The Turkish Central Bank, however, did hint that it would assess ending rate cuts in December. One broker in a client note jokingly said: “I’m not sure if that counts as hawkish by its standards or if we’ve now just come to expect the ridiculous.” The Turkish lira which had broken the 10 barrier to the US dollar just three days earlier, hit 11 after the rate cut. Inflation is 19.9% in Turkey and rising fast btw. 

I have vivid memories of Emerging Markets, having traded Sovereign and corporate EM just after Mexico’s near default, through the Asian currency crisis and Russia’s actual default in 1998. I learnt the hard way that liquidity can be asymmetric – after making 0.25-point bid/offer prices in 50m Russia 10% 2007-dollar bonds (98.00-98.25) in September 1997, six months later, it was five-points bid/offer in a million (30-35). One day during that period, Mexico 2026s traded in a 30-point (yes, points, not basis points) range. That’s volatility for you, blowing-up your VAR models overnight. 

I wasn’t around for the Latin American sovereign debt crisis in the 80s - I’m old, but not that old! Commercial banks were mostly on the hook for external debt that rose from just $75bn in 1975 to $315bn in 1983. Soaring interest rates prompted Mexico to default on interest payments in 1982 with Nicholas Brady then hatching his clever plan to allow sovereigns to use some of their debt proceeds to buy US Treasury coupon strips - collateralising the principal on their bonds without the need for the US to grant a US sovereign guarantee. (I touted the same idea to the advisors working on Greece’s restructuring). 

Inflation in Argentina in the late 80s hit over 500%. In Brazil it peaked at 3000%, I remember seeing daily Brazilian inflation data, still reporting when annual data was down in single digits. I was told by Argentines that they would be paid daily mid-morning so they could spend their wages at lunchtime before they halved in value by that evening. A hard one-to-one convertibility peg with the dollar finally squeezed out Argentine domestic inflation, until the peg broke and it defaulted again in 2001.

Despite some improvements in economic management, most of Latin America’s debt burden was inflated away in the early 1990s. Investors by the mid-90s had piled into pure sovereign risk, with Eurobonds refinancing safer collateralised Brady bonds. They mistakenly believed the same as the commercial banks a decade earlier that Sovereign’s never default. How many times has Argentina defaulted? The answer is here – a clue, it's higher than 7. Btw Argentine inflation is currently 52.5%. 

EM economies were first to hike rates in 2021, with inflation rates running ahead of developed markets. From experience you need to build credibility early to attract foreign investors to service your local debt and to avoid sharp currency devaluations. But the Turkish President seems to believe otherwise. Once hyperinflation arrives it is difficult to tackle, witness events in Zimbabwe. It requires sharp cuts in government spending and halting the printing of money not backed by the production of real goods and services. 

Peter Drucker puts it well, “you can’t consume what you haven’t produced.” 

In contrast, developed markets central bankers appear much more sanguine, believing that they can run their economies hot. Unlike the 1970s, whose inflation came from a supply shock, the latest wave is resulting from a demand spike post reopening. Supply chain issues and a lack of workers (btw how many are retiring on their stock and crypto profits from the fed driven asset bubble?) are impacting the ability of supply to catch-up with the massively inflated demand from the various stimuli. 

Surely at this point, the last thing we still need is negative real interest rates. Reduced buying (still not a reversal) of government bonds via a taper feels too timid, the Fed balance sheet must reduce, and fast. Surely, we should be raising rates and normalising bond yields? 

For conspiracy theorists, Central Bankers may not be behind the curve at all. 

It may all be by design, as in their minds it may be better to have persistently higher inflation – as long as it doesn’t get out of control – to reduce debt burdens built up during Covid. 

Analysts at Deutsche illustrate this perfectly – the extra inflation (around 4% higher than the past 30 years) if it persists over the next three-years, $1.2trn of debt (almost all the extra debt from the Covid-19 crisis for the US) would magically go away. 

Not just Chicken Feed

Not long after the publication of last week’s Workout, there was yet another shock for beleaguered Boparan bondholders, with news it was discussions with hedge funds over an extra £50m of liquidity. The bonds fell over four points to 79 on the news. We expected headwinds in our deep-dive report in late September (the bonds were just below 90 then) but we hadn’t projected that there would be liquidity issues, we had assumed full availability on their £80m revolver. 

Does this mean that they don’t have access to the RCF? Our piece had suggested that LTM EBITDA by Q4 could be as low as £71m, below the £75m minimum EBITDA covenant, but our definition of EBITDA is far removed from the company definition in a 2021 docs transaction. In any event, they would need a shocking Q4 of £10m to £20m of EBITDA to fail to meet this threshold,  

So, what else could it be? 

Perhaps they are looking to raise funds to bridge to further asset disposals, as it has frequently done in the past. Could it have drawn on the revolver in Q3, thereby reducing its liquidity options? Is Boparan struggling to access its invoice factoring supply chain financing, and requires short-term working capital lines? 

More controversially, could the shareholders have used Restricted Payments capacity to dividend up cash to pay for the Banham Poultry acquisition? Contributing it in the near term is near impossible following the CMA initial enforcement order.

Whatever the trigger, our credit analyst and legal team within a couple of hours had produced an update exploring the covenants and potential triggers. We think Boparan may be able to use its baskets to prime existing holders, by issuing the £50m on a super senior basis. 

Bondholders have less than a week to find out what’s happening, with its delayed earnings due on 25 November, and will update non-subscribers in next week’s Workout

Q3 is Easy not Queasy; Feeling poorly in quarter four?

In hindsight, taking off two days in the middle of this week was inopportune, given that we are in the middle of Q3 earnings season. Luckily 9fin’s analysts and our tech kept on top of releases. Getting to the halfway point of Q3 prints, it is clear that in many cases, despite prior concerns about increased raw material prices and energy costs amid supply chain issues, Q3 earnings have stood up well. 

But in a lot of cases, deleveraging is relatively muted. Many businesses remain over-levered, and while their Q3 results look good against their 2020 comparator, many are still trading at below 2019 levels. A good example is Cirsa whose EBITDA rose 168% YoY, but leverage is a lofty 9x. Similarly, its Spanish peer Telepizza is around 10x. Centre Parcs is seeing stronger revenue numbers than 2019 (mostly due to higher average spend) but is 14.5x levered. 

With large European economies in lockdown for several weeks in Q4 20, the upcoming quarter was expected to be much better in comparison. While many analysts have factored in rising costs into their forecasts, the sharp rise in continental European Covid cases may have passed many of us by, as UK figures were stable for months, albeit at elevated levels. 

Ireland, Slovakia, Czech Republic and the Netherlands all imposed measures in the past week. On Tuesday, Micheal Martin, the Irish Taoiseach said that without its vaccination programme, Ireland would be in full lockdown by now. Daily cases in Austria and Germany are now at their highest levels since the pandemic started. Germany is seeking to impose restrictions on those which cannot proof of vaccinations, with over 22% of its population over 12 unvaccinated, one of the highest in Europe, with only Austria and Switzerland worse off. 

At the moment, most countries are not contemplating a full lockdown, given the success of the vaccination rollouts. But limiting access to public transport and some venues to the unvaccinated will impact revenues for some business and reduce footfall for many during the Christmas season. Ironically, the much-derided at the time unofficial UK plan to develop herd immunity during the late Summer may have worked to some degree, whether by accident or design. 

In brief

Meme HY issuer Hertz is paying off costly preferred stock from its bankruptcy exit, with a $1.5bn high yield offering that sources told 9fin was based on strong reverse enquiry. Hertz also pre-negotiated a lower redemption price for the preferreds.

The initial terms of the 9% preferreds, placed with Apollo in May, stipulated that Hertz could redeem them at any time so long as the company delivered Apollo a 1.3x multiple of invested capital. However, an 8K filed on November 4 shows that both parties agreed to a slightly lower redemption price, so long as the company repurchased the prefs within 90 days. An extra sweetener for Hertz, on top of the overall lower cost of capital offered by the new bonds.

McLaren bonds were supercharged this week, rising six points on Monday after a report in Autocar that Audi would acquire the UK-based supercar group. This was in the slipstream of German Automobilewoche, saying that BMW would buy the automotive division, with Audi (over)taking the racing division. This raised the prospect of the Silver Arrows being both on the grid, for the first time since the 1930s. Our legal analysts were quick to qualify the bond covenant implications.

The Autocar report was subsequently denied by McLaren, but yesterday, management told bondholders the door remains open to “collaborations”. But off the merger track, cash burn and chip shortages are a worry for investors with stock build for its new Artura hybrid blamed for big moves in working capital. Its Applied division sale has brought attention to lagging EV efforts, with competitors such as Aston Martin aiming at 2025 to be on grid, with McLaren in danger of being lapped if it crosses the finishing line in 2030.

Codere’s restructuring finally became effective today, after a minor delay. The Spanish gaming group has €225m of new money (€100m bridge already provided in the Spring) with a debt for equity swap for the 2023 SSNs who have 54% of their debt reinstated into new 2027 SSNs with the remainder equitised, with bondholders taking control. Ratings agencies have expressed concern that the restructuring may not be enough. If you are a client you can see more details in our Restructuring QT. If you are not a client but would like to request a copy, please complete your details here.

Raffinerie Heide has picked an unnamed bookrunner and says it is closely working with them on the preparation for the launch of a refinancing of its €250m December 2022 SSNs. Exact timing and the format of the refinancing is to be determined shortly, with an estimated launch in early 2022. The Germany-based refiner said that the Q3 result was impacted by sharp increases in energy costs which partly offset improvements in refinery margins. EBITDA for the quarter whilst showing an improvement over the prior year, is still around one-third of historical levels. Net leverage at the end of the quarter reduced by two turns to 6.6x. 

What we have been reading this week

Distressed funds have raised record amounts, but pickings in the current environment are slim. Oaktree is one of the most experienced players in the space and has some of the most patient capital and just released a report – Global Opportunity Knocks: The evolution of Distressed Investing. Oaktree are moving beyond their “Good company, Bad Balance Sheet” approach and expanding their playbook, and look further afield such as in Chinese HY. 

Earlier this week, I was sent a blast from the past, Citi’s Credit Primer from 2005, penned by David Newman – their former head of HY research, now at Allianz. As you can see not much has changed in EHY in the past 16 years:

South Africa’s carbon-unfriendly coal burner Eskom didn’t do too badly from COP26, if you believed the initial headlines of ZAR 130bn ($8.3bn) of concessional funds. But earlier this week, Public Enterprises Minister Pravin Gordhan – a former Finance Minister (famously fired by Jacob Zuma during a non-deal European roadshow for the Sovereign after promising to be tough on graft and nepotism at the Energy Utility), said the money will not go towards reducing its ZAR 450bn debt pile, and Eskom’s energy transition was just one of three government projects being considered for funding.  

There is still plenty of resistance within to Eskom’s turnaround plan as new CEO Andre de Ruyter dryly explained in a News 24 report after three simultaneous incidents caused blackouts across South Africa: 

“My fundamental point of departure has always been not to attribute to malice what can be explained by incompetence…”

With Venture Capital seed rounds hitting $100m or more, do the economics stack up? Based on previous return dynamics, you would need your top performing investment to be worth $10bn to give a 1.3x return, or $100bn to give 13x. Time to dig out blueprints for an EV Ute.

This week, I was shocked and saddened to hear news that Robin Dicker, QC had died suddenly after a short illness. The South Square lawyer was involved in corporate restructuring cases for over 30-years. I personally remember watching him in action for the first time in 2005. Of late, he was the go-to lawyer for EG Group in Caffe Nero and acted in Virgin Active on behalf of their landlords and company side for Amigo. 

As one anonymous lawyer posted on an industry website this week: 

“Every so often someone pops up who seems to have clarity of mind and the ability to express complicated things in a simple way. They make the complex simple.  He was one. Sumption did this too. A pleasure to sit back and listen to.

Robin had nothing to prove and was just pleasant and focused. He wore a good suit well, too.

We have lost someone who was turning into one of the greats.”