Market Wrap

Friday Workout - Take Care; 50 Sheds of Grey; Wiz-Sinks while Moby Floats

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

Journalists can have a difficult relationship with Private Equity. For many hacks, which are by their very nature often left leaning, PE can be easy to blame for many of society’s ills. I was reminded of this when looking through early versions of our ESG QuickTake for Voyage Care, and the raft of articles blaming PE and financial engineering for the collapse of a number of UK Care Homes in the past decade. From my experience some of these articles were often wide of the mark, sometimes with real world consequences.

In a past life, as I transitioned from covering European corporate restructurings post GFC – which I was finding to be dull and predictable – I landed in the world of securitisation and its role in care home and private hospital finance. A multitude of Opco/Propco structures to strip out asset value, mis-matched interest rate swaps out of kilter with underlying lease structures (to bet on the 10–30-year yield curve, a legacy of when ratings agencies allowed these sorts of things – spoiler alert, it didn’t end well).

For advisors and me it was an opportunity to unpick complex structures which to some might have been migraine inducing and in need of time in a darkened room, but for us it was a welcome relief from the simple and transparent corporate restructuring deals at the time. 

My profound apologies once again to my ex-colleague Jon Berke flying over from the US to discuss European mid-market at a meeting with a top tier financial advisor, but instead he had to bear an hour-long brainstorming with yours truly on exactly how the two Theatre Hospital CMBS – backed by 31 specialist care hospitals leased to BMI Healthcare – could be restructured. My opus on the eventual restructuring three years later is available on request. 

My introduction into the world of care homes and specialist healthcare was the Titan Europe 2006-4 securitisation backing Four Seasons Healthcare. In 2006, Three Delta, a relatively unknown Middle Eastern Investment fund paid £1.4bn for the business, but as it transpired, the equity portion was minimal. With numerous advisors and funds all over the multiple debt tranches, led by RBS, it is probably the reason why I still hold the Debtwire record for most sources close to the situation in an article, at 15. “…according to the fourth, sixth, eighth, ninth and twelfth sources.”

The Four Seasons deal was put together at the height of the securitisation wave with RBS in particular keen to find innovative ways to unlock what it's bankers saw as hidden property value in the sector. It was a big player in commercial real estate finance and made huge fees on all sides of the deal (including the swaps) but was less lucky with the Priory, unable to offload its c.£800m debt exposure before the music stopped, and later on it would hit the front pages for its role in the downfall of Southern Cross Healthcare

Shortly after the Mail article, questions were being asked in parliament, with the newspapers saying that thousands of care patients (it had 31,000 residents) would end up on the streets. At the time I knew this was totally inaccurate, the operator could easily be replaced, I was aware that Southern Cross landlords had lined-up alternatives in their contingency plans. 

Yes, private equity ownership did cause real damage to the sector. The use of financial engineering and sale/leasebacks at elevated rents for sponsor-owned care home businesses did put pressure on cash flows. This meant that cost cuts were needed to service debt and this did result in lower standards of care and unfortunately a number of unnecessary deaths. CEOs with no healthcare experience were put in place by private equity sponsors, leading to one industry veteran CEO to confide in me that he refused to countenance a merger with another business forced upon him by creditors purely on quality-of-care and other governance issues. He said he was ready to go public with his concerns if they went ahead with the M&A.  

But the media frenzy was not only overblown, it also had real world consequences. At least one rescue, with one of the world’s largest private equity firms set to invest over £100m, was withdrawn at the 11th hour after a weekend PE bashing article on their target. My article on the rescue financing was ready for publishing that Monday. After the funds were pulled, the business collapsed, the shareholders ended up with bagel, and 3,000 jobs were lost. 

Four Seasons Healthcare ended up in new ownership but was restructured yet again and has been in administration since 2019. The Priory was passed around the PE community (RBS managed to recoup £133m after their debt was repaid) – first in a lender sale to Advent in 2011, then to Arcadia, it is now owned by Waterland who bought it in 2020 and recently merged it with Median KlinikenCare UK escaped a full-blown restructuring but it has remained in the hands of Bridgepoint since 2010, with a sales process abandoned in 2018.

So, have PE firms learned their lessons from earlier in the decade? If this is a sector which isn’t suited to high leverage, why do sponsors continue to like care home businesses and lever them up? 

One answer might be demographics, our ageing population and hopes the sector can benefit from a longer-term solution in the UK to its social care problems. According to the CMA the industry is worth £15.9bn a year, and the industry remains fragmented with 14,800 registered organisations providing care. But government funding for local authority adult social care fell in real terms by 29% from 2010 to 2020, according to Allyson Pollock, clinical professor of public health at Newcastle University and author of NHS plc: the Privatisation of Our Health Care. 

Voyage Care was recently acquired for £330m by asset manager Wren House, fully owned by the Kuwait Investment Authority (KIA), the sovereign wealth fund of the State of Kuwait. 

It priced its £250m 2027 SSNs at 5.875% yesterday afternoon. 

As our ESG QuickTake outlines, it has some of the best standards in the industry, with 95% of its services rated good or outstanding, versus an 86% average. While competitor HC-One saw 12% of its patients dying of Covid-19 by summer 2020, Voyage Care saw just 2.25% of total deaths in 2019-2021. If you are not a client and would like a copy of the Voyage Care ESG QuickTake, please complete your details here.

But all care homes are suffering from increased staff costs and shortages from Brexit, minimum wage hikes, higher insurance premiums (due to Covid-related claims) amid concerns of a cash crunch at its local authority funders, with plans for caps on lifetime care costs balanced by relaxation of means testing thresholds. Asset backing looks strong however, with a decent level of protection under the docs, most notably for sale/leasebacks. Definitely one to watch going forward.

50 Sheds of Grey (plastic) 

A chequered past history can often cloud judgment for investors on their assessment of new deals. Prospective lenders can be put off by previous restructurings and poor performance and may be unwilling to give much credit to PE sponsors and the apparent strong turnarounds under their watch. This might provide an opportunity for those less inclined to dish out punishment and be more submissive.

Keter is a good example. The BC Partners-owned “global leader for at home lifestyle solutions’ which enhance people’s spaces, while also lasting a lifetime.” Keter says it is positively impacting people all over the world, every day. 

It adds that the “resin-based solutions” market is growing faster than the market for wood and metal sheds, storage etc — “consumers are increasingly investing in and prefer aesthetically appealing, well-designed, functional, durable and sustainable solutions over traditional products or materials, such as wood or metal.”

Yes, just in case you missed it in the paragraph above with Grade A corporate puff – a reveal that they make plastic sheds and garden storage boxes. Apparently these were a boon during lockdown (I won’t use the Garden man cave stereotype) as we all spent more time at home and craved more outdoor space.  

In 2018 after poor performance which one buyside attributed to self-inflicted cost control issues following acquisitions, its main facilities were downgraded to triple-C, and Keter was forced to raise new debt at 91, and in early 2019, the debt was trading as low as 71. 

The rebound since has been impressive, with overheads cut, products rationalised and greater accountability across divisions. LTM Adjusted EBITDA to 30 September 2021 was €220m, with equivalent figures for FY 20, FY 19 and FY 18 at €194m, €131m and €93m.

Sensing an opportunity, BC Partners (to cash out on its €250m PIK paying 11.5%) prepped an IPO in September 2021. Despite according to IPO documents being “considered by many of its customers as a category captain for resin-based solutions” it failed to get away, and BC has gone down the refi route, which to the relief of lenders hasn’t included a dividend recap. 

Buysiders consulted by 9fin journalists for our loan refinancing preview had wildling differing views – you could say there are 50 Sheds of Grey – one of Keter’s sheds reproduced below:

For some the story being told by the sponsors has failed to resinate (pun and spelling intended), as raw material costs bite and price rises are put in place by the company to mitigate. 

But others we talked to remain big Keter fetishists, ecstatic in their Shed heaven:

Time and time and time again
I look to me my only friend
Time and time and time again
Are you here for my pleasure
Or are you going for gold
Are you going for gold

For a more straight-laced look at the business, our loan preview is due later today. 

Wiz-Sinks, Moby floats plan

As we finalise our Blessed to be Stressed report, a peripheral figure on our watchlist snuck out an agreement with its PIK bonds this week. We last looked closely at WiZink Bank, the Madrid FinTech which provides revolving credit card facilities and financing for second-hand vehicles last March

Changes in regulation followed a ruling from the Spanish Supreme Court on March 4, 2020, which claimed that WiZink interest rates (26.82%) on its revolving credit cards were excessive which then impacted revenues as usury claims continued to rise. 

It managed to stabilise the business, albeit at lower levels, and despite good performance in late 2020, management had declined to give future guidance and confirmed that no dividend would be paid during 2021 to Mulhacen, the issuer of the €515m Senior Secured HoldCo PIK Toggle Notes. The sponsor, Varde, had previously said it would place €50m in a cash box by end-2020 towards debt service, aiming to build up a reserve amounting to 20% of the loan principal by the end of 2023. 

The PIK Toggle Notes had rallied from the high 50s a year ago, to the mid 80s, last September and had hung in above 80 ever since. But yesterday they fell 23.5-points to 62.06-mid, and are now 51.65-mid. Yesterday, WiZink announced a restructuring proposal agreed by Varde and an ad hoc committee of bondholders advised by Houlihan Lokey which comprise a majority of the holders. The company is advised by Moelis.

Under the plan there is a new €280m 10% PIK Toggle first lien facility to finance a €250m capital increase to WiZink, 50% financed by Varde and 50% by an ad hoc group of bondholders advised by Houlihan Lokey. The PIK Notes will be partially equitized, with 55% (at current principal) reinstated into new reinstated 8% PIK Toggle 2026 Notes on a second lien basis. Varde will remain majority shareholder of Mulhacen with 60% – with the remainder allocated to bondholders, the vast majority going to the new money providers, with just 2.5% going for existing noteholders. 

Lockups are being signed and further updates on implementation will be provided in due course with the intent to complete the proposed transaction during Q122. 

There was better news for long-suffering Moby bondholders this week. The Italian ferry group confirmed press reports that an agreement was reached with its main financial creditors, adding that the new continuity plan filed with the Milan court on 19 January (a day before the 20 Jan deadline) “provides recovery percentages higher in respect to the previous plan filed by Moby SpA on 29 March 2021.”

In October it announced that it had entered into a non-binding Memorandum of Understanding (with an ad hoc group of bondholders who together hold in excess of thirty-three per cent of the €300,000,000 7.75% Senior Secured Notes due 2023) to engage in negotiations for “providing the additional financial resources necessary to support a new composition plan to be submitted to Moby Group financial creditors.”  

But days later it emerged that Moby had filed a complaint in the US courts which claimed that “Italian vulture investor Antonello di Meo and Morgan Stanley and its subsidiaries attempted to illegally acquire control of Moby S.p.A.” This was subsequently withdrawn. 

Last March, Moby told the court it would sell five vessels valued at €132.7m, two Sardinian properties for €8m and said they would offload their tugboat division, valued at €50m. This would have allowed €61.6m of bank debt and €121.2m of bonds to be repaid, with the remaining €101.4m of bank debt and €121.2m of bonds downgraded as secured debt (under the Italian process, uncovered debt by collateral value can be converted) and be repaid at a minimum of 13c, which could rise to 19%. Financial investor Arrow Global would purchase some debt of CIN-Tirrenia (the other entity owned by Onorato Armatori), paying €77m to allow the release of guarantees on the CIN-Tirrenia vessels held by bank and bond creditors.

Details of the new plan have not been disclosed – we will be hunting down the key terms – the 2023 bonds are currently indicated in the mid 70s, up from 60 at the beginning of January. 

In brief

Nordic Aviation Capital has submitted its plan of reorganisation and filed its disclosure statement and plan of reorganisation. The filings provide more detail on the restructuring for the Ireland-based leasing company which filed for Chapter 11 on 19 December. As reported, the restructuring plan envisages $537m of additional capital, a $170m DIP facility and a c$4bn reduction in the $6.3bn of debt, with NAC creditors becoming the largest shareholders. 

The disclosure statement provides more detail on the options available to various sets of NAC creditors, which as reported is tailored to the various creditor groups, with different return and risk profiles. One group, most notably the NAC 29 holders, wanted to drive their returns via the restructured equity, some lenders wanted to receive more reinstated debt and further groups of lenders wanted to take aircraft collateral and carve themselves out of the plan. 

Last week, Emily Geiger from Kirkland & Ellis acting for the company said there was 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. For further background on events leading to distress, the business turnaround plan, stakeholder analysis, jurisdictional issues and financial summary – please see our QuickTake.

Matalan second lien debt remained a premium priced item this week, soaring from 70 at the start of last week, to a high of 88 after the UK-based discount retailer released results for the 13-week period to 27 November. As reported, higher levels of full price sales and quicker turnaround of stock levels helped Matalan to mitigate a sharp increase in cost of sales and six-week delays in stock deliveries. ‘Unprecedented levels of agility’ allowed the UK-based discount retailer to generate profitability ahead of 2019 levels in two consecutive quarters, said management, who have guided for £98m to £100m of FY 22 EBITDA amid hopes that revenues can top £1bn once again.

LTM leverage dropped 0.4x to 5.0x during the quarter, but management offered little fresh new information on progress of refinancing the company’s January 2023 and 2024 notes, saying that they “continued to evaluate all alternatives and options consistent with the maturity time frame,” and adding that they would not elaborate any further on the earnings call. 

So why the big move? Perhaps management is being coy, and a refi is closer than we think?

Carlyle Global Credit has disclosed that it was the provider of a debt financing package of c.£370m to Caffe Nero which it says, “has reduced its debt exposure while strengthening the company’s balance sheet and providing it with additional funds to support its growth plans.” 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. It is unclear whether the mezzanine facility was repaid from the new finance, but according to the Carlyle announcement ownership remains unchanged with the majority shareholding remaining with CEO Gerry Ford, his family, and friends. 

What we are reading this week

It’s been a busy week looking at credits and edits, so this week’s selection is drier than normal. 

Smile Telecom’s second UK Restructuring Plan is the first to exclude all bar one class from voting on its new plan, outlines Hogan Lovells. 

While LevFin defaults and restructurings remain low, Stephen Phillips – one of the sharpest minds in the restructuring legal community – reminds us in a LinkedIn post that there is more activity in the wider market. Rising wages and raw material costs in the construction sector is a recipe for financial distress.

Driving back from Brighton’s well-deserved draw against Chelski on Tuesday night, I was listening to a 5Live radio discussion on Derby County and their fight for survival. So why do clubs end up in so much trouble, and why do rich businessmen splurge so much on clubs seemingly well above their fundamental value? This Athletic article tries to explain “how do you value a football club.” 

A few pieces on my second love, sovereign debt restructuring.

A sobering report on Egypt’s precarious debt position, is it going the same way as Lebanon – the similarities are striking.

Turkey is another high-profile sovereign which could yet topple into default. I will be listening into EMTA’s webinar next Thursday, moderated by my former colleague Asil Orbay-Graves from REDD. 

The Eskom turnaround has been slower than a super-tanker, I was writing about the impending restructuring in March 2019. This week, Bloomberg’s Luca Casiraghi has the scoop that Rothschild is now representing bondholders, concerned that the division of the South African Energy utility into three, may affect the serviceability of its $25bn of debt. I could be persuaded to revisit my former specialist subject in the coming weeks. 

The Guardian blames former journalists for the drinking culture in number 10. Channel 4’s Liz Bates gets caught up in a “work event” outside Downing Street as “maybe a hundred bewigged Boris lookalikes jig around the street. 

Unfortunately, the twitter account is no longer active but the book is available here and at all not so good bookshops

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