A difficult week to focus on Leveraged Finance, conflicted by Ukraine talks, liquid-fuelled garden work events, 7% inflation prints amid the racket from visa issues down under. In the first full week of 2022 for European High Yield issuance there were signs of a return of new issue premiums giving investors opportunity to reprice credits in their latest financing rounds. We also saw several 2021 restructuring carry forwards amid a scrabble to cover updates from some of the less willing to share formerly troubled credits. 

Normally we are pretty accurate in our day one relative value assumptions accompanying our credit quick takes. But this week, Tereos, Alsea and United Group all saw IPTs emerge at wide levels, well outside our informed estimates. Guidance and pricing saw limited tightening which might lead to suggestions investors are becoming more cautious on fundamental value while reassessing secondary trading levels. 

Tereos is a great example. The France-based sugar producer is a highly cyclical credit. It was trading at distressed levels as recently as late 2019 (19% yield at end October) after a sugar crash across the whole sector. Its inputs are affected by climate change and usage of pesticides (there is currently an exemption in France to use Neonicotinoids which kill bees and other pollinators) amid a strong global desire to reduce levels of sugar consumption to reduce the obesity crisis. As one HY manager noted on FinTwit, for the industry, “population growth and per capita incomes are the main drivers of revenue growth”, which might trump well-meaning intentions to reduce sugar highs. On the positive side of the ledger, they are the second largest producer of plant proteins and a significant producer of artificial sweeteners.

When assessing the relative value for the new bonds, I was amazed to find Tereos’ existing 2023 and 2025 bonds trading below 3% on a YTW basis. Some of the 23s will be taken out by tender from proceeds of the new €350m 5NC2 notes. It is a no-brainer for 7.5% 2025s (issued in October 2020) to switch into the new bonds – they are callable at 103.75 in October but bid at a lofty 107.25 last Friday. IPTs came out at the 5% area, and the deal ended up pricing at 4.75%, with the bonds trading up to 101 on the break.

Does a return of New Issue Premium (NIP) - from admittedly a small sample, United Group and Alsea may attract premiums given their respective jurisdictions - make it harder for LevFin bankers to sell carry forward stressed refinancing deals such as Matalan, Takko and Raffinerie Heide?

Not so, according to Credit Suisse bankers - btw belated congrats for the Heide refi mandate - who told LevFin journalists on a 2022 outlook call of increased market confidence that Matalan could be refinanced. 

The UK discount retailers’ £350m Jan 2023 SSNs have had a good run of late, rising almost three points to around 96.5-bid since 4 January, to yield just above 10%. The second-lien, however, are trading in the mid-70s and despite some commonality in ownership with the SSNs, it is far from a done deal, with management already guiding significant headwinds in Q4. We will be listening in carefully on the earnings call next Monday for some clues. 

Kudos to Matalan management, their presentations are always very detailed and investor calls are incredibly informative - the ideal standard for others to follow. While we are on the subject, the level of access and availability of info for HY credits and reporting requirements in general is going down the pan. A major bugbear for us at 9fin, taking up time and energy better used elsewhere. We get them eventually, but surely it is better (and more accurate) to obtain at source in a timely fashion to better inform the LevFin community and create investment opportunities for non-holders.

Anecdotally, we see a strong correlation between difficulty of access and biz performance. Why are issuers chickening out? We all know that life is a rollercoaster and investments can sometimes go down the toilet.

Oops - there goes my dry humour January resolution!

Changing Takko 

Despite being in the same sector and in a similar position as Matalan, Takko is a lot harder to access and more difficult to understand than its UK peer. Reduced disclosure inevitably makes it tough for analysts to fully assess a tricky credit whose fortunes appear to have changed markedly in the past six-to-nine months. 

In early March 2021, the Germany-based discount retailer was fast running out of cash, with talks over a €75m state-guaranteed loan from KfW breaking down, and interest payments temporarily suspended. In mid-March, Takko received €53.6m of new money — a €23.6m super senior term facility maturing on 31 May 2022 and a new €30m term loan maturing 15 August 2023, mostly provided by sponsor Apax. 

Liquidity was just £52m last May, but by end Q3 (to end October) this leapt to an impressive £242.5m, boosted by increases in payables days negotiated with suppliers during lockdown. 

In common with Matalan, Takko faces significant upcoming maturities – including super senior debt in the first half of this year. On an update call earlier this week, management said that it would look at refinancing its May 2023 SSRCF and November 2023 SSNs on a holistic rather than a piecemeal basis. They are currently monitoring markets and ‘considering all possibilities.’ Despite an impressive Q3 (generating €77.5m of FCF to end October) they said: “we don’t feel that the markets are right,” citing uncertainties regarding Covid restrictions imposed in Q4 for its German and Austrian markets. 

There was no mention of a sounding out exercise led by Deutsche Bank in November, which I’m relaibly told was recently disclosed by my ex-colleagues at Debtwire. 

One questioner on the call asked whether there were any discussions with banks over the super senior debt facilities which mature in May 2022. 

“We are well aware of the maturity and are constantly in discussions and contact with banks,” Takko management said in response. The analyst commented that auditors would be very nervous about giving a going concern report in the annual report if these were not addressed. “We are pretty sure that we will have addressed [them] by then,” said management.

Management was unable to give specifics on the quantum of the working capital unwind from seasonality and the normalisation of trade payable days in the fourth quarter (ends January 2022). Liquidity had dropped to €204m on 23 December. They said that they would revert on what the €32m YTD consisted of in ‘other items’ in the cash flow statement.

Counting our blessings

We are including Takko in our upcoming ‘Blessed to be Stressed’ report with some other newbies. Three names have dropped out since the last edition – McLaren (refinancing with new investors); Haya Real Estate (likely restructuring) and Lowen Play (restructuring). We will leave you guessing on the other new entrants. Feel free to submit your suggestions for candidates for us to look at. 

After our success with Lowen Play (we flagged likely refinancing difficulties last February) we are on the lookout for names which could enter into stress and/or are mispriced. FinTwit has suggested Iceland and Ocado as potential casualties in 2022. I'm going for Ontex, what are your picks?

Conversely, we will also take a closer look at deals which were restructured in 2020, to see how well they are performing to their revised plans. Travelex continues to struggle, but how are names such as Selecta, Swissport, New Look, Pizza Express and gategroup doing? 

Carry forwards

Most restructuring activity is carried forward from 2021, from deals already well underway and pre-agreed. But unlike last year where deal implementation carried on well into the Spring, many deals will be concluded soon, leaving the cupboard bare for those unable to head out east and appraise Chinese property.

Earlier this week Naviera Armas declared its restructuring effective with the Commercial Court of Las Palmas in Gran Canaria sanctioning the master restructuring agreement filed with the court on 4 November. As our Restructuring QT outlines, the Spanish ferry operator, privately owned by the Armas family since 1941, will hand over economic control to its creditors but retain a 51% voting stake after subscribing to a €40m capital increase. Around 40% of the debt (€251m) will be equitized with the remainder converted into €376m of new 2026 notes with enhanced collateral and security. The €100m of super senior bridge financing provided by bondholders last spring was repaid at the restructuring effective date (12 January) from the sale of the Balearic business to Grimaldi.

Eleven months after Intelsat filed its Chapter 11 plan of reorganisation in February 2021 – to reduce the world’s largest satellite operators’ debt from $16bn to $6.4bn – a $3.375bn ($2.875bn to syndicate) TLB is being pre-marketed this week to support its exit financing. There will also be $3bn of senior secured notes and $500m super-priority RCF. One of the most interesting deals of the year. 

Intelsat will be heavily dependent on incentive payments from the FCC for its C-band spectrum to be made available for territorial wireless use. These payments in total are around $4.9bn and are to be paid in phases providing certain caveats are met. 

The biggest risk to the largest $3.7bn payment due in early 2024 would involve two satellite failures out of the three dual satellite launches planned in 2022, notes S&P. I can envisage lenders livestreaming satellite launches and being barely able to watch! Another event type to add to 9fin’s calendar?

Today (14 January) is the lock-up deadline for Lowen Play. As of 23 December 77.9% of the German arcade gaming business’ SSNs had signed up to lock-up agreements for the restructuring. Some wag decided it was a good idea to name the new parent company Dice NewCo. Admittedly nowhere near as bad as the BofA banker who famously named a Parmalat SPV Bucanero (Black Hole in Italian) - a few more here

Under the restructuring plan, €350m of 5.375% November 2022 SSNs will be exchanged into €220m of December 7.75% (PIYC element under certain conditions) 2025 SSNs and €130m of Holdco PIK notes (12% PIK, 0.5% cash) due September 2026. New money of €30m will come in as a SSN tap and backstopped by the ad hoc bond committee, if a new SSRCF cannot be raised. 

The Opco/Holdco split makes it easier to restructure further down the line if the business fails to recover as projected under the revised business plan. The €40m SSRCF will be repaid from cash on the balance sheet at completion. Debt maturities are extended until Dec 2025 and Sept 2026, Given a lack of a deleveraging injection from the sponsors who are standing pat, bondholders will take ownership and control of the business.

Lowen Play is projecting €82m of FY22 and €99m of FY25 adjusted EBITDA (net leverage of 6x and 5.5x respectively). Our deep dive in February cautioned that the EV/EBITDA multiple could be as low as 4-5x, potentially leaving the PIK impaired. With the PIK paying 12% (plus 0.5%) the debt balance will grow by another €75m by 2025. 

The pre-restructured bonds are trading around 91 – yielding around 16% - time to blow on the dice and hope to roll a double (digit return)?

Buy the DiP on NAC DAC?

Yesterday’s hearing for Nordic Aviation Capital DAC (NAC DAC) was relatively brief, with the cash management order shelved for a later date, with just an uncontested DIP financing order on the agenda. Judge Kevin Hunennkens at the US Bankruptcy Court for the Eastern District of Virginia approved an order for $170m of DIP Financing. 

The Ireland-based aircraft leasing company said it has made good progress with 88% of lenders signing up to its restructuring support agreement, compared to 77% at the time of its filing for Chapter 11 on 19 December. A final hearing is set for 3 February. 

Emily Geier from Kirkland & Ellis, representing the company, said that 10 out of the 13 debt silos were now onboard, with NAC 33 and NAC 34 ($529.8m) facilities, led by BNP Paribas and MUFG signed up to the RSA, as well as NAC 8, NAC and JOLCO lenders. This left ECAs, Kirk Capital and New York Life, with whom they are still negotiating. As reported, at the initial hearing a 20-strong lender group representing $900m of claims voiced their concerns.  

Under the Restructuring Support Agreement (RSA), in addition to a $170m Debtor-In-Possession facility, there is $537m of additional capital — $337m via a rights issue plus a new $200m RCF exit facility. In return for a c.$4bn reduction in the $6.3bn of debt, NAC creditors will become the largest shareholders. The rights issue is backstopped by the NAC 29 creditors and Silver Point-led lender Group. The DIP facility will be provided by existing creditors. 

For further background on events leading to distress, the business turnaround plan, stakeholder analysis, jurisdictional issues and financial summary – please see our QuickTake.

In brief

We’ve given Emmet McNally a well-deserved rest from the German real estate complex, but Adler, Vivion and Aggregate still generated a fair amount of attention this week, most notably due to pieces from our colleagues at Bloomberg and Reuters.

Citing a Citi analyst report which cautioned that Aggregate would struggle to repay its debt to Vivion, Bloomberg said that the bank is recommending investors short the Vivion bonds at 96.

9fin subscribers already knew about Vivion’s ongoing exposure to Aggregate Holdings from our piece on 13 December, based on our conversation with their investor relations team. We further updated following Aggregate’s surprise Q3 update for investors in which analysts expressed confusion about €250m of bonds issued by Aggregate to Vivion as part of the consideration for the Furst project in Berlin. Emmet provided a further update on his analysis on 5 January.

Adler announced on 13 January that it had closed a portfolio sale of 14,400 residential units to KKR – corresponding to a €1.05bn valuation and €600m of net cash proceeds. It claims this would reduce the LTV to below 50% using the cash inflow to deleverage its balance sheet. Therefore it was with some surprise that we saw a Reuters interview which quoted Max Rienecker, the co-CEO talking of his hopes to extend €600m of debt with German banks due in the next two years. In addition, it would look to repay €1.1bn of bonds due over the same period, by issuing new bonds. It begs the question – the €1.4bn of cash proceeds from the two portfolio sales – to which debt exactly are these funds going to be applied to?

Adler’s cost of debt is at least 250bps higher than prior to Viceroy’s short-seller report which landed in October but was an open secret since mid-Summer. Bloomberg’s Jack Sidders has looked deeper into allegations that Azerbaijan’s premier Aliyev family was connected to Cedvet Caner and his associates with companies controlled by the Azeri investor still owing the german real estate company €250m. Despite Caner’s assurances that he doesn’t control Adler, his wife recently disclosed a 7.4% stake. 

Smile Telecom was back in the High Court this week, for yet another UK Restructuring Plan. The African Telco group was first in court in March last year to sanction a new money restructuring for the troubled operator hit by sharp devaluations in the Nigerian Naira. One creditor 966 Co Sarl is offering to provide $35.6m of new super senior funding to avoid a liquidity crisis. We still have to wade through the skeletons and will update if there is anything new and interesting to report. 

Caffe Nero has completed a debt refinancing from three banks, which has likely dashed the Issa Brothers hopes to gain control on a debt default, The Times reports. As we reported, last year the founders of EG Group bought into the £160m of the mezzanine, seeking to use a landlord claim to overturn a CVA. 

What we are reading this week

An update on Petition’s how long before the bankruptcy pros meet the crypto bros?

If you thought last week's episode was bizarre (to briefly recap - tech dinosaur Blockbuster Entertainment was to be the first ever DAO-owned DeFilm streaming platform) this week it was the turn of another Jurassic period company, RadioShack to air. 

The Initial Coin Offering white paper is my top weekend read, after seeing this excerpt, surely there must be more gems like this: 

The most important day for any new emerging technology is the day on which it “crosses the chasm.” The moment of mass adoption among even the most skeptical consumer.

Until the iPhone, Tesla self-driving car, or Amazon.com crossed the chasm they were but an embryo in the economic womb. But after that crossing, they became trillion-dollar assets (or close to it). We intend RadioShack to be the first protocol to pass over into mainstream usage in the history of DeFi.”

Petition then deconstructed the latest ruse to get investors to part with their cash in new, yet more complicated ways. There is a discord channel too for potential investors to share their views. My weekend is sorted!

As the Novak Djokovic saga continues, a fantastic piece of work from Die Spegel on whether the World’s number one tested really positive for Covid on 16 December. 

You will never question the quality of Premiership refereeing again after you read this write-up of Mali’s 1-0 win over Tunisia at the African Cup of Nations on Wednesday. Over 30 mins after the game ended, players were in ice-baths and the Mali manager in a press conference when they were told that they had to get back on the pitch and complete the match. The Zambian referee had first blown to end the match after just 85mins – but then resumed after his assistants corrected him. A sending off followed after four minutes of VAR (he didn’t reverse his decision despite being invited to do so). The match had two penalties and nine substitutions, but he still blew full time at 89.47. Eventually the Mali players returned to the pitch but after waiting five mins in vain for the Tunisians to turn up – he blew his whistle for a third time to end the match. 

Belt and Braces – China is finally applying the brakes to Africa lending. I learned at first hand in 2019 about how embedded Chinese companies were in Zambia, but as the FT’s big read the brakes are being applied to the belt and road programme. Zambia has long since defaulted, but many other African countries are likely to do so too. Sovereign debt restructuring is one of my specialist subjects – but sadly outside my remit at 9fin. 

At 9fin we have attracted a lot of young talent unwilling to commit to long hours and beastings from banker and lawyer bosses. As Owen Sanderson says in Excess Spread: “A start-up with smoothies in the fridge, a foosball table, and a juicy warrants package might offer a better work-life balance AND more money than grinding away at the bottom rung of an investment bank.” The pandemic has changed many perspectives for those at Investment Banks including an anonymous Goldman Sachs UK staffer who tells of their burn out in March 2021

Over the past week or so, we’ve seen a lot of jitters in selected markets after a huge bull run and concerns over the effects of the Fed withdrawing the kool aid. But as Howard Marks from Oaktree notes, despite years of sharing his thoughts – he has never devoted a memo to selling – despite it being an inescapable part of the investment process. 

This reminded me of a great post from Steve Clapham last weekend – inspired by the BBC drama The Tourist – “If your memory suddenly disappeared and you couldn’t look back...How would it change the way you invest? On the negative side, you wouldn't have any knowledge of past market manias and crashes. You’d also have to regain all your analysis skills – but that’s not my point. My point is you might also be freed from some costly biases.”

If you see a chart like this – just because a stock has gone up so much – surely it can’t be Cheap. A stock's value, however, is based on projected future revenues and profits.

 If you zoom out the chart is Apple from 2010- 2017

Finally, if you can’t wait a few more days for the next Cloud9fin podcast - I highly recommend The Coming Storm by Gabriel Gatehouse on BBC Sounds - the fictional facts (or is that the other way round?) on the origins of conspiracy theories in the US and the genesis of Q Anon.

If you would like more information about 9fin, please content team@9fin.com.