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In the last edition, I bemoaned the lack of volatility and questioned whether HY spreads fully reflected risk of rate rises and renewed lockdowns. This week Vix Vapours rubbed out several months of HY gains, as investors were whipsawed as positive and negative news emerged on the Omicron variant.
Adler Addled investors, journalists, and traders alike, with apparent discrepancies on the terms of its asset sale deal from differing announcements by itself and buyer LEG. Yesterday afternoon’s investor call did mollify and clarify somewhat, but with questions only available via webcast and significant gaps between questions, a cynic might think it was due to the time taken to screen the ones Adler Group management wanted to answer.
Unless we see more certainty in Omicron and a reversal in risk asset prices in the coming week - unlikely given experts are saying 2-3 weeks are needed to assess - primary is probably done for 2021.
Those pushed back include the long-awaited Morrisons deal – we understand in pre-marketing with selected accounts in recent weeks – but will now appear in the New Year. The cap rate on the £2.25bn of SSNs is 5.25% - using Asda as a comp there might be some remaining headroom, but as Bloomberg below shows, sterling bond yields have risen 100bps since the deal was struck.
Difficulties in getting Apollo’s Reno de Medici HY deal over the line (they priced at the wide end of guidance and lowered the OID – and we hear it was proving a tough sell even before Omicron arrived) show how much sentiment and pricing expectations have changed.
With primary hiding under the duvet, our main focus this week was the raft of earnings calls, with a number of stressed borrowers reporting on Monday and Tuesday. Most notable were Adler, Amigo, and Kloeckner Pentaplast – which we will now explore in more detail:
Adler Adds and Subtracts
Investors punished Adler Group earlier this week, after management subtracted the question-and-answer session for its third quarter earnings call. The call lasted just 20 mins (compared to 1hr20 for Q2) and the bonds tanked 4-5 points immediately afterwards. As our write-up outlines, there was some clarity on the reconsolidation of the Gerresheim development asset and while portfolio values appreciated once more, the LTVs spiked to 57% (including converts) from 54.7%. There was also concern as to why the Germany-based property firm needed to draw down on their €300m RCF during the quarter.
The next day, the bonds bounced back, after Adler and LEG announced details of their Northern portfolio transaction. But the numbers from their statements didn’t match. LEG said that the deal is worth €1.29bn to Adler, around €200m below the reported price when the proposed deal was first reported. LEG Immobilien then caused a stir on an analyst call, their CEO reportedly saying “the price [for the portfolio] has changed. We had a deep look into the portfolio and found one or two things.” The LEG release and presentation provided more detail on the rationale behind the deal from their perspective.
The big surprise in the announcements was LEG’s agreement to purchase a 6.8% stake in Brack (BCP) from Adler for €75m. LEG has entered into a call option for Adler’s remaining stake (63% of BCP) at a strike price of €157 per share with a 30 September 2022 maturity. If the call is exercised it could result in total cash proceeds of €850m. This plus €800m coming from the portfolio deal plus net proceeds from a €1bn portfolio sale to KKR (due to complete in Q1 22) could (if applied solely to the bonds) result in a significant amount of debt reduction.
Adler scheduled a call at 2pm the next day (2 December) for analysts and investors. We dialled in early, concerned that too many trying to join might crash the site.
The bulk of the €200m discrepancy in the €1.29bn purchase price reported by LEG could be explained by a previously unmentioned €135m deferred tax liability. Most of the €800m of net cash proceeds will repay their €400m bonds due in April 2022 and credit facilities – presumably the RCF fully drawn in Q3 to provide ‘flexibility’.
Proceeds from the second portfolio sale to KKR will be used to repay additional debt beyond 2022 and to fund capex, management said. They are discussing whether to buy back bonds and shares at a discount to crystallise value, with the latter trading at a significant discount to stated NAV.
The two LEG transactions will reduce LTV to 49%, below their medium-term leverage objective. But Adler isn’t stopping there, our impression is that they are motivated by closing the deep NAV discount (the shares are still well below levels in early September) by selling non-strategic development assets.
But what assets are non-strategic? Wolfgang Felix from Sarria commented in his question, on the controversial Gerresheim asset – the sale recently reversed and taken back into the Adler Group - “would travel with Brack to LEG.” After confirming this, Adler hastily brought the Q&A session and their 49-minute call to an end.
As 9fin’s Emmet McNally pointed out in the Q3 earnings review, the company humorously noted just days earlier that the Gerresheim project “now perfectly fits into our build-to-hold approach” after changes in the zoning permit means properties built will now be rented apartments rather than condominiums. That statement in itself bordered on hyperbole but now looks even more out of place now that the asset would leave Adler’s balance sheet were LEG to exercise its call option.
We cheekily suggested on FinTwit that unanswered questions should be posted online.
We would question why LEG is so keen to secure the Brack Portfolio at a premium – given the noise around some of the developments. Could it be a way to provide a valuation point to Adler to help smooth the portfolio sale, and anyhow why wasn’t it announced at the time of the portfolio transaction? We would also like management to explain the concept of REDD blockers and why there is deferred tax for the portfolio sale and how it is calculated.
Amigo tries to make friends
Amigo Loans released its half-year results to end-September on Monday. But the financials were not our focus, but instead its progress on a second scheme of arrangement to deal with compensation claims that threaten its future. It revealed that it plans to apply for two schemes – firstly, a New Business Scheme contingent on an equity raise and resumption of new lending, and secondly, a managed wind down scheme. If the judge fails to sanction the first Scheme, they will be asked to sanction the second option during the same hearing. Without a Scheme, the company says it will face administration or another insolvency process.
Discussions over Amigo Loans revised Scheme have taken much longer than expected, with a revised proposal being submitted to the Independent Complaints Committee (ICC) on 12 November. Once agreed it must be shared with the FCA, who then need a reasonable amount of time to assess, management said on its earnings call. A Practice Statement Letter is unlikely to be released until the New Year. The subsequent court process is likely to take several months, cautioned management, who added that a resumption of lending would only occur after the scheme had been approved.
Around £300m of fresh debt and equity finance would be required to relaunch guarantor lending and promote new Amigo products. There is no anchor equity investor but there are a number of expressions of interest, said the management team on the call. Despite “very frequent and constructive discussions with the FCA” on the new propositions – “no commitment has been given [by the FCA] either way,” they cautioned. FCA investigations on past lending practices are making very slow progress and after presenting a huge number of documents to the regulator – “it is in their hands”. Management admitted that it “would be very difficult to do an equity raise if this uncertainty persists,” adding that the FCA is aware of this.
With the FCA saying that it will not approve resumption of lending and new Amigo products until after the scheme succeeds, and only if the company can raise a significant amount of debt and equity, “material uncertainties remain,” admitted management. To ensure survival, it needs an approved Scheme, a successful resolution of the FCA investigations, FCA approval of its new products, and securing significant investment in the new products, they outlined.
Going nuts over KP
Last week we said: “For many deals launched this year, based on fully-baked marketed EBITDA numbers, we are already seeing disappointments and excuses from borrowers – as they underperform on their over-optimistic business plans.”
In hindsight, it was nuts to invest in KP (Kloeckner Pentaplast) earlier this year. Even before the Q3 earnings release, their subordinated bonds had traded down towards 90. From the get-go their earnings disappointed, with significant lags in their ability to pass through rising raw material costs. It is now clear that sponsor SVG Global refinanced – and paid itself a dividend at peak Covid tailwinds.
For the second quarter running the Germany-based industrial plastic packaging firm has cut FY 21 EBITDA guidance, down to €235m compared to €305m at the launch of its bond in Q1, and €275m on the Q2 call. Accelerated price rises should catch-up and will match cost inflation by December, said management, who said the time lag for pass-throughs for non-indexed contracts is now reduced to 70-days. Next year should show improvement, with high confidence that profitability should return to 2020 levels (€285m adjusted EBITDA, €305m Pro Forma).
As well as sharp increases in raw material costs, Kloeckner is suffering from supply chain disruptions, and more recently sharp increases in energy costs. Cost inflation was €104m during the quarter and €300m for the year. Sales prices increased by 16% on a consolidated basis in Q3, with revenues up 12%. Management said that the resultant 4% drop in volumes was around 50:50 for customer demand and supply chain issues. Cost of materials is the largest component of COGS, and according to KP accounted for 53% of net sales for the nine-months to end September 2021. COGS rose to €422.2m in Q3 21 from €344.3m a year earlier.
Kloeckner Pentaplast’s 6.5% 2026 SUNs fell by over two points on the Q3 release. The bonds have since recovered their losses and are quoted at 91.16-mid, an 8.8% yield – compared to 6.5% at pricing in early February. The SSNs are more resilient, yielding 5.35%-mid.
Stressed Storm Surge
This week saw a perfect storm of earnings releases for stressed borrowers. They mostly blew on Monday and Tuesday, making it difficult to keep up with the deluge of releases and calls.
On Thursday am, we produced a catch-up report, titled After the storm - stressed earnings catch-up with an abridged version reproduced below:
Ellaktor – build back better
The recent €150m capital increase for the Greek construction and concessions group has removed any lingering insolvency fears, but the rebound in earnings from a covid-affected 2020 dip remains slow. The AKTOR construction division continues to weigh on overall profitability, due to cost overruns, as it seeks to exit from loss-making international projects and be more selective on new domestic projects.
In theory, Ellaktor’s 2024 SUNs are insulated from the construction business, sitting outside the restricted group. But in practice the concessions business is heavily dependent on the construction arm, despite growth in the environmental and renewables businesses.
The health of ATKOR was the only question on the Q&A for their Q3 call.
Management was asked whether the construction business would return to profitability in 2022. “[It is] very difficult to predict.” We would like to say that next year we will not lose too much money but will not commit to it. “There are improving trends, revenues will be up, new projects are much more profitable.” Management said that they hope to break even by year-end 2022 (on the Q2 call that they hoped this would be by the end of 2021!).
The €670m 6.375% Dec 2024 SUNs currently trade around 95.5, to yield around 8.5%, around 200bps wider than the tights seen in early September. There was a hopeful teaser for long-suffering holders in the earnings presentation – “Ongoing discussions with the local banking system with the target to increase funding access and lower the medium-term funding costs (our emphasis added) of the Group.”
TUI Cruises– bruised by Omicron
Last Friday, TUI Cruises bonds suffered heavy bruising by the news of the Omicron variant and renewed restrictions. We had to double check if the results were out, so severe and fast was the price move. Their Q3 earnings update arrived this week, albeit in just 11 pages (10 if you exclude the disclaimer). Most investors are fully onboard with the financials given that the tap of the SSNs was only in late October. There is plenty of buoyancy with covenant adjustments and suspension of testing periods to March 23.
Since the end of August 11 out of their 12 vessels are back in operation, but the rising infection rates in Germany since early November have affected bookings, it said. Angela Merkel last week said that Germany was considering a full or partial lockdown. Yesterday, Germany announced more measures including major restrictions on the unvaccinated.
SIGNA – Developing Watch
SIGNA Development bonds divide opinion. Following a re-rating of the German Real Estate sector on governance and accounting concerns, some think it is guilt by association, not helped by past and present corruption allegations against founder Rene Benko. Others think that it should be considered more favourably, on a par with Spanish residential home builder peers such as Aedas and Via Celere.
After a sharp fall in bond prices during October and November, SIGNA met with a number of investors in November to reassure them they are not on developing watch. Yields at one point had topped 9%, compared to 5.75% at issue, with absolute prices dipping below 90.
SIGNA has a mix of residential and commercial properties, with significant exposure to recent real estate hotspots Vienna and Berlin. Their business plan is to finance projects via debt and sell at least 50% forward to property investors prior to their completion, which normally takes 3-5 years. Optically pro forma LTV looks low. But it applies different accounting practices to its peers (but similar to Adler and Aggregate) by recognising annual changes in fair value of its development portfolio in its P&L.
As we said in our legal analysis, the focus on gross development value for reporting and covenants is aggressive, and as our Legals QuickTake explains there is significant capacity for additional senior project debt (70% LTV) and it can pay annual dividends of 6-7% based on NAV as long as a 55% net LTV is met (allows £104m for FY20).
EBITDA, which is highly reliant on increases in development valuations, fell 30.7% YoY in the third quarter, with leverage rising 1.4x to 7x versus the prior period. The earnings report, as is the case for many Austrian companies, is skinny, so we will have to await the conference call and their presentation on 13 December. We would particularly like to understand the €460m increase in financial receivables.
Lenders continue to drip feed funds into the UK-headquartered currency provider. The August 2020 restructuring had provided £84m of new liquidity and cut debt from over £385m, to £160m. It was implemented via a pre-pack administration sale of certain companies and assets to Travelex’s senior secured noteholders in the UK.
So far this year, EBITDA losses are £47.1m, but only a £7.4m loss in Q3. The latest travel restrictions are unlikely to help, and we wouldn’t rule out another restructuring in 2022. There is a new money need for next year, with the company saying that it remains in discussions with its major shareholders and third-party financiers on liquidity funding for working capital as the travel sector seeks to recover. It will issue a further update in December.
Lecta
The Belgian wood-free printing paper manufacturer has had a troubled history, with its last restructuring completed in February 2020. It had a standout third quarter, with sales up 62.3% YoY and EBITDA rising 387.1%. Net leverage dropped 10.5x from the prior period to 12.4x.
Admittedly, the revenues were boosted by price rises as it sought to recoup higher raw material and consumables costs – up 50% compared to September 2020. However, as a percentage of revenues, they fell from 53.1% from 49.1%, with labour costs rising 12.6%.
Olympic Entertainment - Odyssey or Tragedy?
The last year or so has been quite an odyssey for Olympic Entertainment. Bondholder uproar on the transfer of some of its assets out of the restricted group last summer - with some threatening legal action - was then followed by a very public spat between partners of its sponsor Novalpina in the Spring, getting us to look at the change of control provisions. There then came better news in the summer, with talk (hat tip Bianca Boorer from Reorg) that further casino purchases would be contributed by the sponsor to the restricted group. And more recently, bondholders might have hit the jackpot, after Bloomberg broke the news that Entain might bid $1bn for the casino and gaming group.
But in the meantime, earnings continue to disappoint. The financial highlights (or should that be lowlights) are reproduced below:
The EBITDA bridge looks more like a tragedy - are they uneager in Riga? Let’s hope the M&A deal completes.
The May 2023 bonds are currently quoted around 92.5-mid, just under 13.% yield, which suggests that holders believe that there could be more chapters to come.
Loewen Play - RCF roll dice
In October, Loewen Play released a cleansing presentation causing the bonds to fall by as much as five-points to 88 as the German arcade and casino operator issued an update, interpreted as a cleansing presentation, and a sign that refinancing plans were struggling. We had forecast that refinancing would be tough as regulatory and tax changes impacted the bottom line, in our deep-dive from February.
Reorg Research revealed in November that PJT Partners and K&E were advising a group of bondholders with around 75% of the November 2022 bonds. Rothschild and Latham & Watkins are advising the company on refinancing and strategic options. Reorg said that refinancing talks which included an equity injection from long-standing sponsor Ardian had failed after the coupons being offered for new first and second lien were seen as too high.
The company has confirmed super-senior RCF lenders had agreed to extend their facility to October 2022, with the €40m drawdown rolled over to December. It plans “to roll-over the current full utilization in December 2021.” However, it then adds that the super-senior revolving credit facility lenders “have recently issued a reservation of rights letter due to the non-materialization of a senior secured notes refinancing by an agreed point of time.” The company remains in “constructive discussions” regarding a potential standstill.
Performance in the meantime, whilst improved since reopening remains below 2019 levels. This is partly due to special Covid-19 measures such as 2G rules (allowing entry only for people who have been vaccinated or have recovered from Covid-19) and new limits of amusement machines with prizes under an Interstate Treaty which came into effect in July.
More recently throughout Germany there were partial shutdowns of arcades in areas with very high hospitalization rates. In mid-November, the Netherlands initiated a new partial shutdown for at least two weeks, requiring a daily closure of arcades at 6pm, Loewen Play said, adding that “these developments have a significant impact on our coin gaming sales.”
STOP PRESS This morning Loewen Play’s €350m 5.375% November bonds dropped by around five-points, as news emerged of a restructuring plan which envisages bondholders taking 95% of the group, with €220m of the SSNs reinstated, together with €130m of HoldCo PIK notes. The bonds are currently quoted 89.75-91.125, 16.3% yield (mid)
Look out for a restructuring QT and our analysis of the transaction early next week.
Lycra to be stretched by supply chain issues in Q4
It was a positive quarter for Lycra, seeing strong demand due to macro-economic trends, sustainable branded fiber growth, Covid-19 recovery and inventory replenishment across the value chain. Raw material costs have increased, most notably PTMEG prices, which has led to “strategically increased” Lycra fiber prices. Together with another crude-based petrochemical MDI, PTMEG accounted for ~85% of spandex ingredient costs for the nine months to September 2021, up from 75% in the same period last year.
The company notes that historically it has not hedged raw materials and energy costs. Its spandex facilities are operating at full capacity and it’s using a JV with a related party to purchase additional Chinese spandex capacity.
The fourth quarter will see lower volumes due to seasonality and short-term production cuts relating to supply chain interruptions for PTMEG. It said, “although we are expecting some further margin decline to occur in Q4, we expect an improvement in Q1 2022.”
Haya Real Estate management confirmed hiring of legal and financial advisors and said it was “proactively and diligently exploring alternatives to strengthen our balance sheet including dealing with Senior Secured Notes ahead of its maturity in November 2022.” On their Q3 21 earnings call they said they are engaged with a group of bondholders but cautioned that discussions are at an early stage, with no timeline set.
The Spain-based real estate manager and servicer has become increasingly cautious as 2021 developed about the prospects of refinancing its 5.25% SSNs and Senior Secured FRNs. It was widely reported that Houlihan Lokey and Linklaters were appointed company side, with PJT Partners mentioned as being in pole position to grab the bondholder advisory mandate assisted by Latham & Watkins. According to 9fin’s holdings data, Alcentra, Blackstone, Invesco and Tikehau are the largest holders. The role of owner Cerberus in driving business into the group could be critical in the negotiations.
Corestate shares rose 20% after announcing on Wednesday afternoon that Karl Ehlerding and Stavros Efremidis intend to acquire a significant stake. After hours it added thatPassiva Participations S.a.r.l. / Aggregate Holdings 2 S.A. and Vestigo Immobilien Investment LP, have reduced their shareholdings to zero. Aggregate Holdings owned its 10% stake following its sale of its Bank Aggregate Financial Services to Corestate earlier this year. But it is unlikely to provide much liquidity to Aggregate as 1/10 of market cap is just over €10m.
Production of McLaren’s supercars has spun off track. It said that “due to industry-wide interruptions in the global supply of semiconductors, McLaren Automotive Group has temporarily reduced production of some models...We anticipate the first McLaren Artura customer vehicles to be shipped in Q2 2022 given these shortages.”
KME said the sale of its specials division will now conclude a quarter late in Q1 22, blaming a tax neutrality ruling from the German authorities. It remains coy on the €200m of net proceeds – repeating the same mantra that it will be used to deleverage the balance sheet. Some analysts have cited concerns about the off-balance sheet items – such as the €393m borrowing base facility (BBF), and factoring liabilities (which sit at the same KME SA entity), increasing leverage to over 8x. Adding in the pension deficit of €204m, this increases into low double-digits. Management have said that they have requested a one-year extension of the BBF to the end of February 2023.
Comexposium was back in the UK courts this week, seeking to overturn an August ruling against it and in favour of a group of lenders. SVP and Attestor sought to use the English courts to gain information to help assist them in developing a counter proposal to a planned term-out, which was approved by the Nanterre court this September. The funds own 55.9% of the bank debt. We are unclear why the French events business is spending so much money and court time on this – but perhaps the lenders are using their win as part of a wider strategy. If you are involved and reading this, please get in touch to satisfy our intrigue.
