As I tweeted:

The Itraxx Crossover – a proxy for strong BB European High Yield Credit - closed 30bps wider at 501 bps last Friday - more than double where it was in early January. News over the weekend that Crypto lender Celsius was freezing all withdrawals caused yet more uncertainty with Bitcoin and most notably, Etherium falling sharply amid worries about wider contagion amongst digital currencies – most notably Tether with around $1bn exposure around a margin loan.

Monday was another savage day, with one US HY market participant telling our CEO it was the worst trading day he has seen since the financial crisis, as traders across the globe raised their expectations for sharper rate rises and higher terminal rates. We now learn that a huge $6.6bn was withdrawn from US HY funds in the week to 15 June. There were big strains in FX too, with funds betting against Japan being able to support the Yen, Deutsche analysts estimates that their central bank has spent $76bn this week alone on propping up the currency.

Over in Europe, we saw sharp rises in Government bond yields – with Italian and other peripheral spreads widening dramatically – giving flashbacks to the eurozone crisis, and prompting the ECB to host an emergency meeting on Wednesday. The crossover closed at 533bps (+32bps).

On Wednesday, there were some signs of consolidation and tentative attempts to call a bottom. But yesterday, in another ugly, volatile day for markets, the Crossover widened by another 41bps to 568bps. I would caution that on a technical basis many markets are very oversold – most notably HYG (the US index) below – as we know short squeezes can be severe in bear markets.

But even if we get some recovery from here, has the damage already been done for 2022?

The European HY market increasingly looks shut for the summer (apart from the odd brave issuer such as Manuchar) and the leveraged loan market is barely open. While in the US, deals can still get done, but only at very incredibly expensive (to the borrower) prices.

Witness what happened with the Intertape deal this week:

Going Private

The tough primary environment is echoed by the surprising pricing announcement on Wednesday for Preem – the Swedish oil refiner and distributor.

There was no launch announcement or price talk for the €340m of 12% green notes due 2027, led by Citi (left) which priced at 96. Rated B3 (bond) and B1 (CFR), it came at a time where refiners are making abnormal profits due to record cracks spreads, and is lowly levered. Proceeds will take out an existing term loan.

Our read is it was placed semi-privately with a handful of private investors, plus TLB lenders willing and able to roll into bond debt. In this market, soft marketing a deal in the background with private credit is the way forward, amid the market volatility and with fickle public investors. Credit Suisse bankers sitting on their Raffinerie Heide refi must have shuddered on seeing the pricing.

Another announcement on Wednesday piqued our interest. Access Group, the UK-based business management software provider secured Europe’s largest ever unitranche, at £3.5bn. In an LPC article, their sources said: “Access preferred to secure funding from direct lenders not only because the broader leveraged loan market has been struggling this year, but also the software company has had a long relationship with direct lenders for at least five years.”

This comes hot on the heels of private lenders taking down chunks of hung LBO debt, most notably Morrisons for their SSNs tranches. We are reliably informed that bidders in the Boots auction are going down the private debt route too. On the side-lines of the Super Return conference in Berlin one private lender said that there is an expectation that the primary syndicated loans could be “locked up” for larger LBOs in Europe for the rest of the year.

So where are all the European Leveraged Loan buyers?

Despite limited issuance of late, Kofax this week decided to ‘eliminate’ (ouch) the euro tranche in favour of all-dollars (at a 93 OID!). Even with the sell-off in secondary, there has been little outright buying of Lev Loans, save a couple of ‘print and sprint’ deal hovering up some cheap secondary paper. As 9fin’s Owen Sanderson has written, the arb for new CLOs doesn’t work based on early 2022 warehoused paper and given extremely wide junior CLO tranche pricing.

The buyers strike could have long-lasting impacts for LBO financing. With significant funds coming into private credit (€2-3bn per month), the pricing converging, and a fresh appetite for larger deals, could CLOs find much slimmer picking when they finally decide to go back to work?

It is not just in primary, where private credit could be eating investors’ lunch.

Distressed funds might also see private lenders at the table. It’s already been reported that Matalan sought their help to find junior subordinated debt to ‘stretch’ their debt structure, and I wouldn’t be surprised to see competition for liquidity finance in other upcoming situations too.

Could there be a risk that the LevFin market could be going from public to private?

Celsius and Fear and Fright

In the past I had suggested that a stock market sell-off and/or a collapse in crypto were some of the biggest risks to the LevFin bonanza. Whereas leading up to the financial crisis all the leverage was in commercial real estate and LevFin debt, sitting mostly with banks, this time around it’s the arena of equities and crypto with private investors taking the pain.

Some would argue that this can be contained, a bunch of speculators got burned and lost their stakes, no big deal for the wider economy, if anything it reduces disposable income and calms inflation.

But when leverage gets into the equation, you can lose more than you have invested, and the providers of leverage are on the hook if you unable to find the additional funds. Whereas most of structure finance and bank lending is now heavily regulated and has hefty capital requirements, the opposite occurs in equities and Crypto, the regulatory authorities have allowed an explosion of margin debt, short-term options trades, and other exotic products for retail investors.

After initially saying that its problems were temporary, according to the WSJ, Celsius has reportedly hired lawyers Akin Gump to advise on ‘solutions’ which include a refinancing and financial restructuring. But what exactly are they refinancing or restructuring?

Celsius says it manages $11.8bn of crypto assets, offering up to 17% yields on deposits. That feels a lot like banking, but how can they offer such rates?

The answer is that they lend the digital coin deposits to speculators who are making leveraged short bets on the same currencies such as Bitcoin, Etherium, etc or in the case of stablecoins, allow more firepower to take out leveraged crypto longs. But high double-digit rates would suggest that this is a risky business, after all, we all know how volatile crypto is, and do the depositors when they hand over their coins really know how sound and capitalised companies such as Celsuis are?

The other problem is Celsuis’ role in the eco-system. It has a $500m margin loan from Tether (down from $1bn) which is collateralised in Bitcoin, so, if the price falls, they can get margin called and are asked to provide more Bitcoin.

Tether can also be seen as crypto bank. They say that their loans and deposits are over-collateralised, but as Matt Levine notes there are no capital requirements and according to their filings at end March, they had just $162.4m of equity capital compared to a $82bn balance sheet – a capital ratio of 0.2% versus at least 8% for banks. Tether would say that most of its money is in Treasuries and commercial paper, but secondary prices would have fallen as rates rise – the mark-to-mark on those positions has likely blown through the equity capital, already.

There is also the small issue of $3.1bn of secured loans and $5bn of other investments – which include digital tokens. Levine suggests these loans are made to platforms and speculators. Tether says that their loans are overcollateralized. It claims to have liquidated its loan to Celsuis without cost, but crypto prices are down around two-thirds this year (market cap $1trn from $3trn) and I suspect the over-collateralisation level on most of its loans is unlikely to fully compensate for the moves.

In the end, it doesn’t matter unless there is a full-blown run-on Tether, amid a collapse on coins. But the risks and correlation are clearly there and for those of us who experienced the GFC the similarities are stark.

I agree with Matt, that much of the developments in Crypto, such as platforms DeFi and stablecoins were about putting more leverage into the system (if the volatility wasn’t enough already).

Levine adds: “I am not sure that we are yet in a world where crypto is deeply interconnected with the traditional financial system in such a way that a crypto implosion could bring down banks or real businesses. But we do seem to be in a world where crypto is deeply interconnected with itself, where bad stuff happening in one pocket of crypto can have unpredictable consequences in other parts of the system. That is not exactly a good thing, but it is an interesting thing, and it is in itself a sign of maturity. Crypto is big and valuable enough now to have banking crises.”

Many bruised investors outside crypto will pray he’s right. But we do have at least one situation which overlaps between world’s, our old friend Microstrategy.

As many of you will know, their CEO Michael Saylor is the biggest crypto bull in the paddock and has bet the company farm by borrowing $4bn – via high yield, converts and more recently margin loans to buy Bitcoin. The latest $205m margin loan from Silvergate (which has a 50% LTV trigger) may have hit the call, as Bitcoin dipped briefly below $21,000 this week, the level which the company said on a May earning call would trigger additional bitcoin.

The company has since denied that it has had to put up further margin. Despite its $4bn spend on Bitcoin being worth just $2.9bn this week, it can say it is able to HODL as its nearest maturity is $650m of converts is in December 2025. Their $500m 6.125% 2028 SSNs are around 80, for around 10.5% yield.

Doesn’t sound like much for what is effectively a bitcoin collateralised bond – surely some crypto outfit would offer you more – I sense someone smarter than me could structure a trade around this (implied vol on Bitcoin must be high now, use the bonds to hedge credit risk and Bitcoin exposure?)

Stress Management

As we outlined in the first few paragraphs it has been hard to keep up with developments in rates and high yield bond prices. So, apologies that our Top of the Crocks report (we are looking for a better name – suggestions to chris@9fin.com) was a little later than promised.

The report shows how 9fin’s bond and loan screeners can help funds and advisors locate distressed/restructuring opportunities and detect price moves.

To recap, our view is that price is no longer an appropriate marker for stressed and distress.

In recent weeks, rises in rates have led to high convexity bonds dropping sharply. As at earlier this week 648 bonds (out of 1491) from 310 (out of 552) issuers now trade below 90. That’s up sharply up from just 131 issuers in mid-April.

We believe spread-to-worst (STW) is a more appropriate measure.

At 9fin we define stress as over 800bps STW and distressed at more than 1200bps.

In total, we have 167 bonds from 116 issuers at STW of 800bps or more. Of those, 49 bonds from 34 issuers are denominated in US$.

Breaking this down further, we deem 106 bonds from 78 issuers to be stressed (800-1200 bps STW) of which 34 bonds and 23 borrowers are denominated in US$.

To provide some context, in mid-March we had just 49 stressed issuers, meaning 29 companies have entered into stressed territory since then.

Recent entrants in stressed include Graanul (which reported poor Q1 numbers amid concerns over raw material sourcing), Ardagh, Groupe Casino, Solenis, Atalian, Aggreko, Modulaire’s SUNs, and ASDA’s SUNs.

In distressed we have 61 bonds from 44 companies (over 1200 bps STW) of which 15 bonds from 11 issuers are in US$. This is 12 more companies (in all currencies) than in March.

Recent entrants into distressed (from stressed) include Orpea, McLaren, Diebold Nixdorf, Maxeda, HSE24, Frigoglass, and Matalan.

While establishing which names are stressed and distressed deals is useful, finding new entrants and sharp movers within these universes is arguably even more important. Users of 9fin can access live daily bond prices and end-of-day loan pricing, making it easy to screen for price and spread movements over time.

As outlined earlier in the Workout, the sell-off in the past week was particularly acute in dollar-denominated HY. Using our screeners in total, 197 bonds from European names in US dollars had fallen by more than 2% in the past week.

Over the past month, the biggest EHY bond movers were were Corestate (our recent Stressed QT is here); Matalan second lien (our latest piece is here); Maxeda (our earnings coverage is here); Upfield/ Flora (our deep-dive is here); Aggregate Holdings (our latest piece is here); Consolis (our earnings coverage is here); Paprec (recent CEO bribery scandal); McLaren (our legal analysis is here) and Orpea (patient care scandal, our recent coverage here).

For European leveraged loans, a total of 17 loans fell by more than 2% last week. If you expand this out to the past month, the number rises substantially. A total of 145 loans from 99 issuers have fallen by 2% or more, with 25 of those declining by more than 5%.

The largest movers over the month were Arvos, Biscuit International (our recent piece is here), Cineworld and GenesisCare (our recent coverage here); all of these declined more than 10%.

There is much more that advisors (and journalists) can use under our screening tools. Use leverage, maturity, and interest cover metrics for other signs of stress and potential triggers.

A good example is refinancing risk. In total, 31 bonds from 27 issuers are stressed/distressed with upcoming maturities of less than two-years (out of a total of 227 bonds from 154 issuers)

Our next report will arrive end-June. It will update some of the numbers above and focus on the biggest movers, new entrants, important events and news flow for the second half of the month.

In brief

A quieter week for earnings and deal developments.

Most of our editorial team were away at events – SuperReturn in Berlin, AFME LevFin in Paris and Global ABS in Barcelona – we have several leads to follow-up however, so expect more breaking news next week.

Those of us stuck in balmy blighty, focused on publishing QuickTakes on some expected transactions and summarising recent developments.

Cerelia has extended the deadline on a proposed covenant waiver to 2pm BST on Friday from 4pm BST on Tuesday, June 14, as some of its €495m-equivalent senior secured term loan B lenders are unhappy with certain terms of the deal. The group is asking for a waiver to amend its permitted debt covenants, to raise an €80m Prêt Garanti par l’État (PGE) loan, mostly guaranteed by the French government, as reported. The group has been facing liquidity challenges due to the rise in input costs from Ukraine following the Russian invasion. The French pie and pizza dough maker’s sponsor Ardian is proposing to provide an equity contribution of up to €25m until December 2023 — the individual equity additions will each be for a minimum amount of €2.5m. These will be drawn automatically subject to the group’s liquidity falling below €20m at month end.

Frigoglass now has a full set of advisors amid concerns that the Greece-headquartered manufacturer of drinks coolers and glass bottles will fail to meet short-term loan maturities causing a cross-default on its bonds. Our Stressed QuickTake is here for clients or you can request a copy here.

Matalan failed earlier this year to undertake a refinancing via Goldman, after a pre-sounding exercise. Bondholders are concerned about upcoming 2022 maturities in a difficult HY market and are talking to Perella Weinberg and Houlian Lokey. Our expectation is that an A&E is the way forward. We lay out the options in our Stressed QuickTake. If you would like to request a copy complete your details here.

After months of deliberations, Abengoa has finally submitted a restructuring plan with a 30 June deadline for creditor responses. But uncertainties remain over whether SEPI, the Spanish government-backed fund, will provide €249m of funding, after months of prevarication. The disbursement by SEPI is a condition precedent for the transaction, alongside €300m of super senior bonding facilities from local Spanish banks. Otherwise, the Spain-based engineering and clean technology group whose parent entered into bankruptcy protection in February 2021, will file for liquidation on 1 July. Under the restructuring plan, US-based investment fund TerraMar is injecting €200m into Abengoa, in return for 70% of the equity.

We previously wrote about McLaren’s liquidity situation which may have been the catalyst for its recent bond sell-off. On a recent earnings call, there were questions regarding McLaren’s available liquidity, and the supportiveness of shareholders to inject more cash into the Group. Our legal team looked at debt capacity under McLaren’s $620m 7.5% Senior Secured Notes 2026, in particular, priming debt. They also considered McLaren’s £95m super senior revolving credit facility and certain features that may be present in the springing financial covenant in that agreement.

Orpea secured a new €1.73bn facility, plus a potential elevation facility of up to €1.5bn (from third-parties) which should allow Orpea to repay existing finance arrangements on time (taking away the need to amend their terms) and fund essential investments in its real estate over the next 12-months. The financing gives much needed breathing space, given a €1.755bn maturity wall later this year. However, the French care home provider could need to do more to de-lever and stabilize its balance sheet, with further significant maturities in 2023-2025. In total, the group has €8.87bn of gross debt and a real estate portfolio valued at just €8.179bn. Look out for a more detailed report from our analyst team.

Pro-Gest (PG) held its eagerly awaited Q1 22 earnings call on 10 June 2022. The Italian pulp and paper group was forced to stop paper production in early March following a sharp spike in gas prices. The shutdown sent their 2024 SUNs tumbling c. 20 points. After a four-day downtime, PG restarted the mills and its bonds rebounded into mid 70s and have plateaued there ever since. With other high energy intensive sectors at risk of ceasing production, their action achieved the desired political effect, catching the attention of the Italian government, who rushed through energy subsidies to support the country’s post pandemic recovery, easing future shutdown fears. However, question marks remain over the resilience of PG’s profit margins given demand headwinds in H2, and its ability to generate sufficient cash to de-lever the company without further government help, especially ahead of its refinancing efforts in 2023.

On Tuesday, Estonian wood pellet producer Graanul sought to reassure investors and analysts over its supply chain and ability to pass through higher input costs. Raw material shortages in Q1 22 led to lower volumes, and Granuul’s margins were squeezed despite significant price hikes. The company’s bonds dropped sharply last week, after earnings showed that Q1 22 adjusted EBITDA fell to €25.5m, from €34.4m a year earlier. Most of the analyst questions focused on pass-throughs, and alternative sources of raw materials. With Belarus (10% of inputs) and Russia off the table, sourcing materials is “very challenging”, management said. They expressed hopes, however, that private forestry groups would take advantage of high pricing during the upcoming harvest season; they also want to source more from the Nordic region.

What we are reading this week

While many observers are now talking about a recession in the US, predicted for next year, what is the prospect for corporate profits?

As Ed Harrison outlines, the end of the low inflation, zero-rate policy era will mean that for the fist time in a generation “companies may have to deal with a prolonged period of price pressure and the cost increase and shifting demand that inflation generates.” The Risk of Mean Reversion Has Stocks Staring at a Profit Squeeze. PDA’s results release today evidences this - margins halving in just one quarter!

In a scathing article in the FT, Martin Wolf says that all the dominant features in the world economy are the same as in the 1970s. He says that vast debts make the world economy more fragile than it was over 40 years ago, with policy errors of the 1970s echo in our times

When it comes to legal matters around politics, David Allen Green is always enlightening. Examining the UK’s Northern Ireland Protocol legal position - using the ‘necessity’ argument makes no sense, he argues.

My weekend reading is a paper from Riz Mokal from South Square Chambers. He says “Many English (and other) restructuring lawyers consider that the [English] scheme of arrangement cannot be characterised as an insolvency procedure for certain international instruments…This article shows that this view is mistaken.” I’m sure our friends at K&E will concur.

An intriguing story to investigate further this weekend - a Google engineer has claimed that their chatbot is ‘sentient.’

Our engineers at 9fin will be pleased, Microsoft has retired internet explorer after 27 years. So, when will they decide to get rid of Edge?

Crypto hedge fund Three Arrows Capital is struggling to meet margin calls - expect more casualties to emerge in the coming days - as digital asset contagion bites.

9fin loan reporter Laura Thompson earlier this week was wondering where her hotel is:

And finally a strong pun game from BofA. “The Flow Show: Wake Me Up Before EU Go-Go”