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Despite last week’s carnage in secondary, signs of life are emerging in European LevFin primary, most notably the launch of the long-awaited 888 acquisition financing for its purchase of William Hill’s non-US assets. Our initial thoughts on the reopening are it is not demand driven, but more of a recognition from arrangers it is unlikely to get any better, deciding to offload paper from their books before the summer break.

But doing this can be painful, witness the 86 OID on Manuchar 7.25% bonds (to yield 10.96%) with Credit Suisse being sole books, ouch. Losses from jumbo deals such as Citrix could be in the hundreds of millions for lead arrangers as our Cloud9fin podcast discusses.

The $64m question is will it affect future underwriting appetite, and alter the terms for new deals, such as Boots. Private Credit is now well and truly at the table too.

We all know the narrative by now, for a sharp rise in EHY yields and spreads (around 300bps wider on the crossover this year to north of 550bps). High inflation, negative fund flows, sell-off in other risk assets on rate hike fears, supply chain issues. We now have the added threat of recession (German Bunds yields fell by a record 20bps yesterday) which could be magnified by Central Banks apparent willingness to continue to hike as demand fades. Government bond yields have risen markedly in this year, most notably in the UK and Europe, but despite the recent reversal, it is still highly uncertain where and when the terminal rates will peak.

But with a swathe of EHY deals now offering double-digit yields, are most of these increased risks now priced-in? Is it a time to go shopping for bargains?

Taking a look at senior-secured deals in sterling (table reproduced below) – double digit yields are on offer for some surprising credits – most notably Asda (CPPIB you should look away now, how do those Morrisons subs look now at 6.25%?); Miller Homes, Lowell and Modulaire.

Or switching into Euros, we have SSNs for CBR Fashion; Konsberg Automotive; Profine; Lowell all trading north of 10%. Moving down the cap stack, you can buy Solenis; Ceramtec; Loxam; Altice; Groupe Casino, TDC, Stada and Modulaire Group SUNs in the low teens.

At the bottom of our screenshot is Maxeda, whose SSNs came unstuck after the release of its Q4 21 numbers last month, showing EBITDA falling 51.4% YoY. They traded down from 87 into the low 70’s, with half that move happening after a disappointing conference call. As reported, a number of investors were concerned about management’s ability to provide a clear narrative.

So, many of us were surprised just how quickly, the Dutch DIY chain managed to fix its problems.

During the first quarter it more than offset its cost inflation through increased prices that translated to gross margin expansion, albeit with higher labour costs a bit further down the income statement. Supply chain disruption was less severe than many worried, with good availability of stock and falling freight costs easing investor nerves.

Maxeda brought forward their seasonal intake of goods from the Far East, and with container costs falling, they are now locking in 50% of expectations for the next 12-months. In Q1 they benefited from a $7,000 fixed cost contract for 60% of their imports, well below the spot prices during the quarter which averaged around $12,000. Prices have since fallen to around $8,000.

A €37.5m draw on the company’s RCF in Q4 21 was repaid during the first quarter, leaving cash at end May of around €44m. Pressed on whether they would consider bond buybacks given how cheap their debt is trading, management said they aren’t thinking about that option right now.

Adjusted EBITDA is now back to 2019 levels (€24m) at €25m in Q1. There is a big divergence in performance in its two key geographies of the Netherlands and Belgium, however, with sales growth of 35.9% and -12.8% versus prior year, respectively. Management put this down to more stringent lockdowns in the Netherlands in the comparable period relative to Belgium, however, but also signalled lower consumer confidence in Belgium acting as a headwind.

Using the better comparable of Q1 19, revenue growth was 2.1% and 6.1% in the Netherlands and Belgium respectively. Overall, revenues were up 4.4% against Q1 21, and 4.2% against Q1 19. Gross margins expanded to 37.1% versus 34.3% in Q1 21 and 34.5% in Q1 19.

Year-end leverage should come in at around historical levels at ~4x, said management.

So, given the above, does 14.5% yield for senior secured paper, admittedly for a name which has seen a lot of past earnings volatility, compensate you enough for the risk?

Boparan claims to have turned a corner, after suffering a perfect storm over the past 12-months. There is some delight in the latest quarterly numbers for the UK-based poultry producer with EBITDA margins back to those touted at the time of their stressed refinancing in November 2020 and the company saying that the £135m pro forma EBITDA is achievable going forward.

But as 9fin’s Emmet McNally writes, with LTM LfL EBITBA at £77.5m, they barely passed the £75m test during the last quarter. If the negative EBITDA impact of the Uttoxeter biscuits manufacturing site (outside of the restricted group and was sold during the quarter) was included, LTM EBITDA is only £73.3m.

Boparan has been working hard on passing through costs, with two price increase rounds during the quarter. It has now introduced monthly price ratchet contracts, mostly for feed costs.

Emmet thinks that If Q1 22 was as bad as it was going to get, Q3 and Q4 22 will be about as good as it gets. He says:

“What will prove a tougher headwind in 2023, as has occurred before, is the non-feed input cost inflation the group is likely to face. Management admitted on the Q3 22 earnings call that commercial negotiations spanning two quarters (Q1 and Q2 22) had proven tough. There had been some success in passing through non-feed inflation, but there was more to do.”

We add that there is strong inflation ahead for energy, packaging, and labour costs. Labour costs are around 18% of total costs, as we outline in our deep-dive. These are not new headwinds, but we think it’s clear that tough negotiations this year could prove even more challenging next year. Retailers are now faced with declining consumer confidence and are worried about demand. This will make it more difficult for Boparan to pass on non-feed cost inflation, in our view.

Net leverage has fallen 1.6 turns since the prior quarter to 6.7x. The bonds have rallied 4-5 points this week to 73.5-mid, to yield 18.37%. With liquidity issues seemingly behind it, and covenant breaches less likely in upcoming quarters, it is not chicken feed, if you believe the Chicken King.

A regular in our blessed to be stressed series, Matalan got its timing wrong in failing to get a refinancing of its 2023 and 2024 bonds away late last year. As reported, concerned bondholders recently appointed Perella Weinberg (1st lien) and Houlihan Lokey (2nd lien) as financial advisors.

Teneo and Clifford Chance are the company’s legacy advisors and the owners, the Hargreaves family, are working with advisors from Lazard and Paul Hastings. But according to sources close to the situation, there is no engagement from the UK discount fashion and homeware retailer. The main focus for the company was dealing with RCF and CBILS maturities in July 2022 and whether it would use balance sheet cash or seek to refinance, they explained.

Yesterday (23 June), the company revealed its £50m RCF due in July-22 will be refinanced with a new £60m 18-month loan facility from a private credit provider, and £25m of expensive 1.5L debt with the same maturity taken out with cash.

The new £60m super senior facility is being provided by direct lender Bantry Bay and will effectively replace the RCF at the top of the cap stack in terms of seniority. The facility will pay around SONIA + 7%. Management were positive on the flexibility direct lending gives them, and said “although [we’re] not ruling out public markets, [we are] exploring different options”, a possible nod towards refinancing £350m SSNs due Jan-2023 via the rapidly growing private credit space.

The new £60m facility will be drawn “relatively fully” at end July when the 1.5Ls and RCF mature. With July maturities addressed and short-term liquidity ensured, management can now turn their attention to the 2023 and 2024 maturities, saying they have begun preparations for negotiations with bondholders, with Tim Isaacs appointed as non-exec to oversee.

With pre-IFRS LTM senior secured leverage at 3.6x from 4.2x previously, in normal market conditions, it should be refinanceable. But management conceded the HY market is effectively shut for names such as Matalan. Some form of A&E and/or some recutting of the debt stack is needed. It would be no surprise if private credit was part of the solution, with a need to reduce senior secured leverage. The Hargreaves family could provide additional support too.

There were a lot of questions from analysts on the underlying level of EBITDA. The sources close told 9fin that an A&E or refinancing could be possible if Matalan could get back to around £100m of EBITDA – the figure guided by management in the previous quarter.

Matalan is back to triple digits EBITDA, but numbers are messy. The £100.3m of pre-IFRS 16 EBITDA (for year end Feb 22) includes c.£30m of Covid support in the form of ~£24m business rates relief, a ~£5m furlough claim and ~£3m from local authority reopening grants. However, management pointed to the trading disruptions of six-to-seven weeks of store closures at the start of the financial year and supply chain disorder resulting in lower stocks than planned, to find comfort in saying that an unaffected year would have seen EBITDA above what was booked.

Inflation, freight costs and supply chain issues remain the key headwinds. A new two-year freight agreement (from March) will result in £40m of shipping inflation alone for FY 23 (versus pre-covid), but management said they have mitigated around a quarter by changing the way they bring goods into the UK. Without going into the specifics on pricing, investors were told the “majority” of freight for FY 23 and FY 24 is covered in terms of both price and capacity.

A 6.5% increase in the UK national minimum wage is an £14m increase against pre pandemic levels which management says it can offset through increasing the number of self-checkouts, as well as supply chain automation. Store managers will go from overseeing one to two stores in close proximity. To mitigate rising raw materials costs it is changing the fabric mix, ordering materials earlier, and moving Far East sourcing to the Near East. A strong dollar also hurts, but 80% of USD exposure has been locked in at a rate north of $1.35 to the pound.

Matalan’s £350m 6.75% Jan 2023 SSNs were little changed yesterday at 81.75-mid, according to ICE Data, with the deep discount to par reflecting the challenging HY market.

Clients can read our Stressed QuickTake is available here. If you are not a client but would like a copy, please complete your details here. 

The back and forth continues between Viceroy Research and Samhällsbyggnadsbolaget (SBB) the Swedish social housing provider who is accused of cooking the books.

In February, there were 1,000 people on the Q4 webcast and another 100 on the phones. The surge in interest in the Sweden-based social housing provider’s results followed Viceroy Research’s report titled Samhällsbyggnadsbolaget: Hard to pronounce, harder to justify value.

The report alleged suspected related party transactions, highlighted conflicts of interest, governance concerns and the alleged inflation of fair market values in the company’s portfolio. Viceroy questioned the liberal use of hybrid securities for funding and its effects on reported LTV and expressed concerns over the issuance of D shares as part consideration for acquisitions, a number of which it viewed as round-tripping deals.

SBB issued a rebuttal of the Viceroy allegations, and CEO Ilija Batljan (whose corporate past was highlighted in Viceroy’s report) didn’t hold back in his responses to questions on the Q4 call. “We will never let criminals affect our company”, he said.

He even attempted to make a joke about the report saying that the company name is not that hard - and gave some hints on the pronunciation.

At the time SBB’s Investment Grade bonds traded in the 80s from around par. They have been steadily declining ever since, despite a series of announcements and deal flow from the company in which it attempted to put a positive spin on performance, with Viceroy issuing a series of their own updates. The shares continued to slide, much to Fraser Perring’s glee, down by 75% YTD.

Viceroy issued another report, in which they highlighted ‘material reconciliation challenges’ in a deeper review into SBB’s financial accounts.

Viceroy said they “have requested that SBB prove these reconciliations through correspondence and answer basic questions regarding non-cash entries in its statement of cash flows. SBB provided non-answer statements, including that its method of acquisition accounting is industry standard (it absolutely is not).”

The short seller adds: “SBB also acknowledged material error on its presentation of Contracted Future Rental Income, which was inflated by over 100% in 2020. Unsurprisingly, this was not picked up by auditors EY, who were also presented with this error, and have made no attempt to correct its audit opinion.”

In response, SBB said that Viceroy had alleged that SEK 14bn (conversion) of liabilities sit outside the balance sheet, “which is incorrect and misleading.”

It added: “To clarify note 26 in the annual report in relation to the claims from Viceroy, the purpose of the note is to clarify that the debt does not have a direct impact on the cash flow statement but has been added indirectly through the acquisition of a subsidiary. For acquired subsidiaries, SBB applies the industry standard, where acquired subsidiaries are reported on their respective rows in the cash flow statement instead of making a net reporting of all items as a single item.”

I will leave it to the accountants amongst you to argue over these points and I readily admit I haven’t taken a closer enough look yet to have an opinion. Another situation to add to my burgeoning – must do more exploratory work – list.

But Mr Market appears to have made-up his mind. SBB’s €750m 1% 2027 SUNs fell over eight points yesterday to 65.83-mid. Just two weeks ago Fitch affirmed their BBB- rating with a positive outlook.

Revlon is a beauty products business which is no stranger to distress and restructuring.

As Petition outlined earlier this week in their excellent post, despite a ‘transformational acquisition of Elizabeth Arden’ in 2016, revenues at the combined group fell off a cliff in 2017. Newer competitors such as Coty were sexier and saw the move online for beauty products, accelerated by the pandemic, earlier, with Revlon looking less attractive.

Revlon’s problems had arguably started even earlier with a liability management exercise in 2019. Without a refinancing its 5.75% March 2021 unsecured debt, springing maturities would kick-in for its 2023 term loan and their ABL. But Revlon got the refi away, delaying the day of reckoning.

But 2020 performance was a disaster, forcing it to secure $65m of incremental funds “from certain “participating” lenders who subsequently provided the now-infamous BrandCo Facilities.

On May 7, 2020, a new credit agreement “with certain of its existing debtholders” provided Revlon with $1.85bn of BrandCo debt - detailed by Petition in 💄Revlon: Lipstick on a Pig? Part III (The Uptier Exchange)💄

The new money facility had a first priority lien on Revlon’s brands, such as Elizabeth Arden and American Crew, with participating term loan lenders rolled-up into new longer-dated second lien, but non-participating lenders in the legacy term loan were relegated to third lien status.

Those familiar with other uptiering transactions in the US, will know where this was heading – to the courts.

But as you may remember, a day before the lawsuit was due to land, Citibank paid third lien lenders by accident. They asked for their money back, but the hedge funds said no.

Citi sued, and lost. And while they awaited the outcome of their appeal, Revlon filed for bankruptcy last week.

This raises questions of who are the creditors of the 2023 (now third-lien) term loan? After paying out $500m in error, is Citi now the main creditor owning the debt?

With the appeal ongoing, the repaid lenders told the bankruptcy court that they are contingent creditors. Then there is the question of what Revlon does here. Surely it is motivated to ignore Citi’s claim as a creditor – the debt has been extinguished after all – to reduce its overall debt burden in the Chapter 11.

Citi is also in a difficult position, having arranged a new revolver in 2020 to help get the votes to strip assets from the term loan lenders. If the whole BrandCo transaction is reversed, the priorities of the lenders and the debt stack changes markedly. Perversely, Citi might want this litigation to succeed the most, as it will elevate their claim from third-lien status to the front of the queue. But does that also make it a claimant and a defendant?

If that isn’t messy enough, it looks like Revlon could become the next meme stock.

Echoing the fun and games we had for Hertz, the stock was at one point up 260% in the following week to $8.14. It is currently at $7.32 for a not inconsequential $392.6m market cap.

But with a $4bn debt stack and unsecured bonds trading in the teens, that doesn’t make much sense. Buy the unsecured and short the stock, surely, it’s a win, win, win. But that didn’t work out that well for Hertz, mind. Plus, Revlon chairman Ron Perelman owns 85% of the stock, which means a short squeeze is highly likely (as 37% is sold short).

At extremis, could we see a point where stock could be issued ATM to help reduce the debt burden? I wouldn’t rule it out.

Nordex is a confusing business for us at 9fin Towers. We couldn’t understand while it was holding such a large cash position, while having such an unusual capital structure, as we outlined in our deal prediction last July, most notably an expensive shareholder loan – provided by Acciona – paying a chunky coupon of 10% was recently used to refinance their 1.8%-3% promissory notes due in April 2021. Now after a poor first quarter where adjusted EBITDA turned negative amid projections for FY 22 margins of -4% to 0%, it must rely on its cash buffer.

Questions are being asked about the upcoming maturity of its €275m 6.5% Green Bond due in February 2023, given the challenging environment for European High Yield. On its earnings call earlier this week, management reiterated previous comments that all options are being explored, which they said include equity, equity-linked and an “equal instrument.”

The bonds are languishing at 95.5 offer to yield 14.6%, despite being easily covered by the €680m cash balance, and the Wind Turbine producer having a €1.4bn market capitalisation.

Another interesting situation is Raffinerie Heide. Despite the contribution of the Kalundborg refinery by sponsor Klesch, most market participants believe a refinancing of its €250m November 2022 bond is near impossible. But with diesel crack spreads hitting record levels after Russia diesel (54% of European supply) is banned, could it generate enough cash in the meantime to repay the bonds? Crack spreads are >$40 compared to historic averages of $6-7.

We almost got through a second week, without a mention of German Real Estate. For those who are missing the coverage, we are turning our attention back to Aggregate Holdings next week.

Adler Group said that it ‘welcomed’ the examination order by BaFin for its FY 21 accounts, probably not the word we would use - lost in translation and all that. It also finally announced that it had initiated a squeeze out for the minority stake in Adler Real Estate.

Our crawlers last night picked up that Corestate shareholder Karl Ehlerding has sold his 6.21% stake. Remember, it was only on 1 December that Karl Ehlerding and Stavros Efremidis or companies associated with them intend to acquire a significant stake in the company from Passiva Participations S.a.r.l. in an over-the-counter placement at market conditions. Efremidis subsequently became chairman of the supervisory board in March.

Aside from the Viceroy report on SBB, our weekend reading will revolve around potential improvements in UK Restructuring, with the UK Insolvency Service publishing a interim report evaluating measures enacted in 2020, most notably the UK Restructuring Plan and moratorium. For those which are time poor, Kate Stephenson from Kirkland & Ellis has written a summary.

Unashamed plugs for cracking 9fin content - our popular 9Questions series first restructuring guest – Paul Kirkbright from Alvarez & Marsal. Our ESG webinar is another must see.

Fraser Perring is having a mid-life crisis, his SBB short helped to buy an expensive Italian tractor

Having left the Ionosphere, it is intriguing to see my financial journalist colleagues subject to M&A and the likely financial engineering. First Reorg, then Euromoney. It can be difficult when you are covering your own financing – I still remember being sent Project Jack by my sources – the lender presentation for Acuris (then Mergermarket) and the financing for the BC Partners’ acquisition. Here at 9fin we’ve noticed a pick-up in inbound from financial due diligence providers and CV inflow.

Last week we saw further cracks in Crypto space, prompting the FT to launch the Crypt to detail where the digital bodies are buried. Bitcoin has clawed its way back above 20k level; but bailouts are multiplying. This thread on how the Anchor interest rates were inflated, if true, is instructive.

And finally, when you’ve got work at 9 and football training at 5 (sent from No Context Brits).

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