This week it was revealed that the US Justice department have launched an investigation into short sellers over spoofing and scalping, with Carson Block served with a search warrant by the FBI in October. Over this side of the pond, in 2020 Muddy Waters famously won a court battle over his short on Burford Capital after the litigation funder asked the LSE to hand over trading data on its stock. His report caused a 50% drop in their shares overnight. But even he will readily admit, there can be easier ways to make money, while sleeping easier at night. 

Fellow short-seller Viceroy Research had a notable home run with Steinhoff but of late their success is more mixed. Their report on Adler and Aggregate in October created shockwaves across the German Real Estate market and we believe that the latter has impending liquidity issues (more later), but Adler was able to refute a number of the key allegations and offload properties at a premium to book value. 

It is worth mentioning at this point that outside blatant fraud and accounting manipulation it is rarely that black and white. I’ve direct experience of seeing massaged numbers and changes in accounting treatments to maximise sale prices on exit. 

How big a leap is it from the ever-larger adjustments and one-off adjustments to pro-forma EBITDA we see on many LevFin LBO deals, to a point where bond and loan investors can argue they are being misled and ultimately a material adverse change occurs? How high is the hurdle for management reps and other warranties to be called upon? 

This week Viceroy announced another target. Elsewhere, evidence was released by advisors of significant accounting manipulation, arguably one of the worst examples since Steinhoff. 

Both also begin with the letter S: SBB and Schur Flexibles. 

Pronouncing its innocence

Viceroy Research’s short-seller report on SBB – Samhällsbyggnadsbolaget: Hard to pronounce, harder to justify value – has many similarities to their allegations on Adler, with alleged suspected related party transactions, conflicts of interest, governance concerns, round-tripping transactions and alleged inflation of fair market values. 

Their timing was perfect, just two days prior to the release of the Q4 numbers for the Sweden-based social housing provider. Yours truly and 999 others were on the webinar and another 100 on the phones for the SBB update call. I suspect there were less than 100 for their Q3 release. 

Ahead of the call and presentation, SBB issued a rebuttal of the Viceroy allegations. CEO Ilija Batljan (whose corporate past was highlighted in Viceroy’s report) didn’t hold back in his responses to questions about the allegations on the call: 

“We will never let criminals affect our company”, he said.

Batljan said the Swedish authorities were informed, hinting legal proceedings to be initiated for unlawful market manipulation. He even attempted to make a joke about the report saying that the company name is not really that hard – and gave us some hints on the pronunciation. 

But during the Q&A session, he failed to answer whether a special audit would be commissioned to investigate the Viceroy allegations. One questioner asked if SBB would improve its transparency on acquisitions and change its board composition to address governance concerns. 

Another commented on lessons from other short-seller cases, most notably German real estate peers, that even if the allegations are totally unfounded, once a reputation is tarnished it can take a long time to rebuild investor trust. Shareholders in Adler would agree, which trade at around 30% to their NAV.

With interest rates rising, the focus should shift away from an aggressive acquisition strategy (SBB has a target portfolio of SEK 300bn by 2026, from SEK 190bn at FY 21) and focus instead on cash retention, they suggested. 

The CEO tried to focus on the positives during the call, saying that SBB had strong cash conversion (a figure Viceroy had alleged is the worst in the sector). The sale of building rights netted SEK 2.6bn (€223m) alone in the fourth quarter. He added that these assets are lowly valued with another SEK 21.4bn of estimated profits. 

Cash would be used to deleverage in 2022 and to repurchase some of its senior notes which are now trading at attractive levels, with the aim of 100% of sustainable debt finance, he added. The company’s aim is to achieve a BBB+ rating (from BBB- currently). 

Less encouraging was his comments that he viewed SBB as a family business, he wanted to grow dividends for the next 100-years and for the benefit of his grandchildren. No mention was made of the debt characteristics of the liberal use of hybrids which he said they liked and were a permanent part of the equity structure. LTV including the hybrids looks high for an IG credit at around 60%.

Our initial thoughts are that there is no gotcha in the Viceroy report, but the chunky hike in fair market value does look somewhat aggressive, despite the use of international property valuers, given the rent capped slow growth in rents. 

Downwardly Mobel

Last week, I mentioned two examples of companies which defaulted prior to their first interest payment. This was triggered by the shock news at Schur Flexibles who had appointed PJT and A&O amid concerns about accounting irregularities. 

I can’t believe that I forgot to mention the Schieder Mobel insolvency in June 2007.

Leading up to the filing, myself and my former Debtwire colleague Adelene Lee wrote 44 articles in three months on the company founded by Rolf Demuth – the self-proclaimed Henry Ford of the furniture industry. He ended up on trial in 2010 for fraud, credit fraud and balance sheet manipulation. 

The business at its height had 11,000 employees and €1bn in sales and claimed to be the largest furniture manufacturer in Europe, famously making the iconic Ikea Billy shelves. Incredibly it had 80 operating subsidiaries, with over 50 in Poland alone. 

It was not one of Goldman Sachs’ best moments. Sitting on the left with a number of German banks, a €145m HY bond was shelved in 2005, it was then repackaged in 2006 to a €95m second lien at E+750bps placed with a number of hedge funds, with €105m of first lien sitting ahead. We scooped a German insolvency filing that April, but this was withdrawn after GS Credit Partners put together a €65m rescue super senior bridge loan. 

After AlixPartners supplied a Chief Restructuring Officer and PwC started a forensic investigation, it was clear that there was rampant fraud with a number of transactions with companies owned by management. Arrest warrants were issued. I remember having to explain to my global editor that I couldn’t reach a member of management for comment – my German-speaking colleague tactfully said he was now behind Swiss Curtains (bars) – he probably had only one phone call, and it was unlikely to be to me!

To cut a long story short, lenders refused to equitable subordination to the tune of €100m, leading to a second filing for insolvency. Recoveries for the second lien were in the teens.

Surety for Schur

At a video conference meeting yesterday, Schur Flexibles provided more detail on accounting issues that led to a 25-point drop in its €475m TLB and fears of a restructuring before its first interest payment. It unveiled sharp reductions to reported 2020 and 2021 EBITDA numbers with an additional liquidity need, on top of the €23m shareholder loan, previously announced. 

On the call, the company and its advisors outlined their initial work and revised projections. As reported, Alvarez and Marsal (A&M) were brought in to investigate compliance and accounting irregularities in early January after the departures of the former CEO and CFO in December. KPMG were subsequently hired to review the 2020 and 2021 numbers. The company has appointed PJT Partners and Allen & Overy as financial and legal advisors, with lenders appointing Houlihan Lokey and Milbank earlier this week. 

The accounting issues relate to IFRS accounting issues and the treatment of certain items, meaning that EBITDA and the capitalisation was overstated at issue, said two sources close to the situation previously. Today lenders learned that around half of the 2020 downward adjustments were related to capitalisation of expenses with management having full discretion over how they were booked. 

There was also evidence of misappropriation of funds by former managers, including inflated bonuses, property deals, kickbacks and dubious consultancy fees. Their location is known, but for now no criminal charges have been made.  

More positively, current trading is strong, with FY 23 EBITDA projections double the FY 21 provisional numbers, but still shy of the marketed EBITDA at the time of the September 2021 LBO financing.

Sponsors B&C and Lindsay Goldberg are supportive, willing to provide back-to-back default guarantees for supply chain finance and the new facility. Their immediate focus is to convince around 50 other financial creditors not to withdraw their support, which includes bilateral, supply chain credit, credit insurance and reverse factoring. A separate call was held with them after the SFA lenders. 

Securing a standstill is the next step. An independent business review will be next, a prerequisite to talks over new financing with a signing of lockups in June. 

In the days ahead of yesterday’s meeting, there was interest from distressed funds in the TLB, seeking to buy pieces of debt to get information, with prices moving from the mid-70s to the low-80s. Prices fell by around 10 points after the meeting, according to one lender. 

NB Our article yesterday contained a lot more financial and detail from the lender meeting – we have omitted for non-subscriber readers – interested parties should complete their details here for a copy of the report.

Chris Haffenden and Michal Skypala discuss Schur Flexibles in this week's Cloud 9fin podcast. Also in this issue the LevFin Wrap, Covenant Close Up and our ESG segment.  Listen here.

Aggregate loses some of the parts

More bad news for Aggregate Holdings this week. As regular readers will know, we have been highlighting liquidity problems at the German Real Estate developer for a number of months now. 

Vonovia’s enforcement of a pledge to gain 20.5% of Adler Group shares from Aggregate Holdings suggests how precarious the liquidity situation has become. The troubled German real estate firm has since tried to reassure investors that this doesn’t constitute a cross default, but that didn’t stop its bonds trading down by up to 20 points to around 50, at Wednesday’s close.

Last October, Aggregate announced that Vonovia and a consortium of banks had provided a €250m loan due in April 2023, secured on its entire 26.6% stake in Adler. The loan helped bail out Aggregate, which was facing margin calls on a JPMorgan loan secured against its Adler stake, resulting from a sharp drop in Adler’s share price following Viceroy Research’s short-seller report. 

At the time, Vonovia had positioned itself as a stabilising force with wider ambitions to avoid a collapse in the German real estate sector as it consummated a jumbo merger with Deutsche Wohnen. It said:

“Finally, and not to be underestimated: The shareholders and all other relevant stakeholders in the German resi sector have no interest in an unstable Adler.”

The full terms and conditions of the loan were not disclosed by either party. 

Vonovia said the shares were pledged “as collateral for a loan that Vonovia had granted to Aggregate Holdings Invest on 7 October 2021 to replace a bank loan of Aggregate Holdings Invest.” By taking this step, Vonovia said it was “protecting itself against a loss of its receivable following a failure by Aggregate Holdings Invest to provide contractually agreed cash collateral.” 

Aggregate was quick to respond, saying the move was against a clear understanding between the parties that the loan covering the Adler shares was a strategic loan, and it was conducting a legal review of the implications. Aggregate said it didn’t believe that this specific event constitutes a cross-default on the 2025 bonds as the Adler shares were not held in a material subsidiary. 

But we are not so sure, our initial calculations suggest otherwise. 

The inability to post contractually agreed cash collateral and the crystallisation of a substantial loss to book value of the stake raises questions over possible maintenance covenant breaches, and ability to meet other obligations. The cross-default provision in Aggregate’s 2025 bonds may also be at issue and requires interpretation of the precise wording of the German law docs. 

Our article explores these issues in detail. 9fin subscribers if you missed it before, it’s here. 

We have put our analysis and further questions relating to continuing obligations towards Vivion on the Fürst acquisition to the Aggregate CFO but have not yet received a response. 

We will keep you updated. In the meantime, we are keen to talk to VIC Properties convert holders. 

Haya – Friday at 8 – don’t be late

Friday at 8pm, is now the preferred time for borrowers to announce agreements with their creditors. 

The previous week we had the amend-and-extend from Olympic Entertainment. Last Friday it was the turn of Haya Real Estate. I’m out this evening – can any Financial Advisors forewarn me of any significant news?

The Spanish Real Estate loans and NPL servicer announced its long-awaited A&E. As we suspected, the deal terms were more nuanced than those leaked by the Spanish Media in January. The proposed deal offers a small principal paydown, with quarterly cash flow sweeps, a hefty interest margin bump, and a minority equity stake to sweeten a maturity extension to 2025.

As our analysis piece on Monday outlines, a significant give from bondholders is the cancellation of a shareholder loan, which combined with the shift of the debt upstairs to a UK/Lux HoldCo solves the potential negative equity problem. 

With EBITDA projected to be just €47.6m in FY 25, compared to €66.9m at FY 21, a key element of the restructuring is the cash flow sweep mechanism. Under the plan, the board must appoint an M&A advisor by July 2023, and if a sale isn’t completed by the summer of 2024, bondholder board appointees have powers to push harder for an exit.

Yesterday, Haya announced that it wasn’t selected for the key Sareb contract which runs for three-years from June 2022. Haya had previously expressed confidence that it would win the contract, and it was baked into the projections under the restructuring plan. But it was not a condition precedent and no changes are expected yet, according to a source close. 

Its bonds have fallen by around 7.5-points this morning to 76-78. 

Low Profil?

9fin’s Alex Manolpoulos’ analysis got a special mention from management in Standard Profil’s Q3 earnings call after he predicted a poor quarter a few days in advance.

There was some relief for beleaguered bondholders after the announcement last Friday that after over six-months of trying they finally obtained a RCF, a three-year facility signed with Credit Suisse. We wonder if any hedge funds are sub-participants. 

As Alex outlined on Tuesday, “the coincidental timing of the RCF announcement, a week ahead of results, will muddy the picture for buysiders attempting to play the semiconductor / supply chain recovery story in the name. With weak Q4 numbers expected due to little improvement on the key negative drivers highlighted in our coverage of Q3 results, the question is whether the new RCF gives investors’ confidence to look through shorter term top line and input cost woes to a late 2022/H1 2023 recovery.”

The key point will be the pain share initiative, which seeks to push through price rises to mitigate substantial increases in raw material costs. Crude prices have continued to climb, up ~25% vs September 30th, with Carbon Black up ~20% over the same period. EPDM prices have somewhat stabilised however (although still elevated), when using a Synthetic Rubber Index (which includes Ethylene Propylene) as a proxy for pure EPDM price.

The Q4 earnings release emerged on Thursday evening. Our earnings flash – Sales -9.5% YoY, EBITDA -51.7% YoY, Net Leverage +1.1x to 5.7x vs. Prior Period

In the management presentation, Standard Profil sees some light at the end of the tunnel (let’s hope it’s not an oncoming car) saying: “However, with improved visibility and reliability of customer orders towards the end of 2021, the first ray of sunshine appeared.”

Nappy Rash 

Our deep dive on Ontex, the Belgian nappy producer, released last week proved timely. 

As Emmet Mc Nally summarised, the Q4 21 earnings call on Wednesday was a mixture of refreshing honesty about the company’s performance under previous management, and frustrating reticence about addressing specific questions and downside risks. The company’s €580m 3.5% 2026 SUNs have retreated a couple of points since, at 89.5-mid to yield around 6.25%. 

Key points from the call and earnings release are that covenant waivers were secured for 2022, non-core assets are recognised as discontinued and held for sale, and earnings will get worse before they get better in the early part of 2022 as cost inflation pressures pick up.

FY 21 earnings landed right on the latest projections outlined in December, while the outlook outlined by management on the call for 2022 was short on quantitative detail. 

In our deep-dive of Ontex we said the situation requires something of a wait-and-see approach at present. We expected more insight from the latest results, however given the cloudy outlook presented, we find ourselves left waiting for more.  If you are not a client but would like to request a copy of the Deep Dive, please complete your details here.

It would be rash to buy here – remember I had strongly argued against paying 3.5% at issue in June. 

In brief

KME bondholders finally had some good(ish) news this week. They were expected to be repaid from the proceeds of the Specialty division sale – in the end €190m of the €300m notes will get taken out at par. The bonds are up to 97.5, which is probably about the right level. 

Saipem provided a mini update yesterday. No further negative impacts from the backlog review from 31 January, which led to over €1bn of negative equity and a potential €1.5bn capital increase. It said that preliminary management accounts consolidated adjusted EBITDA for 2021 were negative €1,192 million, affected by the difficulties on specific projects in the offshore wind and onshore E&C emerged in the backlog review (management accounts consolidated adjusted EBITDA in the fourth quarter was negative €901 million; positive for around €120 million excluding those specific contracts).

The next key date is 15 March, when it is hoped that a €2bn capital increase and a €1bn bridge loan will be approved by the board. It says: “discussions continue in a constructive way with the shareholders exercising joint control – ENI SpA and CDP Industria SpA – and with the banks with regards to the financing package.”

Some developments this week, for two of our Blessed to be Stressed (B2BS) companies: 

Matalan put out what looked suspiciously like a cleansing statement this week. One interpretation is that it confirms our suspicions that it may be talking to funds over a refinancing or a soft A&E. Its second lien which had risen on hopes of a refi, gave up some ground this week. News that founder John Hargreaves faced a £135m capital gains tax bill after a lengthy battle with HMRC also weighed on prices. 

Our write-up from the 16 January earnings call is here.

Lycra’s shareholder issues caught up with the Spandex manufacturer this week. Creditors to shareholder Shandong Ruyi Technology Group said they will seek control of Lycra after Ruyi defaulted on a $400 million loan it took from them to buy the fibre maker. Receivers will now go after the assets, with Lycra likely to be put on the block. 

The bonds go current in May, and are on the list for our B2BS predictions, in the meantime our write-up of the Q3 earnings update is here.

What we are reading this week

A slightly skinner selection than normal, as I have been spending most of this week buried in cleansing presentations and creditor updates. Luckily, primary issuance was subdued as Russia/Ukraine dominated the news. 

As Russian troops crossed the border yesterday, we released Russian invasion of Ukraine - Impacts in European leveraged credit. Our initial screen used 9fin’s text search tool to look for mentions of Russia and Ukraine across our library of high yield offering documents and reports. We have also looked at names heavily exposed to natural gas price increases, following the suspension of approvals for the Nordstream 2 pipeline, as well as LevFin issuers owned or financed by selected Russian institutions. If you would like a copy of this report, please complete your details here.

We will explore these names in more detail in the coming days and weeks. It was also a busy week for earnings releases with around 45 yesterday alone, so plenty of call replays and reports to work through in the coming days. 

It will be no surprise that Elon Musk has been investigated for insider trading in Tesla Stock after his twitter poll on whether to sell shares. 

The Guardian released an expose (sort of, it was a bit muddled tbh) on 18,000 leaked Credit Suisse clients, but they appeared to have missed a big one:

Our new US office has some very cool artwork – yes, this is an original