Friday Workout - Schur - will let you down; Regaining Olympic Gold; Nappy Ever After?

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Friday Workout - Schur - will let you down; Regaining Olympic Gold; Nappy Ever After?

Chris Haffenden's avatar
  1. Chris Haffenden
14 min read

While HY primary was on ceasefire with markets consumed by Ukraine tensions, yet another tape bomb went off in LevFin. Schur Flexibles issued a lender update statement on Tuesday afternoon which led to its September-launched €475m TLB falling over 30 points. Prior tape bomb Saipem has its own immediate securities needs – as amounts to be raised increased yet ever higher this week. There were signs of renewed hostilities with a potential firefight at WiZink, which may not be a drone deal with Barclays now leading the insurgents. 

But it wasn’t all doom and gloom, late last Friday evening Olympic Entertainment bondholders secured an A&E which saw their prized assets return to the restricted group. 

The market feels very different from a couple of months ago. Secondary loans are starting to cheapen, despite significant inflows and plenty of open loan warehouses, and it is now impacting margins on primary, with single B names starting to approach the 450 bps level. As Owen Sanderson outlines in excess spread, while the arbitrage is attractive, it is becoming much tougher at the bottom of CLO structures. 

On the collateral side, the number of negative surprises is picking up, and our watchlist is starting to grow. With the earnings season just starting, more names are likely to appear. Advisors are getting busier, and looking further out for more potential surprises – perhaps Ontex, a good primer for next week’s numbers is our latest deep-dive (more on this later). 

The speed and severity of events unfolding at Schur has surprised even seasoned LevFin pros. Many can’t remember a deal going into a likely restructuring before its first financial update and interest payment. Personally, I can only remember two:

Cammell Laird in 2001, when its Italian cruise ship customer literally turned its boat around and reneged on a refurb contract, pushing the Birkenhead shipyard into likely insolvency. I remember hosting a call for disbelieving bondholders with my shipping expert colleagues. They didn’t take our advice or grant us a mandate; the eventual recoveries ended up in the teens. Not a great start for the fledgling European High Yield market. 

The other example is even more bizarre, in EM (obviously, that’s where all the fun happens), where the Russian Finance Leasing Company told investors that it had no knowledge of launching a $150m bond, in July 2009. They added management present on the roadshow and who signed the bond docs were not authorised to do so and – you couldn’t make this stuff up. In 2014, the CEO was arrested in Austria and was extradited to Russia – which he said was on trumped up charges. 

Schur - will let you down

Changes in Schur Flexibles senior management, announced in mid-January barely registered with lenders. The release on the ‘new management constellation’ was upbeat with the current COO and Alec Baldwin look-alike Juan Luis Martine Arteaga taking over as CEO, and Mathias Breuer appointed as CFO from Semperit. The company said the ‘realignment of the Group’s management is secured’.  

But in the background, Alvarez & Marsal and KPMG were feverishly pouring over the books of the Austria-based flexible packaging producer, Europe’s fourth largest. The two were brought in after the previous CEO and CFO left in December after ‘strategic differences’ with sponsors B&C and Lindsay Goldberg. It was soon clear there were ‘compliance issues’ amid concerns about accounting irregularities, sources close to the company told 9fin. 

As our initial update outlined, EBITDA was significantly overstated by IFRS accounting outside accepted boundaries with certain items being capitalised in error. 

Schur Flexibles told lenders on Tuesday that it had picked PJT Partners as financial and Allen & Overy as legal advisors, as broken by Reorg Research. The statement came as the first communication with lenders after pricing LBO financing for the takeover by B&C Group from previous sponsor Lindsay Goldberg (who retained 20%) in September at a 99.5 OID, paying E+425 bps. According to S&P, net leverage was expected to be 5.8x at FY 21.

We revealed lenders held a call on Wednesday afternoon to discuss appointment of advisors, aiming to have them in place before a company video conference update on 24 February.

One concern expressed by lenders contacted by 9fin is the rapidly deteriorating liquidity position, with the cash burn estimated to be €30m to €50m since launch in September. As reported, the sponsors B&C and Lindsay Goldberg have provided a €23m shareholder loan to give a buffer, which should fund the business through the next 13-week period to early May. 

A&M is working on a revised business model to reflect the reduced EBITDA, the sources said. Both advisors require more time to complete their work, and only their initial findings will be presented next week at the lender meeting. It is expected that lenders will be asked for a standstill and for certain waivers, including the ability to access the RCF. 

Lenders, however, remain in the dark, and will be wary of making concessions. They will be looking closely at the docs, management representations at time of issue were based on figures which the company now says are inaccurate. Access to the RCF is blocked, given legal concerns for directors, and lenders will also be concerned about their own legal responsibilities into fresh lending. 

There is also a worry if the term loans are impaired, and lenders will be wary of an Austrian insolvency filing, which is a lengthy process and according to one legal expert is “truly awful”. B&C appears supportive, however, and is mindful of reputational damage amid a number of Austrian financial scandals in recent years.

9fin will be watching this situation closely as it develops, and there is more information in our coverage not included in the above. Ask for a trial subscription to see more. 

Olympic Gold 

Give me something I can hold 

With that something I will grow

Olympic Entertainment bondholders spent almost 18-months fighting sponsor Novalpina who used a J Crew like manoeuvre to take out the online business and Lithuanian land assets in the summer of 2020 from the restricted group. Funds holding the €200m SSNs due 2023, led by Bybrook and subsequently joined by largest holder Albacore called foul and hired lawyers Kirkland & Ellis to prepare a litigation strategy. 

Holders were outraged by the transfer into an unrestricted subsidiary (Olybet Lux) for €18.4m (covenants allowed €20m) – which they believed was at less than 3x EBITDA. In addition, €25m was drawn on the RCF and upstreamed out of the restricted group. But after some initial noise regarding litigation, it went very quiet, until an announcement at 8pm last Friday

It was an early Valentine’s present to bondholders with a creditor-friendly A&E deal. 

Key terms saw bondholders finally managing to wrangle the prized online assets back into the restricted group, with a maturity extension out to 2025 and an additional 100 bps of interest on the €200m SSNs, as well as a €25m equity injection to pay down RCF drawings. There is also €23m of cash at the Olybet subsidiary whose EBITDA has grown from €5m to €20m at FY21 and Croatian land assets. Docs are tightened significantly; subscribers can look at our full review of the legals here

In total, 92% of holders have agreed to key terms and are locked-up, exceeding the 90% needed to implement via a consent solicitation, without the need for a court process.

So how did bondholders manage to win back the gold? 

The collapse of Novalpina and the subsequent transfer to Berkeley Group Research as GP in August triggered a change of control under the notes, according to two sources close to the situation. While ultimate ownership stayed with the sponsor, the full voting rights went to BRG, which was the trigger. But the CoC wasn’t announced - most likely as BRG didn’t want to set a precedent given problems at NSO – Novalpina’s most troubled investment, meaning that Olympic holders could accelerate, after 30-days grace, the sources said. 

With online gaming businesses attracting high teens multiples and Entain reportedly an interested party, the bonds should easily be covered, especially when all Covid-restrictions are lifted from the land assets. There is room for consolidation and roll-up opportunities too. 

For more analysis our A&E report is here, and shortly releasing a Restructuring QuickTake, and a restructuring review piece going behind the scenes into how the deal evolved. 

How can you decline such grand designs? 

I'm flattered that you thought 

I make a good reward, but 

How can you survive my blatant lies? 

I'm flattered that you thought 

So come taste my good reward

Nappy Ever After?

Ontex caught our attention at the backend of 2021 with a surprise investor update issued mid-December signalling a major change in strategy in the face of unprecedented cost headwinds and an uncertain outlook. The Belgium-based nappy and sanitary products manufacturer has had a chequered past with a perception of limited purchasing power and plenty of execution risk. 

As management outlined Ontex 2.0, amid broader cost inflation concerns that first surfaced in late September, we were reminded of Ontex’s fixed-price contract exposure and susceptibility to raw material prices first brought to light in our Credit QuickTake in June last year. 

After the bonds dropped to around 90 and spreads to worst widened to 570bps, Emmet Mc Nally released a deep dive report to assess the value proposition at current levels. 

Our bullet point summary is as follows:

·    Ratings pressure and/or covenant risk may be priced into bonds, but de-leveraging trajectory and decent equity cushion makes for an interesting value proposition

·     Liquidity is not of immediate concern with litigation proceeds received in early October further boosting resources

·     Undisclosed maintenance covenant headroom looks likely to tighten in 2022  

·     Non-core asset base disposal is underway with Brazilian asset advisors appointed

·     Valuation metrics are capped by metrics paid for assets, especially considering arbitration proceedings and a subsequent settlement

·     Lack of granularity on divisional earnings makes determining non-core value challenging, but we estimate value could be in the €320m-€410m range

·     One potential benefit of the disposal program would be a reduction in exposure to FX movements; exposure is not entirely removed due to raw materials used

·     Core business and simplifying of portfolio will be the driver of profitable growth 

·     FY 23 core EBITDA margin target is just a maintenance of achieved in FY 20 

·     Uncertainty on the company’s pricing power in Europe and the recovery of margins appears contingent on passing through some of its cost inflation

·     Ontex’s product portfolio has become too complex, leading to operational inefficiencies

·     The fixed price nature of customer contracts means cost inflation pressures are unlikely to subside in the near term

·     Binary market and tender dynamics in the European private label business are unfavourable for Ontex in either situation

·     Limited information available to build an informed view on the planned expansion into North America despite some execution risk being borne by creditors. 

·     A new look management team has injected impetus but may have work to do to educate on expansion plans

·     Ontex faced significant cost headwinds in 2021 and anticipates this persisting in 2022 and 2023 

Non-subscribers can get a copy by requesting team@9fin.com

Their Q4 results are due next Wednesday. 

In brief

We’ve spoken in the past about the aggressive WiZink restructuring deal – favouring the two funds which drove the deal, and new money providers – leaving non-participating PIK holders with very little. With 75% of holders locked-up we thought it would get over the line, despite some disgruntled holders, as this could be implemented via an English Scheme or UK Restructuring Plan. If they failed to get to this level, Beach Point and Monarch indicated it could pass with a 50% plus 1 vote using a distressed disposal clause in the inter-creditor.

Bloomberg revealed this week that Barclays’ distressed desk is heading a group of holders representing more than 10% (blocking a consent solicitation, which needs over 90%) advised by Weil. With Barclays a powerful force in the distressed market, there is a lot of pressure on funds, noted one hedge fund, who noted that some holders might be looking at docs to see if there is any way of reversing the irrevocable acceptances. There is also the question if the lockups will hold up in a Scheme vote. 

The early bird deadline is today. We will update further when we can.

Adler has appointed former Vonovia CFO Stefan Kirsten as chairman with a mission to restore confidence in the German Real Estate landlord and developer. Its shares rose by 7% on the news. It also won a court case which ruled Viceroy should cut ‘untruthful details’ from its short-seller report. But its long-dated bonds are languishing around 80, to yield around 6%. 

Aggregate Holdings, Adler’s largest shareholder, arguably has even more reason to restore investor confidence. It has decided to show the full Hogan Lovells report which the company says fully exonerates it from Viceroy’s allegations if investors are willing to sign an NDA

Saipem was hit by a €192m fine in an alleged corruption case after the Tribunal of Algiers had imposed a fine and compensation for damages of €192m. The case relates to the 2008 tender for the award of the GNL3 Arzew contract. Saipem has appealed the decision. The Tribunal of Algiers also sentenced two former employees of Saipem Group (the head of the project GNL3 Arzew and an Algerian former employee) to five-years and six-years of imprisonment respectively.

On 16 February, Bloomberg reported that a €4bn restructuring package was being put together for Saipem. This would include a €2bn capital increase, and a €1bn credit facility, and is working with advisors to offload a drilling division which could net €1bn in proceeds. Over the course of the week Saipem April 2022 bonds recovered into the mid 90s after hitting a low of 87 last week, as hopes rise of bridge facility, but longer term there remain concerns with the 2028s stuck at around 80.

Next week the board meets to approve preliminary data for 2021 on 23 February, with a press release due a day after. But the key meeting is on 15 March, when the updated strategic plan will be submitted for approval with a conference call due on 16 March. 

Next week sees Q4 results for Standard Profil, whose bonds fell into the high 70s after a poor set of Q3 results, as we flagged. It has attracted interest from distressed funds in recent weeks, with the bonds approaching the mid 80s. 

After negotiations dragging on for months, the troubled automotive seals producer today announced that it had secured a €30m three-year RCF from Credit Suisse, the terms were not disclosed. The bull case is that the company can now limp through 2022, with OEMs unwilling to see a defaulting supplier. The bear case is Q4 numbers are likely to be shocking, with better entry points, and management are unconvincing at best on their ability to fix. 

Aston Martin also reports next week, with investors keen to hear more about delays in the delivery of the Valkyrie hypercars and plans to electrify its range by 2026. Billionaire investor Lance Stroll has talked about refinancing the expensive debt (10.5% and 13.5% coupons) but there remains decent call protection and financing markets are less conducive, in our view. 

What we are reading this week

Bloomberg lost an important case this week in the Supreme Court, which could have significant implications. Editor John Mickelthwaite makes a strong argument on the decision and how it could protect powerful people from full accountability

A lot of nervous editors will be reading the judgement this weekend. 

A Fantastic piece of analysis from our friends at Petition - online grocery delivery businesses and their economics, with some already starting to fail. Is the latest technology enough to avoid the mistakes that were made by Kozmo and UrbanFetch in the 1990s?

One development which we think is not getting the headlines that it deserves is the SEC’s regulation of private markets and its ambition to regulate anything outside of the public securities markets which could be systemic - crypto/defi/stablecoins, and PE that means you.

Matt Levine, says there are two ways that they can regulate:

1. Rulemaking, which everyone is consulted, the rules are devised and everyone knows what they can and can’t do, or;

2. Regulation by enforcement - relying on old rules such as don’t use artifice to defraud. Enforcement actions are then used to decide what is allowed, and the SEC sues participants, with fines the cost of doing business. BlockFi’s $100m fine might be just the start.

Last year, the ECB sent this as a Valentines’ message - it hasn’t aged well 

Roses are red

Covenants are hollow

All your collateral belongs to Apollo 

This time last year, we were in full meme stock and tech bull mode. This week Cathie Wood’s famous market timing went awry on an appearance on CNBC this Thursday - thanks for the FT’s Rob Smith for snapping this gem

What is the opposite of a rising tide lifting all boats?

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