Can I get a witness [statement]

One of the main mistakes that distressed investors coming over from the US make is thinking that most processes are similar to Chapter 11 and underestimating the differences in legal jurisdictions and how their judiciary operate. Their travails with French companies over the years underlines this, with notable debtor wins, such as Group Rallye in 2019, where creditors were shut out of the process and whose debt was terminated for 10-years.

Wary of the same fate, Comexposium lenders SVP and Attestor are seeking to use the English courts to gain information to help assist them in developing a counterproposal to a planned term-out, which will be considered by the Nanterre Commercial Court on 14 September. The funds own 55.9% of the bank debt after buying in after the Sauvegarde filing made last September. Fellow coordinating committee members Hayfin and KKR are supportive of the legal claim. The funds have already offered to part and fully equitise their debt claims, but say the French events business failed to engage, with shareholders keen to remain whole and keep lenders at arm’s length.

At issue is whether lenders’ rights under the SFA clauses relating to provision of information remain enforceable following the issuer Cassini’s entry into Sauvegarde insolvency protection. The claimants are seeking declarations from the court that the clauses are enforceable, and that Cassini breached its obligations by failing to comply with the SFA agent’s request for information last October. Cassini contends that the SFA clauses are no longer enforceable following its entry into Sauvegarde.

The dispute hinges on differing interpretations of French insolvency law, which we discuss in further detail below. This case is being heard in the English courts under the SFA’s exclusive jurisdiction clause, after a jurisdiction challenge by Cassini was rejected in July.

The funds position is that the SFA information obligations are enforceable under the general principle of French law that lawfully formed contracts have binding force unless terminated or discharged, or as otherwise provided by statute (Article 1103 of the French Civil Code).

They argue that none of the statutory exceptions apply to the SFA information obligations - neither the Sauvegarde moratorium on payment obligations nor a provision (Article 622-13 of the French Commercial Code) giving Sauvegarde administrators the discretion to override contractual terms and elect either to terminate or continue “ongoing” contracts (both sides agree that because the term loan was fully utilized prior to entry into Sauvegarde, it is not an “ongoing” contract for purposes of French insolvency law). Therefore, they say, the general rule applies.

Cassini’s position is that because the statutory provision in Article 622-13 applies only to “ongoing” contracts, this means that only “ongoing” contracts (and out of such contracts, only the subset of contracts the administrator elects to continue) can be enforced during Sauvegarde. It argues that it would be absurd if a contract which is not “ongoing” could be enforced against the debtor more easily than an “ongoing” contract, applying the established “a contrario” technique of interpreting French statutes, the opposite of an analogy.

Expert witnesses from both sides were extensively cross-examined, Prof. Reinhard Dammann for the funds, and Prof. Le Corre for the company, over three days, with a final day for closings. There was a late intervention by Cassini’s lawyer Mr Santoni who provided further evidence on 10 August which led to an earlier trip to court by the claimants to be able to file evidence in response.

The oral judgment is still being delivered at time of publication. Justice Kramer said that he has found that the information provision continued and applied after Sauvegarde. He also ruled in favour of the claimants on declaratory relief, including making a declaration that there is a breach of the SFA in not providing the information requested.

Crackin’ up – over a Refi for Heide

After teasing lenders for months over a potential refinancing, Raffinerie Heide gave some details on progress in its Q2 earnings call. Bookrunners will be announced within the next ‘couple’ of weeks on the IR site, with final discussions surrounding timing and other details ongoing. The Germany-based refiner wants to launch the refinancing prior to its Q3 earnings release scheduled for 19 November.

But with just €15m of LTM EBITDA and significant cash outflows given that €110m of deferred taxes must be paid by year-end, it could prove a difficult sell, without seeing a contribution from its long-term owner, the Klesch Group. The €250m senior secured notes due November 2022 jumped in May, after their long-time sponsor had announced the acquisition of Equinor’s Danish refinery raising hopes it could be contributed into the restricted group.

However, management said that the Kalundborg acquisition is not set to close until Q421 - and management was non-committal on whether it would be contributed into the restricted group. Therefore, any imminent refinancing would likely be marketed on pre-acquisition numbers, with leverage at ~8.6x as of Q2, not including off balance sheet facilities, which would push leverage well into the teens.

Having long-standing and experienced management who understand the cyclical and volatile nature of refining margins and crack spreads is a key plus point. But debt and refining businesses do not mix. Greyer-haired LevFin pros will cite Carlyle’s problems with Petroplus ten-years ago, as evidence.

Play with Fire

Amigo Loans has submitted several options to an eight-member Independent Customer Committee and expects to receive feedback in the next couple of weeks. The aim of the UK-based guarantor lender is to release a practice statement letter in early September and conclude the Scheme by the end of this year.

Options offered to redress claimants include a share of potential profits and contributions from shareholders. There is “a little bit more cash to contribute” after better-than-expected collections performance. When asked about a potential debt for equity swap for its £234.1m January 2024 senior secured bonds, Mike Corcoran, the CFO said that “it’s a possibility,” as all options were being considered, adding that all stakeholders must accept compromises.

One of the key objections to their failed Scheme in May was a lack of a burning platform. A similar Scheme for Provident Financial redress claims was recently sanctioned despite written objections from the FCA, but they decided not to oppose it at Sanction. The FCA was swayed by the decision by Provident to wind down Provident Personal Credit (PPC). “Despite our concerns with the scheme, we were conscious that the only likely alternative to the scheme was the insolvency of PPC. In that scenario, consumers would likely receive no redress, which was an important factor in our decision not to formally oppose the scheme in court.”

Perhaps learning from Provident Financial or under instruction from the FCA to recognise the claims in full Amigo has sharply increased its provisions for redress claims settled either in cash or via a loan balance adjustment. These increased to £344.6m as at 31 March 2021 (2020: £117.5m) with an associated cost of complaints of £318.8m (2020: £126.8m). According to Amigo: “These increases follow high levels of customer participation in the initial Scheme creditor vote and extensive work into planned redress methodology, resulting in both a material increase in expected future volumes of complaints and an uplift in the uphold rate.”

Over 80,000 customers past and present voted, but it is unclear how many of these customers have subsequently issued claims. It does allow it to present to a court a burning platform, saying that if the Scheme is not approved the group is balance sheet insolvent and could be forced into insolvency and/or a managed wind-down of the business.

Today, Amigo released its quarterly results to end-June, the release went into more detail on the potential options: The approval of an alternative scheme; an approved scheme but other assumptions are stressed; a managed wind-down where cash is made available to unsecured creditors after repayment of the bonds; and a no-scheme scenario leaving it without enough funds to repay the bonds in January 2024.

Arguably, with no fresh lending until its new Amigo 2.0 lending product is approved by the FCA and guarantor lending suspended due to Covid and FCA investigations, the group is already in de facto run-off. The lending book has reduced substantially in the past Fiscal Year, leading to growth in the cash balance, which was £177m at end March, and £204m currently, with the vast majority of the remaining loan book due in the next Fiscal year.

Beasts of Burden

Lenders to Irish regional aircraft lessor Nordic Aviation Capital (NAC) “could be in for a shock” if they are betting on underlying aircraft values, according to regional aircraft leasing sources who spoke to 9fin’s Laura Thompson. Some lenders are readying themselves to repossess the collateral or take haircuts based on their perceived value, but the real prices could be a lot lower in an industry which always keeps value and lease rates a closely guarded secret.

Our article sheds some light on the expected values, and goes into detail on NAC’s fleet and the likely values for five-year old aircraft, sourcing data from Laura’s previous home, Ishka - the specialist Aviation financial analytics site.

Two sources familiar with the lessor’s ongoing negotiations say that they believe the firm is likely to file for Chapter 11 or possibly Irish Examinership once their most recent forbearance extension expires on 20 September. However, these negotiations continue under the shadow of descending aircraft values underpinning much of NAC’s debt, some of which have nose-dived nearly 50% during the pandemic. Even top regional asset values collapsed by as much as 30%.

With so many facilities with varying quality collateral and over 70 lenders on some calls, it could prove tough for company advisors Rothschild and Clifford Chance to keep them from breaking ranks and seizing collateral. There has been a steady flow of trades in the NAC 29 debt package at between 69 and 72.

Restructuring options include lenders providing additional liquidity – outlined recently by Reorg Research as being up to $300m and the provision of extra security and improvements in governance.

We expect that negotiations will pick up in the coming weeks. Non-subscribers interested in hearing more can contact Laura at laura@9fin.com

Gimme Shelter

The Covid pandemic has created many structural changes for a number of industries and created a lot of future uncertainty. None more so than the commercial real estate industry. As regular readers of the Workout will know, I am sceptical that offices will ever return to their former state. Tenants continue to pay rents, despite a widespread reduction in occupancy as employees embrace hybrid working, as employers recognise the productivity benefits. Those which don’t grant flexibility are seeing employees finding jobs elsewhere. We at 9fin have been a clear beneficiary of this of late.

Companies have been caught out, with many having more space than they needed pre pandemic as they hoped to grow into it a few-years ahead. Now they are looking to sub-let the space they don’t need, but this will inevitably affect lease rates and consequently the values of commercial property. I expect a significant bifurcation of values with Grade A offices - a more attractive and safer worker environment to attract workers- well-bid, but everything else coming under sharp pricing pressure.

It is not just offices. In the US, even former prime shopping malls are falling into distress as their anchor tenants pull out, causing widespread transfers into special servicing for their loans which were parcelled into CMBS deals, notes Wolf Richter. High profile landlords such as Brookfield and Unibail Rodamco have been handing over the keys to securitised creditors with reappraised values in some cases less than 25% of the valuations at the time of the securitisation.

With the imminent arrival of Owen Sanderson to 9fin, we will be looking into whether this trend and its effects are also affecting European securitisations – watch this space.

What we are reading this week (and last)

With Private Equity bidders circling Morrison’s amid talk that the supermarket store estate is severely undervalued, 9finHQ tweeted the outline of the funding package for the CD&R bid.

Interestingly, as 9fin notes, according to the commitment letter, the SFA has a carve-out for up to £1bn of sale & leasebacks which can be paid out as dividends if leverage is no worse and can be increased to £2bn if leverage reduces by 0.25x from opening. Therefore, it wouldn’t take a lot for the sponsor to repay its initial equity cheque.

But as the Guardian outlines, the pension trustees might prove to be an obstacle, demanding additional security over the assets to compensate for the increase in debt and risk to contributions. The trustees want to agree an appropriate mitigation package – which would be likely to focus on signing over the rights to more of the company’s property (they already have some freeholds as security) – with CD&R as soon as possible. “They would also demand the same concessions from Fortress should it continue to pursue an offer for Morrisons.”

This week, there was a spate of stories attacking Greenwashing and the meteoric rise of ESG. Its rise has caught many funds and companies off guard alike and there is a huge rush for talent as they struggle to adapt. As one FinTwit tweeter noted:

“OK let me tell you a story: Mid-size AM now offering more money to junior ‘ESG analysts’ with obviously no business background than to fund managers. Mission: make the portfolio greener! How far will this go?”

9fin has been actively tracking ESG issues for some time. We now provide ESG QuickTakes for primary bond and loan deals, and have just produced the first in our 9fin climate series – on the shipping industry. Jack David’s - The freight-ening truth - is shipping aligned to climate goals? questions if Shipping companies are dragging the anchor on emissions.

I would also recommend The Critic’s excellent deep dive: what will net zero cost?

On holiday I was relatively good at avoiding email and looking at work related matters, but the Economist asks should you work (a little) on your holiday?

Chapeau for this great headline - Adam and Yves show the naked ambition of brilliant Brighton One for the football pun hall of fame, but for my mind nothing cannot beat Super Caley go ballistic, Celtic are atrocious as the best.

I will end with the best piece I’ve seen so far on the late Charlie Watts – and this great interview with Stewart Copeland on why his drumming technique was so unique.