thursday close) there is still a lot of debris to clear and shattered nerves to repair.

Latest attempts to offload the £6.77bn of LBO debt for Morrisons are illustrative of how much work must be done to restore confidence in European LevFin. To recap, the leads had underwritten the debt at cap rates of 5.25% for the £2.4bn SSNs and 6.5% for the £1.2bn SUNs (the caps rose by another 0.25% in April).

The leads managed to offload the SUNs in early February to CPPIB after giving away their fees. As I said in late March “compiling the deal structure, relative value and likely scenarios made me realise just how challenging it is going to be for the underwriters to checkout without giving up their fees.”

UK supermarket peer ASDA is seen as a direct comp – I think Morrisons should trade in line to a touch wider – ASDA bonds have widened sharply in the past six months. ASDA SSNs which priced last Feb at 3.25% are quoted at 84.22-mid (8.27% Yield) with the 4% SUNs at 76.50 (10.47%) as at Friday midday.

It was becoming clear that offloading the Morrisons 5.5% SSNs would require deep price discounts and result in significant losses for the underwriters.

Reportedly in late April, £1.075bn of the SSNs was privately placed with 10 investors at 89. On 13 May, the company announced the completion of the financing, without disclosing the OID. But this week, it was revealed that private credit giant Ares pulled its £500m order. We assume the leads were the source of a subsequent leak to Bloomberg that in late April, PIMCO had offered to take a billion at 88, presumably to show that the book was covered and the leads still in control. We wonder if their bid (if it’s still there) might get hit – if MFN clauses are in place, it is another point or two of losses to book.

There are a lot of parallels with the hung £9bn Alliance Boots deal in the summer of 2007. The deal arguably marked the turning point for the boom and bust for the European Leveraged loan market.

Some of the leads eventually tried to offload in April 2008, as a lock-up agreement between the underwriters expired, with RBS marking its position down to 88. But that attempt failed. The leveraged loan bonanza was over, and it took several years for jumbo underwritten LBO deals to return.

There are other underwriting horror shows from around the same time, Bavaria Yachtbau, Ideal Standard, David Lloyd, The Priory all spring to mind. At least this time around the private credit and pension fund pool is much deeper, giving leads more comfort, albeit at a price.

Morrisons numbers go stale on 16 June. There were hopes of launching the remainder of the financing this week (£1.325bn of SSNs left), but according to a source familiar this is likely to happen post Jubilee holiday. According to investors, the banks are talking an eight-handle for the SSNs, having decided to sit it out on the loans.

But their task is complicated by poor Q1 results yesterday from ASDA whose notes were also under pressure on concerns that the Issa Brothers bid with TD&R Capital would utilise capacity under ASDA’s outstanding bond covenants.

9fin’s Caitlin Carey is on top pun form in our legal report assessing room under the docs – Giving It Some Welly – Implications of a Boots Bid under ASDA’s Bond Covenants.

Stressed refinancing was still the name of the game, with Douglas, Tullow Oil, McLaren, and Pizza Express all getting deals away, after Aston Martin, Pure Gym and Boparan took the lead in October/November 2020. Performance has since been mixed, with many of these names underperforming, either due to poor business performance and/or treated as high beta credits.

The tightening lending appetite in Q4 21, had put paid to hopes for Lowen Play and Haya Real Estate refis which flipped to restructuring. Next up are Matalan, Takko and Raffinerie Heide which might be heading to A&E or even require debt surgery. In recent weeks, Diebold Nixdorf, Frioglass and Corestate were added to the list of names with advisors appointed in anticipation of a process.

But what other restructuring candidates are there coming down the pipe? 

Rising rates and the effects of bond convexity mean that it can be hard to gauge what is really stressed – as one banker said this week – 90 is the new par.

9fin’s screeners are an excellent way of cutting through this.

I’ve walked through many advisors and funds through this functionality on demos and seen their amazement on what it can do. You can filter by spread, leverage, maturity, price, and several other metrics to build and refine your watchlist.

Want to know the names that would struggle to refinance?

Set the filters to more than say 7x levered, and for those with maturities in less than two years – you can screen for that. If you want to filter further to just those trading at stressed price levels and/or other metrics – you can do that with 9fin.

Want a list of stressed names (say spread-to-worst of between 800 bps and 1200 bps), you can screen for that (the results bring up 84 bonds from 70 issuers btw, see the screenshot below).

Want to filter these results further with specific industries, or add datapoints and credit metrics to your downloadable report, it’s not a problem.

Users can track price/spread movers over a specific time period, the issuers on the slide. Our intra-day pricing even shows how bad the bonds traded during the earnings call!

Similar to our other screeners you can download the results and automatically add these names to your followed companies for update alerts.

If that wasn’t enough, we have a lot more functionality to come. It certainly makes my job 10x easier, as I can manage my watchlist much more easily than before.

But this week, we thought could we take this one step further and make it into a report?

Can we use our tech to outline the new entrants into stressed, or moving from stressed to distressed, and identify the names moving the other way. Who were the biggest price and/or spread movers? Match these moves to specific triggers (news, earnings, trades, appointments) and add links to articles/releases if known?

Our working title is Top of the Crocks – watch out for the first edition in the coming days.

One of the worst performers in the past couple of weeks has been McLaren, a new entry into our Top of the Crocks charts.

Its bonds fell from the mid-90s to the high 80s last week (we had scoured around for news, but couldn’t find any) and they slipped another six-to-seven points, three of which were during its Wednesday pm conference call.

As 9fin’s non-resident petrolhead Owen Sanderson outlined in his piece on Wednesday, the CFO, Kate Ferry, was trying to emphasise the positives, and put the ugly Q1 and FY 21 numbers behind it, saying that the supercar manufacturer was at an “inflection point”.

Most of its woes were blamed on the Artura, its new carbon fibre hybrid hyper-car. It will finally end up in customer garages at end June after being delayed more than twice, with semiconductor shortages and software validation issues cited.

In 2021, McLaren managed to push maturities out from 2022 to 2026, achieved via an equity injection from Ares and the Saudi sovereign wealth fund, disposals of non-core assets, and the sale-and-leaseback of McLaren HQ. McLaren Applied, an engineering arm which sold McLaren-developed technology solutions to customers as diverse as toothpaste assembly lines and racing bicycles was offloaded, while McLaren Group took over McLaren Racing and Heritage Cars from McLaren Automotive, the main business within the restricted group for the bonds.

But while the Artura is finally shipping, the financial position looks precarious once more. In the first quarter there was a £59m cash outflow, leaving just £18m of cash and another £40m of availability, with other facilities unavailable due to a springing covenant. Another repeat in the second quarter, and McLaren would be running on fumes.

Kerry said: “With the launch of Artura, as you can see, the second half cash flows also ought to stabilise and therefore the same goes for liquidity.” She continued: “We have flexibility should anything else arise, whether that’s managing capex, which currently is due to increase in the second half because our confidence in the outlook such that we’re ready to invest….but we have flexibility there”.

But we wouldn’t be surprised it they used some of their other baskets – according to management there is £30m, £25m and £15m available under the general, capital lease and inventory finance baskets – review 9fin’s Legal QuickTake on the bonds here.

Another torrid week for Adler bondholders. Chairman Stefan Kirsten will not be having a restful weekend, as he faces investors, analysts and short-sellers once again on Monday, when the Q1 22 numbers are unveiled.

A Handlesblatt scoop that German prosecutors are investigating the Gerresheim sale in 2017 – which Viceroy and KPMG forensic had highlighted concerns over related party transactions was the trigger. In a secret session, a German Parliamentary committee was told by BaFin that they were instructed to undertake a criminal investigation after the regulator had filed the complaint.

The bonds fell by another nine points on the news into the mid to high 40’s.

After a series of negative news and with doubts rising over whether the bonds would be covered in a fire sale, pressure is rising on bondholders to act now, said an advisor who is acting for a number of holders.

One possible route is via a potential breach relating to whether Adler has produced audited accounts. As reported, KPMG issued a disclaimer of opinion on the FY 21 financials, saying that it didn’t have enough information to complete an audit.

Despite this, Adler maintains that it has fulfilled its obligations, as the wording of the clause in the bond documents does not state it needs to have an auditors opinion, but just that the statements need to be audited – that auditing actions have been undertaken.

However, unlike English law, German law (which most of Adler bonds are under) is more nuanced on contracts. According to one lawyer acting for some fund holders of Adler bonds:

Under German law a clause has to be interpreted through four methodical aspects, the wording only being the starting point, its systematic standing within the document, the history of the clause and last but not least the purpose of the clause. Terms and conditions of bonds are subject to these rules of interpretation under German law and it is to be asked: What would the parties have intended to constitute, if they would have foreseen the problem?

This is very different from English Law documents which almost exclusively focus on the contract clause wording, save for a manifest error, where it’s clear that the wording is wrong in its construction. I’ve lost count of the cases I’ve listened into where ‘the intention of the draftsman’ is discussed ad nauseam between lawyers.

Unfortunately there is no precedent case law in Germany to assist Adler bondholders. In total 15% of holders of a bond issue must instruct the trustee to act on a suspected breach and accelerate and demand repayment at par. In turn, this will likely trigger a cross default in other bond issues.

Such a request is yet to happen, with many distressed funds holders buying into the debt in recent weeks still believing they can sit tight and are money good, noted the advisor who added that in recent days that their conviction appears to be slipping. Financial advisors too are more active, pitching their wares to a variety of bondholder groups.

In the meantime, Adler is going to find it tough to find a replacement auditor. Of the big four, PwC is already retained on compliance issues, KPMG is gone, EY will be wary post Wirecard, leaving just Deloitte. Any new auditor is likely to face the same informational issues as KPMG, however, and with the spectre of a criminal prosecution, the list of those willing to go near it must be short.

Adler executives are in a difficult position too, under German law there must be a 12-month look forward on liquidity and over-indebtedness. Famously, they have 21-days to file in the event of imminent illiquidity, otherwise they are criminally liable.

If I was an Adler Real Estate bondholder, I would be concerned about a series of inter-company loans elsewhere into other subsidiaries, most notably Consus, which could affect their ability to meet upcoming maturities, including the April 2023 SUNs.

Schur Flexibles’ restructuring plan is on track, with no objections voiced at a ‘procedural meeting’ earlier this week, according to a source familiar with the situation. For a more detailed look at the restructuring plan, we provided a deeper dive here and an updated Restructuring Quick Take here.

Upfield Flora posted another poor set of earnings results, with management citing another ‘unprecedented’ quarter, with adjusted EBITDA falling 16.9% to €123m on volumes declines in Europe and North America. Net leverage has ticked up to 8.9x (6.6x on the TLs, maintaining 22% headroom on a springing covenant ratio set at less than 8.5x) as a result of a lower cash balance (€199m). Deleveraging will be challenging, but expectations are that after a poor Q2, the next two quarters should see improvement as by mid-May 75% of pricing is ‘locked’ with customers. Natural gas is now 100% hedged for 2022, with vegetable oil 92% hedged. Our deep dive reports are here.

Wepa is a name which regularly appears on advisor watchlists. After a poor Q1, liquidity for the tissue manufacturer is paper thin at €18m. On a more positive note, the €150m Super Senior RCF was refinanced in April and its liquidity buffer remains untapped (just €75m available due to a springing covenant), said management. Q1 should be viewed as the trough and Q2 will see a significant improvement in EBITDA as price rises take effect. Wepa has set up a task force to mitigate against potential shocks such as supply chain issues and cyber threats, saying that its biggest threat to a return to triple-digit EBITDA for the full year is an Europe-wide gas embargo.

Despite posting an optically strong set of results, Douglas bonds were on the slide again this week. We haven’t had time yet to go through the earnings call and dive into the full numbers but we suspect this slide is the reason why the bonds fell 3.5-points.

Other reporting names to take a closer look at are Intralot (reported today); Adler Pelzer (reported Weds), and Pizza Express (today). Next week sees a number of interesting names reporting including Adler, Kloeckner Pentaplast, Standard Profil, Lecta, Olympic Entertainment and APCOA.

One of my favourite podcasts, is High Performance – with Jake Humphrey and Damian Hughes. Many of their interviews with sports people such as Jonny Wilkinson and Gareth Southgate. But the non-sports ones are arguably even more enlightening, such as Lucy Easthope, the disaster management expert – who’s book When the Dust Settles and her pod with Jake and Damian Hughes inspired this weeks headline. There are definite lessons to be learned for markets and teams from disasters and pandemics.

In the week that Gorillas cut half of its HQ staff, there is a great analysis by the Economist on the secret economics of food delivery – it might make sobering reading for holders of Delivery Hero bonds (sorry I meant loans).

I was at the Chelsea Flower Show on Thursday. While some of the show gardens blew me away, the stories behind them were equally as impressive. The RAF benevolent garden below is my favourite with an amazing sculpture made from 1,200 layers of laser cut steel.

Denial is not a river in Egypt. China has quietly stopped reporting on foreign investor sales in its bond markets, disclose Bloomberg. I was amazed to find out real estate debt is 14-15% of Chinese GDP and their corporate bonds are bigger than most Government debt markets. We have quietly forgotten about China contagion risk, is it coming back?

Stability has returned to Stablecoins (or at least for now) – but as Barclays outlines the test is yet to come, with most acting like ETF’s rather than money market funds – which firms like Tether would like you to believe. This FTAlphaville piece is a must read.

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