But before you criticise me as yet another journalist who fails to deliver on deadline, hear me out. I had promised to deliver 500 words a day, but most days were a bagel as I fished elsewhere. 

If you read on, you might decide to accept my poor excuse for the delay. Btw the draft report is looking great, and I promise 9fin readers it will be worth the wait. 

After weeks of distressed market inactivity, interesting stuff is finally happening, meaning the primary author, yours truly, had to resort to deep thought, and explore some complex universes. 

As a gnarled, grey-haired, (well, what is still left), veteran of the markets, to my tired and fading mind, many restructurings and special situations are pretty straightforward and require little thinking. But some events this week were very interesting, and deserved my attention. 

It certainly got the blood pumping (pun intended). 

But before we head off to Spain, and try to make an Arthur dent into consolidated (and non-consolidated) accounts — a Babel fish would certainly help to translate — there were other situations that piqued my interest. Or to be more precise, they PIK’d or failed to pay interest!

Losing interest

It appears a number of stressed loan situations my colleagues have been flagging since last summer finally got interest-ing in the lead-up to the end of last year. Annoyingly, the ratings agencies had the scoop on a couple before us, although on one it was a matter of minutes. I blame that loss on yours truly taking too much time to do a thorough edit. 

First to stagger up to the last chance saloon was Accolade Wines, which deferred A$27m of interest, originally due on 30 November 2023, reportedly at the request of an ad hoc lender committee for its £301m May 2025 TLB. 

We had written in October that lenders were up for a substantial debt-for-equity swap as Carlyle, the sponsor for the alcoholic drinks maker, wants to quit and become anonymous. At least the offices of ICG, Barings, CapFour and Bainwill have ample stocks of Hardy’s, Echo Falls and Lambrini in their kitchens, one of the few perks from their new ownership. 

Moody’s understands (or was told on deep-background) the deferral was part of ongoing negotiations to pursue a more sustainable capital structure. And it won’t be long before RCF lenders are calling “time lenders please!” as their facility is A$136m drawn and due in May 2024. The agency says there is insufficient cash to repay the RCF, despite recent disposal proceeds from their wine cellars.

There was some resonance in the ratings report for IGM Resins, with once again a missed interest payment (€13m on 4 January), and Moody’s expecting a material impairment. Over 50% of lenders agreed to forbear until end-January — thank god for loose docs, as we have written in the past, quite a few sub-par lenders have bought in the 50s and below — which doesn’t leave much time to discuss ‘a recapitalisation’ of its balance sheet. As 9fin’s Bianca Boorer writes, EBITDA has come unstuck, and is forecast to be in just single figures for FY23. 

From the outside, having ‘constructive negotiations with lenders in the past few weeks’, appears way too late, as liquidity remains tight. At least the company decided not to repay the RCF, €50m drawn, which, as we reported had planned to do to avoid a covenant breach at its Q4 23 test. 

And the third situation we reported on was a scoop. As 9fin’s Laura Thompson exclusively reported earlier this week, distressed German care home operator Alloheim disclosed to lenders at a meeting on Monday that 80% of the €708m first lien had agreed to a three-year extension to May 2028. This followed sponsor Nordic Capital’s agreement to a €60m injection to smooth the deal. The €125m second lien will be fully PIK’d and extended to February 2029. We have a lot more detail on 9fin (as subs will already know) and I don’t want to give away the full value of our content, so will stop there. 

It is almost a year after we flagged that Alloheim was considering an A&E. Given that it maxxed out its RCF to meet an interest payment just a couple of months ago, even taking into account improved performance, the sponsor injection seems more of a placebo (or, more accurate, homeopathic remedy), than having a strong effect on the business. 

And this is the most interesting issue for me. 

We’ve seen a number of deals in recent weeks with quite skinny sponsor injections, conversion to PIK interest, and little real deleveraging. Soft restructurings, which should be full-blown workout deals, are marketed as recapitalisations (or even as holistic). Sponsors retain their interest (and pay little for the privilege) but the interest earned by their lenders isn’t compensatory enough for giving up their repayment option so cheaply — and it may be rolled-up. 

I get that debt service in the current environment is an issue, but that can be cured by more money from the sponsors and a better sharing of risk and rewards. There are a lot of clever people out there who can structure this and price this more accurately. To my mind, CLOs aren’t. 

Blood money

But the most interesting event of the week by far was the Gotham City Research’s 65-page report on Grifols, which I struggled to read on an iPhone on the way into work on Tuesday. 

Gotham’s timing was impeccable, given the Spanish plasma producer and EHY behemoth (it has €9.7bn of gross debt) was widely expected to launch a €2bn plus refinancing in January to deal with its 2025 SSN and SUN debt maturities. The previously announced sale of a 20% stake in Shanghai RAAS — a China-based plasma-derived therapies — for €1.6bn was expected to be enough to deliver (or should that be de-lever) the refi.

As 9fin’s David Orbay-Graves writes, Gotham’s short thesis revolves around Grifols consolidating the results of two companies — Haema and BPC Plasma — into its accounts, despite not owning any equity in these businesses. Combined, these two businesses account for around 40% of Grifols’ profit, according to Gotham. This means true leverage is in low double-digits rather than the 6.9x reported at H1 23, it argues. 

Grifols bought both companies in 2018, paying $286m for BPC Plasma and €220m for Haema. Later that year, it sold both businesses to Scranton Enterprises, an entity owned by Grifols’ largest shareholder (the Grifols family) for the same price at which it acquired them.

Gotham believes this is a tunnelling transaction — the transfer of assets and profits out of firms for the benefit of those that control them. In this case, it’s a vehicle that owns 8.7% of its equity. 

Grifols’ rationale for consolidating the companies’ earnings into its results is that it has an in-the-money call option allowing it to repurchase the companies. This would be at the greater of the original sale price or the cost of redeeming the $360m debt financing backing the acquisition plus accrued.

So is this an operating company sale/leaseback or some funky repo-style transaction used as a way to keep liabilities lower at the Grifols level? Aggressive accounting? Arguably yes, but is it illegal? 

The company has issued a robust defence, saying this structure grants it full control, and therefore, under accounting rules it can fully consolidate, publishing its interpretation in a regulatory release. It adds that there is a 30-year supply agreement from the two companies and it is the sole customer. 

In its bond OM it says the rationale for the transaction was for “financial reinforcement”.

Grifols says it is not obliged to buy the two back from Scranton. But should there be a liability of $538m to account for the cost of exercise? Surely you can’t book and recognise the revenues without also taking into account the liabilities too? 

However, even if you do include the $538m, that doesn’t make a huge impact on the leverage stats. So, to believe this will blow the refi hope off course, the perception of the true level of EBITDA after picking apart the various consolidations and add-backs must change. 

And calculating that isn’t easy. Gotham notes Grifols discloses six different definitions of EBITDA. You may need a large Earth-sized supercomputer to answer this ultimate question, for leverage, liquidity and EBITDA. (btw the answer is not 42). 

As is normally the case with short-seller reports, many will sell first, ask questions later, and then decide if its worth re-entering at lower levels. Grifols’ listed equity fell as low as €8.10 in intraday trading on Tuesday, when Gotham dropped its report — 43% lower than Monday’s close price of €14.24 (add the current trading levels). 

Its €1.4bn 3.875% 2028 SUNs were worst hit among the debt stack, falling from 91-mid (6.1% YTM) on Monday to 85.6-mid (7.5% YTM) on Tuesday. The SUNs are today (Friday) indicated at 86.68-mid. Goldman had traded around €100m in Grifols’ bonds the day the report was published. 

Goldman’s analysts and other bank desks then sought to reassure investors. They said that, while some of the accounting is indeed aggressive and the company has long been criticised for governance issues (given the influence of the Grifols family), this isn’t new as it was known for years.

German consultancy Valuesque wrote about it in great detail in November 2019. The consultants stated at the time they didn’t think tunnelling was the goal, but instead an attempt to make the capital structure look more conservative — they estimated by around half-a-turn of leverage. 

How does that work? The short answer is the covenants are calculated on a consolidated basis!

And what about all the raft of other add-backs for future synergies, run rate cost savings etc, which total around €121m (out of €1.36bn of credit-agreement-adjusted EBITDA)?

GS admits of Grifols: ”Like most HY issuers it has been aggressive with add backs.”

So that’s alright then, everybody’s at it. And as long as leverage is below the 10x multiples where the public comps are trading you are covered, seems to be their simplistic argument. 

That’s not much of a cushion, mind.

Other matters to emphasise

After reading through the Gotham report, there are a few other questions that spring to mind. 

If the 2018 transaction is tickety boo and completely pukka, why was a very similar transaction with GIC in 2021 re-designated? In that deal, Biomat shares were sold to the Singaporean fund for $990m, but again the deal was structured so that Grifols retained 100% control, with GIC able to put the operations back to recoup its outlay. 

€800m from that was initially classified as equity. But the same auditor KPMG, after an internal investigation, decided it was an emphasis of matter which resulted in a financial restatement in 2022. For more details see the Gotham report on pages 18-22. The company statement at the time of the restatement is here.

Gotham notes Scranton also fully consolidates the two companies (how can that be right?) and claims it is highly indebted, at 27x to 31x levered. We haven’t been able to gain access to the 2021 Dutch accounts (the latest filed according to Gotham) so are unable to verify this. 

This raises interesting questions — what happens if Scranton goes bust? Are there any charges over these two business granted to Scranton lenders? Is the repurchase agreement held by Grifols watertight enough to prohibit a sale by whoever takes control of Scranton? 

And is the Shanghai RAAS stake accounting also inflating EBITDA and cutting leverage? 

In a non-cash transaction, Grifols contributed 45% of the economic rights (and 40% voting rights) in its subsidiary Grifols Diagnostic Solutions (GDS) Group to Shanghai RAAS. In exchange, Grifols acquired a 26.2% stake in Shanghai RAAS (voting and economic rights). 

So, for no cash, Grifols was able to include 26.2% of Shanghai RAAS net profit into its EBITDA. Net debt doesn’t change, but EBITDA does. As Paul Daniels (RIP) would say, “Thats magic!”

We were also wondering whether the cash from this sale would be restricted, given that this is a Chinese entity. Local approvals might take some time, meaning that deleveraging might take place some time after a refinancing had occurred?

2025s may not be covered by asset sales

And another question came inbound to us a couple of days ago. This was in response to a Bloomberg articlesuggesting that, even without a refinancing, the 2025 debt was covered from the sale proceeds from the Chinese share sale and from existing cash. 

But the asset sale covenants under the bonds wouldn’t allow this.

Our read is that the covenants in Grifols’ €770m 2.25% November 2027 SSNs appear to indicate that any asset sale proceeds must be used to repay the 2027 SSNs on a pro-rata basis with the 2025 SSNs. That means it may not be straightforward to simply redeem the 2025-due bonds with sale proceeds. Additionally, a carve out permitting the repurchase of the 2025 SUNs appears to only apply if Grifols repurchases all its debt pro rata. 

And the JV carve-out to the asset sale covenant doesn’t appear to work either, as there is an additional limb referring back to language under the asset sale covenant. 

Conference call (also known as the blood line?)

So with all these questions, yesterday’s conference call for investors was a must listen. 

Our transcript is here and most of the auto transcribing errors are fixed. Notably the references to corruption (perhaps due to the CFO’s Spanish accent) are corrected to call option! 

There were some interesting tidbits, part explanations and some limited further disclosure:

• More detail was provided on Scranton. It composes of 22 investors, of whom only three are from the Grifols family. It has supported the group’s international expansion on several occasions and all interactions have been done on an arms length basis
• The consolidation of the two companies added €20m to the group’s EBITDA, around 2%. They claimed that the rationale for the transaction was that Grifols was short of plasma supply, and Scranton made the investment to support the company
• There are no plans to repurchase the shares of the two companies 
• The differences between reported EBITDA and the figure used for the leverage calculation was around 60m (the currency was not stated) last year
• The latest news will have no impact on the stake sale, but no completion dates were given. Proceeds will be fully used to repay debt. But with no mention of what debt would be repaid from the proceeds, it depends on market dynamics. There was no mention of the asset sale covenants either
• But the one billion (currency unclear) of liquidity and the €1.6bn of proceeds will cover the 2025 maturities
• The company does not plan to refinance the 2027s, because these are on such great terms
• Questions from the Spanish regulator were received on Wednesday, and the company has 10 days to respond 
• KPMG will audit the FY23 consolidated accounts, and Deloitte the individual accounts, with Deloitte switching to auditing both in 2024

One questioner asked exactly the right question. What are the differences in net debt at the various levels (subs and parent) and what is the FCF generation at the parent company level? 

If you know this, you can see how easily the borrower can meet maturities, given that 100% of the debt is concentrated at the parent level. The attendee said: “I really think that that would really help to put the concern to rest, regardless of the accounting policies you are using.” 

The answer wasn’t particular clear. The CFO referred him to details of the non-controlling interests that are part of the equity in the financial statements. He added it was the same disclosure as in the earnings report, in the line before recorded profit at the group. He was asked to elaborate on this later on the call, but he referred back to his previous part answer. 

So is this enough to restore confidence and get a refi back on track? 

Looking at the May 2025 SUNs, you might think so. They are trading at 96.68-mid, a mere 5.88% YTM. This is down from 98.5-mid when the news broke, but well up from a 93.4 low. 

But with all this uncertainty it’s a huge lump of debt to refinance in one go. My bet would be a series of tenders and bit-part issuances to market-test appetite and gauge pricing. The risk of going for a big jumbo benchmark deal appears too large. 

And there is the bigger question of whether this will shine a spotlight on other LevFin borrowers and their use of consolidated accounting practices. We can only hope but I’m realistic enough, after covering this market for several years, to suspect not. 

What we are reading, watching this week

Not much time for much else than short-seller reports and a raft of edits, so a shorter list this week than normal. 

I did watch from afar the incredible spat developing between Harvard and Bill Ackman, which has spilled over to plagiarism allegations against his wife by Business Insider. That resulted in this huge post on X. Always one to take the higher ground, the FT has decided to do a quiz:

Bill Ackman or American Psycho?

For those more cerebral restructuring nerds, a really good piece from Kirkland & Ellis on German Restructuring trends. 

Is shareholder consent required to commence a STARUG and are all courts aligned on this? The no-worse off test is basic, but is it robust enough to deal with valuation challenges? Read to find out.

For the compliance professionals who are reading the Workout, let us know your answer to the question set below:

My colleagues were quick to jump on the Grifols situation on social media. From the Scranton annual report, if there is a loan default, there is payment due in blood!

With the Premier League winter break coming up, and an FA cup weekend, you would have thought our first team and our fans would have avoided a trip to Stoke at 3pm last Saturday. 

But you would have thought wrong — the 15 season tickets points on offer to fans could mean the difference in getting a ticket to an away European knock out fixture or not. We had our best 11 (or those which are still fit) and our full away allocation outnumbering the Championship side fans — who obviously weren’t attracted by seeing last year’s beaten semi-finalists and purveyors of great football — Brighton and Hove Albion.

A 4-2 away win, and Sheffield United away in the next round. The team gets to go to Dubai for 10 days, but I’m stuck in Enfield, wrestling with the Workout and minus 10 degrees windchill if I venture out. 

No hyperspace bypass at the end of the universe, but it is just 10 mins to the M25 from my front door.