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Chris Haffenden

It’s amazing how quickly sentiment and prices can turn around and rebound. I took three days out earlier this week sampling the delights of Sheffield for my son’s graduation. The City of Steel was hot metal hitting 39.4c. On my return, I learnt that the market was no longer as gridlocked as my journey back to London on Weds evening. European High Yield was back in the fast lane at full gas (or at least 40%) as Nord Stream 1 come back online, supercharging risk assets.

As I finally, arrived home and fired up the laptop on Weds eve, I ran a 9fin price screener, in total 111 bonds rose over 2% on Wednesday, with 23 over 3%. Aston Martin and McLaren were racing ahead in the fast lane after Middle Eastern equity injections fuelled rapid moves higher.

The crossover hit wides of 626 bps last Thursday, but since has seen a sharp reversal. The index tightened 40 bps on the day to close at 551 on Tuesday and at one point hit 529 on Wednesday morning. A sharp rebound seen in markets as Nord Stream 1 news broke amid talk (confirmed the next day) that the ECB would hike 50 bps, to a much less accommodative zero percent.

A day earlier, the Bloomberg EHY survey showed just how bearish investors had become, heavily underweight, expecting negative returns in Q3, carrying the highest cash positions since the survey started in 2020.

But as we’ve opined recently on the Workout, how much of this negative sentiment and recession fears were already priced-in, was it time to selectively buy?

Poor liquidity has meant the iTraxx Crossover is the instrument of choice for hedges – they are not “just for gardeners”, as my old derivatives-hating trading desk head at BarCap used to say – creating an environment for a sharp short-squeeze.

News flow is more mixed, with corporate actions more supportive to a recovery in bond prices.

There was a sharp rise in European Airline bond prices on Wednesday, cited by one commentator as being driven by Delta Airlines announcing a $1.5bn bond buyback, the day before. Another US based Maverick issuer AMC said it had bought back some of its bonds at a 31% discount.

Suddenly, a host of European borrowers are nibbling at their debt stacks with repurchases – such as Peach, Antolin, Casino, CPI Property and Avation – albeit in relatively small size. Even SBB is getting in on the act, by swapping $100m of SUNs with €100m of new private placement notes.

M&A and equity investments are another source of potential price appreciation. The upside in some cases can be spectacular, if you pick the right bond vehicle.

News of a £653m capital raise supercharged Aston Martin’s $335m second lien 15% all-in PIK notes by 21-points, on expectations that they would be taken out ahead of the first lien. The UK supercar manufacturer said around half of the fund raising would repay debt.

The short notice conference call on Monday (replay here) didn’t explicitly say which debt would be paid down, but there is good reason to expect the 2L notes to be prioritised, say my 9fin colleagues Emmet Mc Nally and Caitlin Carey. We note that “the make-whole provision in the indenture for the 2Ls is ambiguous and its interpretation is complicated by the PIK interest element on the bonds.

We estimate to take out the second lien entirely would cost around $467m – given the notes are callable at 108 in November 2023 plus accrued PIK and cash interest. If it was left to run to maturity, the principal would be $483m – $105m higher than November 2022.

Our legal analysis suggests the first lien covenants do not restrict the prepayment of the 2L ahead of the 1L notes. Covenants do limit the ability to prepay ‘subordinated indebtedness’ but the definition is limited to debt “which is expressly subordinated in right of payment” to the 1L notes or their guarantees. However, the 2L notes and their guarantees are pari passu in right of payment with the 1L note and only rank junior in their right of security.

That is not all, the equity raise could build basket capacity under the 1L and 2L covenants, meaning it could raise additional contribution debt up to 100% of the net cash proceeds secured on a 1L basis. Or if it is designated as a “Excluded Contribution” it will create capacity for investments up to this amount.

A chunk of the money has been spent on a new logo (below) – the first major update to its crest since 2003 – snuck out at the same time as the funding announcement.

Fellow supercar manufacturer, McLaren wasn’t left standing at the lights.

On Wednesday it confirmed a £125m of equity capital via convertible preference shares from existing shareholders, including Saudi Arabia’s Public Investment Fund (a new Aston Martin investor) and its Bahrani counterpart. The $620m 6.5% SSNs rallied 12.5-points on the news.

McLaren’s bonds had come under pressure in late May on liquidity concerns after delays in delivering its Artura hypercar, coupled with semiconductor issues reduced available liquidity to £58m at the end of Q1, with £59m of cash burnt during the quarter.

Our legal analysis suggested limited capacity under the docs to issue additional debt, but the latest equity raise should ease concern over priming debt, although doubts remain on its cap stack and the funding of next generation vehicles.

Iceland Foods Chairman Richard Walker, a prominent Brexiter, often appears on TV and Radio as a doomsayer on the supply chain crisis – famously saying last summer that Xmas could be cancelled – he had warned for months of poor numbers, blaming wage, energy, and input costs.

I don’t think Iceland staff has forgiven Boris for his terrible dad joke on a 2019 factory site visit, when handling a pallet of black forest gateau’s he said: “for freeze a jolly good fellow”

Fittingly on the hottest day in UK history it released its results, seen as mixed, giving cold comfort to some. While adjusted EBITDA fell by just 3.1% YoY (compared to -23% for Asda) – it included a hefty £15.8m of exceptional items, including £15m of supply chain issues – mostly HGV driver shortages. A lack of guidance on current energy costs (FY 22 costs were £70m) save that 50% of costs were hedged for FY 23, concerned investors, as reported by 9fin’s Laura Thompson.

Management said Iceland could benefit from a recessionary environment, as customers turn to lower price point groceries, or try to stock their freezer in the expectation of further cost climbs. Still, “customers are putting less units in the basket”, management acknowledged.

“Prices are going up across the board, but our pricing position is still competitive,” they said. “We can’t compete on every single category, but from a pricing perspective we’re doing okay.”

FinTwit was full of opinions post release. One tweeted on his sums gone to Iceland:

FinTwit 1 then added that Iceland’s average cost of debt is 4.5%, likely to double even if they are able to refi, wiping out their free cash flow. A £100m haircut on the SSNs would only save £8m in interest, so a £200-300m haircut was more likely, he suggested. Their last deal was refinanced at 4x PF leverage, if you assume 6x multiple for the business, the LTV would be a lofty 75%.

Another FinTwit agreed: “It’s also not really FCF generative. If you look at operating metrics, they basically need to keep the Capex taps flowing [to invest in store growth and improvements] or its game over. Total Sh*tco.”

FintTwit 3 then piled in, citing hopes of an equity injection from Richard Walker and the other shareholders, “why would they let the business go.” He then suggested that Asda was much worse, citing governance and accounting concerns.

But at least Asda owns some of their real estate and generates FCF, said FinTwit 2.

If you run rate the -32% in adjusted EBITDA in Q1, Asda’s FCF disappears, countered FinTwit 4.

All entertaining stuff, but the melting ice cube may be a very slow thaw, as its £550m 4.625% SSNs are due in March 2025, and £250m of 4.375% SSNs due in May 2028, trading with 83 and 71 handles, respectively up from low points of 76 and 65 in early July.

In the near-term bond buybacks could be supportive for prices. The company had planned these in the prior quarter admitted management, but energy volatility had caused them to pause.

“It’s clearly a huge opportunity for us,” CEO Richard Ewen told bondholders. “There’s a point where you’d be daft not to buy back if it’s trading at 70p to the pound.” Management spoke with rating agencies in June on the matter to “make sure we do it in the right manner.”

You may have heard of the term “climbing the wall of worry” – a period in which markets shouldn’t be climbing on fundamentals, but they still do – the latest price action might fit this term perfectly.

But EHY remains extremely challenging, especially in Primary, with few deals getting done, and if so, only at rates approaching double digits. The refinancing wall could be a tough one to climb.

As I compiled our latest Top of the Flops report on Monday, I decided to take a closer look at the maturity wall. Exactly how challenging was it?

According to our screeners, as at 15 July, we had 125 bonds from 92 issuers due in less than 18-months, with 24 from 22 in US dollars.

But 91 of the 125 bonds were trading at 97 or above, suggesting the market has a high degree of confidence that these deals will be refinanced, despite extremely difficult primary markets.

We had 73 loans with maturities in next 18 months, but just eight trading below 90. For those loans priced at 90-95, on the cusp of refinanceability, we can add MSX International, Taghleef, Webhelp and Hurtigruten to our at risk list of loans.

For bonds priced at 90-97, we have 13 bonds from 11 Issuers. TDC, Jaguar Land Rover and Eskom are notable here, and potential candidates for our next Blessed to be Stressed report.

18 bonds from 16 borrowers are priced at below 90, indicating that a refi could be challenging. A number are on 9fin’s restructuring watchlist – Takko, Lycra, Matalan, Adler RE, Corestate, Veon or as in the case of Petropalovsk, DOF, and Moby already in restructuring processes. 

Norican may be the one here to explore further. Note Nordex left this list after announcing a new loan to take out its 2023s last week.

Despite the hot and dry weather, there was no O’s (earnings) pipe(line) ban this week with Orpea, Ocado and Oriflame all reporting quarterly updates.

All had been burnt to a severe degree in the first half of the year, suffering from accounting and patient treatment problems, higher costs of delivery and effects of the war in Ukraine.

We were expecting Oriflame’s Q2 numbers to be severely impacted, after halting production in the war torn country and re-designating its Russian subs as unrestricted subsidiaries. As reported, these accounted for 16.3% of the Switzerland-headquartered beauty company’s sales and 11.2% of total assets in FY 21. These will remain independent and self-financing, said management on a conference call yesterday, whose Q&A lasted for over an hour. (Chapeau to 9fin’s Toby Udofia for enduring the lengthy call and providing comprehensive notes).

Adjusted EBITDA in Q2 22 fell from €53m to €21.8m, impacted by lower unit sales and gross margins, higher selling and market expenses, partly offset by favourable FX as the ruble strengthened against the euro. The net secured debt ratio climbed to 5.2x from 3.3x a year ago.

Europe and Asian sales fell 23% with its Chinese business hit hard by renewed Covid restrictions. Costs of goods are increasing, with restructuring costs and admin costs rising as it embarks on more training and conferences to train new staff and try and reverse negative member growth (-16% in Q2). Production of its colour cosmetics has now been shifted from Russia to India.

On a more positive note, production in Ukraine resumed in May, most restructuring costs have now been booked, and management said these measures should have a significant impact upon earnings in 2023, and a full impact in 2024. But Oriflame failed to give a quantum on savings, suggesting they could be double the restructuring costs without providing further detail.

Prices have been adjusted in line with inflation and are being monitored on an ongoing basis. Sales and financial performance should show an improvement in the second half, they said.

The cash position is sufficient at €106.3m, within €80-110m needed during the year (there is a fair amount of seasonality) said management on the call. The company has no plans to address the capital structure by raising equity, and it had cancelled dividends, they added.

Oriflame’s bonds continue to languish in the low-to-mid sixties, failing to recover in line with other beaten-up names. The bonds fell another point yesterday, following the earnings release.

Orpea released its Q2 trading update on Wednesday. Second quarter revenues were up 14.4% YoY (6.4% organic growth) with good business momentum and a slightly improved level of activity in French nursing homes since June. The reduction in occupancy rates, as the patient scandal broke earlier this year, stabilised at the beginning of May and improved slightly since the beginning of June. It reiterated that operating profitability will be affected by the inflationary environment and “exceptional costs and expenses related to the management of the crisis and its consequences.”

Ocado is reconsidering its expansion programme, but remains committed to existing plans for new fulfilment centres despite a 25% contraction in the online grocery market. It posted a group EBITDA loss of £14m compared to a profit of £61m in H1 21; driven largely by Retail that saw a £72.8m reduction in EBITDA due to lower sales and cost inflation, partly offset by release of management long-term incentive provisions. Lower average basket sizes and lower sales were impacting Ocado retail. Worryingly for bondholders, it hasn’t signed up a new client for its international solutions business since December 2019.

It says that a £573m equity issue and new bank facilities should see the division to positive cash flow, despite pushing back the expected date to profitability by one-year. The bonds – a top Haff Short at issue in October 2021 at 3.875% – are now trading with a 81-handle to yield 9.4%. I can still find better value in other supermarkets, but an equity short (still has a £6.4bn market cap) is probably a better trade at these levels.

Less than seven hours prior to its earnings release, Consolis announced that it had secured a €30m new term facility from certain unaffiliated third-party lenders due on 31 May 2025 paying E+700 bps. It will be borrowed “by certain members of the Consolis Group that are not guarantors of the company’s senior secured RCF or SSNs, and are incorporated in Germany, Poland and Spain.” Pro forma the facility, group liquidity rises to €107.9m (€59.9m cash, €18m under its SSRCF and €30m new facility) which it says is adequate to support its operations.

On its conference call today, management said that the facility would enable it to reduce borrowings on their revolver, by “a little bit” adding that liquidity headroom ended up a little less than expected due to an inventory build-up. The new debt is much more expensive, and we would question why they didn’t get greater flexibility from their banks on the RCF.

Second quarter earnings were impacted with volatility in raw material prices and energy costs remain high, but order flows improved as the quarter progressed boosting the back log. It posted €20.3m of adjusted EBITDA in Q2 (€23.6m a year earlier) with an adjusted EBITDA margin of 6%, down 240 bps.

We will be posting a more detailed update later today.

Most of my reading this week was a little arcane, preparing for an internal presentation on UK Restructuring Processes and our first Restructuring 9fin Educational piece on the same subject.

One of the strangest aspects of English corporate law is the rule in Gibbs dating back to 1890, which says that foreign proceedings cannot vary English Law contracts. This has helped the English courts retain their supremacy for foreign restructurings. But it still splits practitioner's views which are 50:50 on whether it should remain, said one prominent lawyer. News that the UK is considering signing up to UNCITRAL Model Law could eventually spell the end of Gibbs, but it is safe for now, as Kirkland & Ellis’ excellent primer explains.

As the temperatures rose to record levels in the UK, Celsius filed its Chapter 11 in the UK – to a chilly reception from our friends at Petition – who produced a great primer.

The hot weather is having strange effects for our friends up north, says the Daily Mash.

But don’t worry, there is still plenty of other locals who still enjoy a great beer – thanks again to the Sheffield Tap for their excellent selection and knowledge this week – at less than £5 a pint!

Situated on platform 1b at Sheffield Station, its good enough to miss your train for – a fantastic setting too, a converted Edwardian waiting room. No wonder it was CAMRA pub of the year 2020.

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