Over in Europe its a similar picture, with the iTraxx Crossover at this year’s tights having closed on Thursday at 381bps. But it is worth noting that it would be 20bps tighter if it were not for the recent price action in European LevFin leviathans Altice International and Altice France. 

A lot of column inches have been written about the trouble Altice TelCo complex in the past couple of weeks. You can understand why, as Dan Alderson notes in this week’s Macro Prophet, Altice (across the Altice International and France complex) is the single-largest obligor holding for European CLOs at €4bn held in total, through 59 managers spanning 511 deals. The US CLO market holds $6.2bn of dollar denominated Altice leveraged finance exposure.

As Dan says, talk about seeing a new meaning in the Altice tagline, “Together Has No Limits”.

While editing his and other 9fin Altice pieces, which highlighted concentration risk and questions exactly how diversified CLOs really are and if managers really differ in terms of performance, I was reminded of the Vivartelender shock in 2014. 

Similar to Altice, Vivarte was a large CLO name — with 172 lenders! 

I distinctly remember the moment when one of my colleagues excitedly told me about a bank meeting in which the Charterhouse-sponsored French retailer introduced a court appointed mandat ad hoc telling lenders it was suspending payments on its €2.8bn debt pile. 

The loans fell 20 points in minutes, to around 50. 

Some of the largest beasts of the CLO market were heavily involved, such as GoldenTree, Alcentra and Babson, with some having exposure in the hundreds of millions. 

The resultant restructuring was savage, with €2bn of the €2.8bn of debt converted into equity. €500m of liquidity came via new super senior term loans paying E+1100 bps, from 11 funds.

But just three year’s later it was back for another restructuring, labelled as a “brutal” example of “Anglo-Saxon ultra-liberalism” by far-right politician Marine Le Pen. By this time the debt had risen to €1.3bn and several brands were put up for sale. Another €846m of debt was converted to equity, leaving €572m of bond debt, whose maturities were extended to 2021. 

But even that wasn’t enough, and in January 2020, there was a third restructuring where all its debt was cancelled, with Anchorage and Hayfin Capital taking control. 

It remains to be seen if Altice goes the same way, but if it does it could be a similar wake-up call for the European CLO market. Unlike the US, the European market has fewer loan names than managers, and secondary liquidity is poor. This means positions are far too similar and, worse still, they rarely change much in secondary. Therefore, most managers will be caught out. 

In addition, Groupe Casino has shown that recoveries for senior secured loans can be more severe than expected. The French supermarket retailer’s TLBs are indicated in the mid-50s. It’s time for managers to show the top analysis and superior selection skills they tout in their materials. I’m looking forward to using 9fin’s new CLO data to pick apart their holdings and performance.

Expect to see a lot more analysis on Altice ahead of their key earnings reports on 7 and 8 August. We are told that owner Drahi will be participating, but whether he will pull a rabbit out of the hat, or is there to reassure on governance after the Portugal scandal, we will have to wait and see. 

We’ve received a lot of questions about applications of proceeds from asset sales (not just the data centres business) and the ability to stream dividends out of the restricted group.

One of Altice France’s most interesting assets is XpFibre (50.1% owned), which sits in an unrestricted subsidiary. Management says in the mid-term it could produce more than €600m EBITDA and will be cash flow breakeven in 2023. With covenant changes as part of the TLB A&E including “asset sale proceeds (including shares of XpFibre) / XpFibre distributions to be applied to deleverage, unless in compliance with 3.5x net secured leverage ratio”, this asset could prove a vital resource for restricted group bondholders, notes 9fin’s Nathan Mitchell in his recent predictions piece. Shareholders are incentivised to help out the OpCo to open up the asset sale provision allowing them to realise value directly from the unrestricted sub. 

Or could they do a Lycra variant?

Standard deviates

Regular readers will know that I’ve taken a particularly close interest in Ideal Standard, and not just because of the ample opportunity to employ toilet puns into my copy. 

The Belgian Bathroom products group has had an interesting history. 

It began with the spectacular flushing away of value by Bain Capital, which bought it for $1.7bn financed with $1.55bn of hung loans led by BofA and Credit Suisse.

The banks subsequently dumped some of their exposure in the 80s in the summer of 2008 as leverage approached 7x. In a bizarre twist, Bain used €321m of new money to buy back €820m of loans from lenders at 55-56c and then as new majority lender waived the breach. Minority lender SVP had taken it to court alleging round-tripping of €75m sitting elsewhere within the group to cure covenant breaches in September 2009, with the money returning the next day. But it lost its legal challenge, after one of the strangest court hearings I’ve covered.

Then in 2011, Ideal raised €250m via a new seven-year SSN to part refinance senior debt, at a purported 3.6x net opco leverage based on pro-forma EBITDA of €69m versus actual €13.8m — funky EBITDA adjustments are nothing new with this business. 

By the spring of 2014, EBITDA was sub €10m and the company offered a swap into new PIK/toggle bonds or preferred equity certificates and/or a mixture of the two, without haircuts. Interest rates offered were in the mid-20s (the majority of the interest was PIK). Anchorage by this stage owned 60% of the debt and was offering to provide €50m of new money. Most holders took the equity-linked PECs option, which would allow funds to take control if performance didn’t improve.

By 2018, the terms and conditions of the gargantuan €2.275bn of preferred equity certificates and shareholders loans were amended under a swap deal, leading ratings agencies to finally treat them as equity. Anchorage ended up owning 80% of the business and CVC Credit the remainder.

And in March 2021, after a big operational restructuring, production moved into lower cost countries such as Bulgaria and Egypt hoping to boost margins from 8% into low double-digits. The company issued €350m of SSNs to repay €272m of PECs (just another €1bn to go) and repay a loan at the Bulgarian sub. Having marketed these at €91.6m of EBITDA at 3.6x net leverage (sound familiar?) with a number of add backs from the €67.5m LTM number, including restructuring costs and full consolidation of a number of JVs, the deal priced at a ‘lofty’ 6.625% — those were the days!

As we can see below, it never reached the lofty heights promised over two years ago.

It’s been on our watchlist in 9fin’s Restructuring Tracker for some time now, as tight liquidity and poor business performance caused its bonds to drop into the 50s. 

A €25m term loan signed in January 2023 secured against a Czech subsidiary provided a much needed lifeline, but we thought that something more material was required, such as longer term liquidity solutions or liability management exercises. 

The announcement earlier this week is novel and interesting. Ideal Standard has signed an agreement with holders of 68.3% of its €325m 6.375% 2026 senior secured notes to lower the change of control provision to require a mandatory redemption at 72c, down from 101. 

So why would holders agree to this? 

We understand that some bondholders, many of whom bought into the debt in the 50s and 60s, were approached a month ago regarding a potential transaction. If the deal goes ahead they will get a decent bump (there is also a 10c early bird fee) and, according to a source close to the company, the shareholders will also get some return. 

It is unclear who the buyer is, as the holders we spoke to didn’t want to find out and become restricted. We assume that the long stop date is end December, in line with the redemption trigger validity date. It can be extended, albeit at a cost. 

The reason and timing for the sale (if any) is unclear, liquidity was okay, but still tight, and the bonds are not due until 2026. Was it directors concerned about their duties, or perhaps an upcoming insolvency event? Did creditors push for a distressed disposal, or a marketing process? Or was it just an unsolicited approach from a third party? 

The mechanics are also interesting. There is an exchange offer with existing notes being exchanged for new notes at a 1:1 ratio. The new notes will rank senior to the existing notes “as to the proceeds on the enforcement of collateral, and benefit from a make-whole provision triggered by a bankruptcy or insolvency event”. 

Ideally, the company wants over 90% agreement from noteholders to amend the terms of the notes without the cost of an English Scheme of arrangement, which would lower the threshold to 75% and bind in the minorities. 

So, as well as cash incentives (payable in connection with the mandatory redemption), there is a coercive element to get it over the line and avoid having a stub in the old notes. 

Dissenters left behind could see their covenants stripped, including change of control and events of default and subordinating the collateral to the exchange notes. There is also a MFN provision whereby the Company will promise to not purchase, redeem or exchange or refinance existing notes for more than 72c/€1 prior to 30 June 2026.

It does feel a little over-engineered but, with information sketchy, we may need to wait for the release of the consent solicitation for more information. We are told this is due in a couple of weeks. Our legal team are primed (no pun intended) and excited about this one. 

So, TLDR, not an outbreak of creditor-on-creditor in continental Europe, but a neat solution which seems to suits everybody, for a difficult credit which few want to own. But it is worth noting that many of the above could be done under the docs with just a simple majority. 

Facilities management

In conversations with restructuring advisors, Atalian frequently crops up. Exactly how the French facilities management company will address the maturities of its 2024 and 2025 SUNs, divides opinion, and could create an interesting dynamic despite significant cross holdings. 

It hasn’t been helped by the company flip-flopping on what to do with the €753m of disposal proceeds from its UK, Ireland and Asian units, which were sold to CD&R. 

Atalian had said it would use the proceeds to repay its €103m RCF, which has now been redeemed, and its May 2024 bond maturity — but, crucially, not its 2025 notes. The plan to only repay the 2024 notes, despite the 2025 bonds ranking pari passu, prompted major bondholder consternation, as reported.

In February, Atalian changed tack yet again — perhaps aware of the difficulties that awaited if it pursued its original strategy — and subtly altered the language in its press releases to suggest it would look at a broader deleveraging that encompasses the whole capital structure.

But despite the May 2024 SUNs being current, the company is taking its time on launching a refinancing process and hasn’t sought engagement with bondholders. New CEO Maximilien Pellegrini who in May replaced Frank Julien the former CEO and largest shareholder who is mired in an alleged embezzlement scandal isn’t to be rushed. Refinancing efforts will start in the last week of September.

Late last week, Everest Research hosted a webinar outlining their thoughts, stating that it will be difficult to refinance on a straight basis, given that Atalian will only generate around €50m of unlevered FCF in 2023, below the €60m of interest costs. Any refinancing would see bond coupons north of 10%, noted Rupesh Tailor from Everest, who outlined an illustrative scenario whereby Atalian uses cash to redeem €500m of its €1.2bn 2024 and 2025 SUNs at par, skewed 70:30 in favour of the 2024 SUNs due to their temporal seniority. This would leave the company with around €100m of cash on balance sheet, in line with historical averages.

To tackle the residual bond debt in a sustainable way, Tailor suggested Atalian might look to amend-and-extend the remainder into new senior secured notes paying 10% interest — but with a 35% haircut applied to the principal.

Even under this haircut scenario, Tailor noted the “figures still look fairly tight in terms of interest coverage [compared to] unlevered free cash flow”, with a 10% post-restructuring bond coupon running at €48m a year versus just €50m of unlevered FCF. On an IAS 17 basis, post-restructuring leverage would be 4.8x under this scenario.

“We could debate what the right interest is given the tightness of the cash flow here. But we’re assuming that bondholders, in a situation where it may be difficult for them to get equity, are likely to push for as much post-restructuring debt in the capital structure as is feasible,” said Tailor. But he cautioned that a chunk of the interest would have to be PIK’d.

There was some relief for bondholders in Atalian’s latest release, with price rises taking effect and the US business getting back to break even, and good progress on the short-term action plan (see slide below):

But on the conference call they wouldn’t drawn on forecasts for FY 24 and FY 25, on which any refinancing would be based, saying that would become clear once the business plan and strategic road map were completed. 

The new CEO said Atalian did want to sit down and have a constructive dialogue with the bondholders:

“in a win-win position, so we need time once again to work on the VPE to make sure that we're able to achieve in the coming years and to propose the best options we can for the refinancing of that, so today it's where we stand, and obviously it's going to be a discussion, and the starting point has to be based on the capacity we have to deliver a VPE, but once again we would like to have a constructive dialogue and all the options which are best for both parties.”

No equity options were being considered, management said on the call. 

Atalian bonds rose sharply on the release and traded up further after the call, closing up 8-9 points on the day into the low 70s. 

In brief

Duck or Grouse? French fine foods producer Labeyrie, which includes foie gras among its products, continues to trade poorly. Laura Thompson discloses that, despite confidence that the company has the liquidity to make it through the year, lenders have lost faith that a clean 2026 refinancing is possible after another sharp drop in performance — YTD EBITDA is down -42% YoY.

Thirteen months after its restructuring was implemented via English Scheme, Haya Real Estate is back in the Rolls Building today for yet another Scheme, this time to enable a sale of the Spanish servicer to Swedish debt purchaser Intrum. The practice statement letter is here.

On Wednesday, the Supreme Court delivered a surprise judgment which enders unenforceable certain types of litigation funding agreements in which the funder takes a cut of any damages award. Per the judgment, Litigation Funding Agreements (LFAs) that are in the form of a Damages-Based Agreement (DBA) cannot be enforced.

We were straight on the phone to Burford Capital, one of the largest litigation funders who also issued $400m of SUNs in late June. A spokesperson told 9fin: “While Burford believes the right legal and policy position is that litigation funding is not captured by the DBA Regulations, we have always been alive to the risk of a contrary result given the language of the statute and we have generally drafted our funding arrangements for English matters to address that risk.”

The UK Supreme Court decision was made in relation to a competition law case — R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others — in which the respondents were required to show they had adequate funding in place. The full judgment can be read here. A legal analysis of yesterday’s decision can be read here.

Selected 9fin content

For non-subscribers who are still on the wait list for our German Real Estate Sector special report, there is a taster from our Cloud9fin podcast, where myself, Emmet Mc Nally and Hazik Siddiqui discuss the key points — at 24 mins, it should be perfect for your daily commute. 

We’ve also updated our Atento Restructuring QuickTake to include details of the restructuring support agreement entered into with bondholders on 3 July. The price of the group’s $500m 8% 2026 senior secured notes tanked around 11 points into single digits after the group released the terms of its restructuring agreement, ouch. 

There may be better news for Finastra lenders, who are hoping to be taken out by over $6bn of private credit financing, whose success is likely to depend on the ability to place $2bn of junior PIK and/or the appetite of the sponsor Vista to put in more equity. 9fin’s Shubham Saharan discloses that revenues and EBITDA had risen in the fourth quarter of its 2023 financial year, after hefty cost cuts bear fruit.

What we are reading, watching this week

A big chunk of my week was reading through correspondence with solicitors, estate agents and mortgage documentation, plus a raft of mid-week earnings releases.

I did, however, see a cracking piece of work from a couple of former colleagues who are now at the Wall Street Journal on Mallinckrodt, set to go into Chapter 11, with a number of hedge funds seeking to use the process to stop a $1bn settlement for opiod victims. 

It’s bizarre that the SEC can’t give a view on whether leveraged loans are securities, but I suspect there are many relieved leveraged finance bankers out there. 

I was unable to attend an event held by Fitch Ratings, Moelis, PJT Partners, Houlihan Lokey and over 50 corporate sponsors which raised over £500,000 to the David Riddell Memorial CIO that seeks to destigmatise mental illness, prevent suicide and save lives. Please donate, it’s an amazing cause. 

For those who didn’t know him, David Riddell was a key member of PJT Partners’ restructuring team. I still remember the shock when I was told by one of his colleagues of his passing. He was just 48 when he took his own life during an acute delusionary psychotic episode. 

A stark reminder to us all, that no deal or situation is worth it, if it affects our own health. 

Nigel Farage’s campaign against Coutts has claimed plenty of victims, including the RBS CEO, and has dented the reputation of the BBC to boot. I don’t want to wade into the politics and the merits, but I did enjoy this spoof:

As a Brighton fan, I’m quite bemused by the events at Chelsea (formerly Chelski) given that they spectacularly blew up last year, as despite stealing our manager, player of the year and coaching staff, they finished 12th. They’re now after our best player, but won’t pay the £100m asking price. 

Either reflecting 9fin’s meteoric rise, or their increasing desperation to find a sponsor, our CEO Steven Hunter (a Liverpool fan btw) received this earlier this week from Chelsea:

A number nine is better than a three. But as everyone knows, 9fin is a very different shade of Blue.

As is the blue on a Brighton shirt, the new 2023 kit is one of the best, btw. 

Our pre-season tour in the US might have blown the cover on yet another star player in the making. Simon Adingra, as Andy Gray would say, “Take a bow, son.”