Three weeks ago I had suggested that something might break in the financial system:

With such a fast and big move (especially in relative terms) in interest rates in the past six to nine months, it is surprising that nothing significant has broken yet — save from the LDI debacle, which was a grey swan and somewhat known.

This may be one reason why markets are pricing so tight compared to where macro conditions would suggest they should be. There has been no external shock to spook the complacent longs (not yet, at least).

So far, so prescient. But I then added:

Given its rude health, the banking system is unlikely to be the epicentre of the next systemic risk earthquake. But the risk has arguably just transferred elsewhere, and is now in less visible and less regulated places.

Oops. 

In my defence, I was thinking about systemically important banks, not ones with very little regulation and oversight. Especially one whose depositors’ fortunes and valuations are intrinsically linked to long-term interest rates, and a bank whose investments are subject to exactly the same risk!

I won’t dwell too much on specifics on the Silicon Valley Bank collapse, my colleagues Owen Sanderson, Will Caiger-Smith on a podcast have covered it extensively.

But while FinTechs breathed a sigh of relief on Monday, the subsequent effects on markets were nothing short of extraordinary. The iTraxx Crossover moved from 380 bps a week earlier to trade as wide as 513 bps on Wednesday. 

While risk assets repriced sharply wider (especially bank stocks and AT1s), there was a huge flight to quality with two-year treasuries having their best single day since the stock market crash in 1987. Yield curves flattened sharply as the new fed window allowed those with significant m2m losses in the long end to unwind positions, and analysts expected central bankers to pause hikes to assess whether there was further damage to the banking system.

The US Two-Year Treasury after posting a 12-Sigma move on Monday, has posted a 3-Sigma plus move, each day, several times in a row. As one FinTwit commentator remarked:

“Statistical odds: Once every 50+ million years. This week's volatility predates most dinosaurs (assuming they traded Treasuries). And that's not an exaggeration.”

Some semblance of sanity has come back to markets in the past couple of days: the Crossover closed last night at 474 bps, and even Debit Suisse bonds have rallied after a SNB intervention. 

It’s too early to say what the longer-term effects of the bailout (in all but name, and could even be argued as QE4) will be, but Armageddon seems to have been averted in the short term. 

Closer to home, will it finally dent the irrational exuberance of LevFin markets in 2023?

In recent weeks corporate finance activity has picked up markedly. A number of interesting transactions were announced for high profile LevFin names, which could lead to them finally addressing overburdened debt structures. This included MFG’s A&E (with a cheeky small dividend), Groupe Casino’s tie-up with TERACT; a chunky Sale/Leaseback for EG Group; and Solenis’ huge offer for Diversey. 

It will be interesting to see if the latest market turmoil affects any of these names, and below we take a look at two of them, EG Group and Groupe Casino. 

Forecourt Example

It has been extremely entertaining to read the back and forth this in the past fortnight on FinTwit about EG Group, reading some of the first takes on the group’s $1.5bn sale/leaseback, whose proceeds will be used to reduce debt. But how and where?

The company is the Marmite of LevFin, heavily dividing opinions. 

The Issa Brothers are either visionaries and geniuses or chancers who got the timing right and took advantage of cheap financial leverage to aggressively build their empire, which may come crashing down at some future point.

Some short sellers are betting the huge maturity wall ($7.7bn by end 2025) will prove insurmountable, especially when elevated fuel margins seen in 2022 normalise, with some estimating that cash burn is already $150m to $200m per year and could rise further. 

They also cite significant non-recurring adjustments to pro forma earnings numbers, with EG needing to deliver planned synergies to make its senior secured debt heavy cap structure work.

Others think it’s a good business but with a bad balance sheet that needs to be fixed. 

The sale/leaseback was at a published cap rate at 6.9%, compared to the 12% where its senior bonds trade, and as one commentator observed, at a flat cost to where the company issued in 2019. As EG Group reports on a pre-IFRS16 basis, the transaction will be deleveraging (by over a turn), the yardstick EG previously said would lead to a potential refinancing during H1 2023. 

According to one distressed analyst, the net sale/leaseback proceeds is nearer $1.2bn after taxes and fees are subtracted. 

The short sellers contend that on a net proceeds basis the cap rate financing cost is nearer to 10%, and the deal will significantly reduce asset coverage for SSN and TLB holders. And even if this is enough deleveraging to undertake a refi or an A&E, as we reported at end-January, EG is likely to have to pay at least 150 bps more on extended/refinanced loans, dropping interest cover to around 1.9x. 

One short seller calculates that to be marginally free cash flow positive the maximum weighted average cost of debt would need to be around 6.5%, well below what is likely to be achievable — as its October 2025 euro-denominated SSNs yield around 10.5%.

With net senior secured leverage reported at around 6x (higher without adjustments) some bifurcation of the debt into junior paper would be preferable, unless the Issa Bros and co-sponsor TDR are willing to put their hands into their pockets to de-lever to a more reasonable 4-4.5x SSNL. Taking into account the large amount of junior prefs and reduced multiples for retailers, some observers believe that their equity could already be underwater. 

But on the other hand, they could be bailed out by the CLOs via an A&E, many of which who have spoken to 9fin remain supportive. 

And encouragingly, the latest market turmoil has failed to impact the A&E for its peer Motor Fuel Group, who managed to price its deal with a slight tightening on the original terms, increasing the sterling loan margins by 175 bps to S+600 bps, and the euros by 150 bps to E+475 bps (three month Euribor was 2.646% yesterday). 

But even if EG could achieve a similar result, that still leaves around three bill of senior secured bond debt to deal with!

If markets stabilise further in coming days, I would not be surprised if EG comes to market ahead of the Easter Break. The latest earnings numbers on first blush looked better than expected, too. 

9fin will be taking a closer look at EG Group and its options: watch this space. 

Breaking the Bank

Groupe Casino is the Moby Dick of EHY credits. It is a great white whale, sighted on the horizon and eyed by advisors and distressed funds. But it’s a highly complex and murky situation and involved weeks, if not months, of analysis — and we had more pressing names to hunt down.

But the recent announcement of exploratory discussions with Teract piqued our interest. The listed company was formed via a SPAC in 2022, whose principals included rock star banker Matthieu Pigasse, tech billionaire Xavier Niel, entrepreneur Moez-Alexandre Zouari and Invivo, a farmers cooperative. 

Details are scant, with around €500m of equity to be injected into the JV, with expectations that some of the debt burden would be shifted to the new entity. This has unnerved bondholders, concerned that yet more financial engineering is on the cards from ultimate owner Jean-Charles Nouri, who has narrowly escaped losing control of his overburdened supermarket group a number of times in recent years. 

The sell-off in its bonds intensified this week, after a less than convincing set of FY 22 earnings, with a lack of detail in last Friday’s conference call on the deal. The call was held in French only — and the company only released an English transcript several days later. 

Overall, Casino SUNs have fallen by over 25 points since the initial announcement. 

9fin’s distressed analyst Denitsa Stoyanova has finally harpooned the whale, with a report which she landed ashore this morning. The exec summary is reproduced below:

Groupe Casino’s financial metrics continued to decline in 2022, reporting its smallest topline and slimmest profit margin in five years. The only growth for the France-headquartered Supermarket group came from Latam, but this failed to offset muted performance elsewhere.

This is a bad time for Casino to underperform in terms of operations, cash flow generation and deleveraging, as the group faces a large maturity wall (€1.4bn in 2024 and €1.8bn in 2025) in France alone. The challenge becomes even more daunting when you consider that Casino is also on the hook for repaying the €1,992m of 2025 maturities sitting at its parent HoldCo, Rallye, which was restructured via a contentious Sauvegarde in 2019.

Casino must increase its cash balances and drive leverage low to be able to dividend up funds to meet Rallye obligations. Alternatively, it must offer a more compelling option than previous attempts to buy back Rallye unsecured debt at hefty discounts, which had received a poor take-up from bondholders.

In its core home market, weak consumer sentiment and high competition weighed on volumes in France. At the same time its ambitious store expansion plan put pressure on Capex investment and on the debt pile, while high interest rates hurt its predominantly variable debt. Cash interest expense has nearly doubled in the last four years and we estimate that the share of variable debt has doubled to 67%. This led to a record €1.9bn of FCF burn in FY 22 with no clarity when this will reverse.

While management plans to cut costs and reduce inventories in 2023, impact on cash flow will be modest at around €440m. Their efforts will mainly focus on growth through store rollouts and completing more disposals. However, Casino has mostly failed to achieve its strategic goals until now, so it is likely that its current efforts will not be big/fast enough to deal with the looming maturities and operational issues.

As a result, the majority owner of Casino, Jean-Charles Naouri, has come up with a plan to unlock value through a proposed merger with Teract, which will likely involve further heavy financial engineering and the ripping-up of Casino's complex existing organisational and corporate structures.

Investors are wary and may be unwilling to take a gamble on Casino, despite its debt trading at distressed levels. Getting to grips with the numbers which are heavily adjusted with a number of exceptional costs and addbacks is one challenge, as is working out asset coverage as the restricted group is predominantly made up of the underperforming French business, with a number of real estate transactions in recent years reducing collateral cover.

Conversely, Casino has proactively sought to deal with its debt pile in the past, via a series of tenders and liability management exercises to take advantage of depressed prices, funded from disposal proceeds. But most proceeds have been applied toward increased capex, rather than debt reduction.

Subscribers can access the full report. Non-subs can request a copy via team@9fin.com.

We are working on follow-up on how the Teract JV could be structured and what is allowable under the docs, so watch this space. 

Whatever floats your boat

In the past couple of weeks, we’ve taken some flak on our Hurtigruten analysis. 

Why are we being so critical on the name, especially as most of the lenders were onboard when the new funding and A&E were announced? 

Firstly, I want to emphasise that our latest coverage was done from an analysis perspective only, reflecting the views of our distressed analyst alone, and not influenced by any short-sellers. 

Secondly, as our coverage was purely an analysis piece we did not want to conflate and confuse by incorporating lenders’ views. 

Thirdly, as journalists and analysts our job is to be sceptical and to challenge assumptions. 

Our report on the agreed deal and subsequent earnings coverage highlights the challenges the Norway-based cruise operator faces in executing its turnaround plan, with lack of clarity and detail on current trading and future projections. The company proposal provides it with less than two-years of runway, given its bonds are due in early 2025. 

We tried several times to engage with the company and its representatives, to walk us through the underlying projections and the rationale behind the plan. We would welcome their input and would of course provide a further update to incorporate any additional information. 

Earlier this week, Hurtigruten announced that 100% of lenders had locked-up to the two-year maturity extension. The next stage is to issue a consent request for the SFA amendments on or before 24 March. The company says it continues to “work towards the implementation of the new 5-year debt facility of €200m (including warrant instrument), the proceeds of which will be applied towards refinancing the existing term loans maturing in June 2023 in full and general corporate purposes, which is expected to complete in April 2023.”

Doing the heavy lifting

After underperforming for months, and amid concerns over available liquidity for the remainder of this year, discussions between Wittur stakeholders and lenders are hotting up.

Lenders to the Germany-based lift components manufacturer are hoping for improvement in Q4 22 after China’s reopening, but as reported, the group earlier this year appointed a Chief Restructuring Officer and enlisted EY to review operational and liquidity issues. 

With leverage set to hit low double-digits in 2023, lenders and market participants believe that in the event of a debt restructuring, recoveries would break in the second lien debt. This puts pressure on junior lenders and the two sponsors, Bain Capital and minority investor PSP, to find a way to protect their existing investments and fund any upcoming liquidity needs.

The Q4 earnings are due next week. The first lien debt is trading in the 60s. 

Watching the Defectives

Our latest version was released earlier this week. A number of high-profile restructuring deals have progressed into the implementation phase since our last Watching the Defectives on 20 January. New entrants into In-Progress are Hurtigruten, Orpea, Flint, R-Logitech, Lycra, Takko  and Technicolor Creative Solutions. 

The pipeline continues to build with Leoni, Metalcorp, and Wittur having entered into Expected.

The only addition to our Watchlist is Cerelia (from expected), but the number of names under consideration has increased with Groupe Casino, Demire, Zoopla, Parkdean, Medical Properties Trust, Praesidad, Oriflame, and EG Group added. 

In brief

While we eagerly await Adler Group’s sanction hearing, which starts on 30 March, there were more legal shenanigans for us to review with the kick-off of a 10 day hearing for Galapagos last week, with hedge fund Signal Capital Partners’ challenge on the application of the inter-creditor to enable a distressed sale. 

VIC Properties convertible bondholders may have got a good deal. Earlier today, Aggregate Holdings announced that 100% of the shares of its Portuguese developer subsidiary had been sold to Albacore, Mudrick and Owl Creek (the VIC convert bondholders). Their VIC bond claim and their guarantee against Aggregate will now be extinguished. 

Flint lenders have rejected a sponsor-led proposal and are set to take over the Luxembourg-headquartered printing packaging company. As 9fin’s Bianca Boorer reveals, around half of the first lien debt will be reinstated at OpCo level and the rest hived-up as HoldCo PIK, with the 2L lien wiped out for a small equity stake. 

100 calls a day uber scoopster Mark Kleinman revealed that McLaren shareholders had stumped up another £70m of funding, as part of a wider £500m recapitalisation to reduce debt and fund the supercar manufacturer’s medium-term development programme. The company confirmed minutes later; our question is whether the £70m is to fund further delays to the Artura, is the limit as to what existing shareholders are willing to put in, or a downpayment on something larger? 

Non-Standard Finance could be a rare debt/equity swap for a unitranche lender. The UK-based consumer finance company has announced that similar to its peer Amigo Loans it is seeking to use a Scheme to deal with redress claims from past lending, with the FCA closely watching from the sidelines. Plan A is a £95m equity raise, a senior secured debt extension (Alcentra is main provider) and a portion of debt exchanged into equity, or Plan B ownership shifts to lenders with £70m of debt written off, and a £40m new money instrument provided.

Just ahead of its earnings release, Technicolor Creative Studios has announced an agreement on a €170m new money injection and a recapitalisation, which subordinates €170m of debt and converts €30m of debt into equity. Our updated QT is here (if you are not a paying client, you can request the Quicktake)

Takko creditors are inching closer to taking control of the German discount retailer, writes 9fin’s David Orbay-Graves. They are taking the keys to the shop, but will offer 5-10% of the equity to sponsor Apax for a smooth transition, he adds. 

It looks as if Parkdean Resorts might escape a restructuring or even an A&E, with various stretch financing options being considered such as unitranche and junior hybrid instruments, notes David Orbay-Graves.

No-one expects the Spanish imposition — our latest Spanish Insolvency Primer is a must read. 

What we were reading, watching, doing in the past fortnight

Not surprisingly, SVB took up a lot of our attention and reading time late last week. Aside from Owen Sanderson’s excellent content (including some interesting thoughts in Excess Spread) the best are from Martin Wolf at the FT, and the Odd Lots Podcast with Dan Davies. 

Do you feel a rush of joy when you use a Selecta vending machine on Platform Two?

Yet more Eskom revelations from the Daily Maverick: Filthy seam of sabotage – how thieving cartels are plunging South Africa into darkness. I’m no engineer, but I doubt if this batch of coal will do much good for power station boilers.

For fans of the vomiting camel chart formation — a fresh one —Medical Properties Trust, on our list of names to do more work on after Viceroy’s short-seller report landed at the end of January.

It was quite a day on Wednesday for Tony Bloom, Brighton owner.

I’m reliably told he got 6-4 odds and also pocketed £200,000 in prize money. He then jumped into a helicopter to see us beat arch rivals Crystal Palace 1-0 that evening (the first time in eight attempts) despite a floodlight failure early into the second half. 

Pep Talk for RDZ — Pep Guardiola told Sky Sports Italia after that Brighton manager Roberto De Zerbi is “changing many things in English football”.

The Athletic’s Andy Naylor: “Guardiola was referring more than anything to the “marvellous football” De Zerbi’s Brighton & Hove Albion side are playing, but the charismatic Italian is also elevating the mindset of his club and his players, rewriting the head coach/manager playbook in the process.”

Grimsby at home this weekend in the FA Cup QF, with a place in the semis up for grabs. If we win our two games in hand in premier league, we are in the last champions league position. 

And finally, some more personal news. 

An English Scheme of Engagement was launched on 5 March. Myself and Denitsa still have to work on our explanatory and practice statements, and we will let you know more about the convening and sanction dates in the coming days and weeks.