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Private Credit 

Chris Haffenden

Wither winter woes and volatility. This week, spring finally arrived for European Leveraged Finance, primary was in full bloom, resplendent with deals in a variety of colours across the credit spectrum.

The market may appear to be coming up smelling of roses, but it is notable that many were launched with significant new issue premiums (NIP)— or at least at initial price thoughts (IPT) stage. A good example is Allwyn(fomerly Sazka and new owner of Camelot, the UK lottery) whose new deal came with IPTs 200 bps over its 2027s for another 3.5-years in duration.

Another name with a NIP in the bid was CABB, whose March 2025 bonds were indicated at around 325 bps on a spread-to-worst a month ago. 9fin’s relative value estimate (our screener and comps scatter graph is here) was 575 bps STW (or 8.25%) using other chemicals comps (weighted to other single-B chems), and at one point it looked as if 9% was would be breached, but the deal eventually priced at 8.75% and traded up to 101.375 on the break. 

It may be the case that lead managers are being overtly cautious on pricing guidance as the EHY market reopens. But curves for many borrowers were incredibly flat on deals earlier this year and, as government bond curves continue to invert further, investors may seek more yield compensation. In addition, spreads in secondary are incredibly tight, arguably due to technical factors, and these should widen out to meet the better value available in primary. We are aware that many more deals sit in the wings, adding to the spread pressure. 

One of the most interesting names this week was Travelodge, which yours truly covered as a restructuring in 2012. It was yet another winner from the pseudo private equity firm Dubai International Capital — its equity was almost entirely funded by debt — whose troubled portfolio of names kept me busy post GFC (Almatis, Mauser, Doncasters amongst others). 

The UK-based hotels business has a chequered history. Taken over by creditors (GS, Avenue, and GoldenTree, which is now sole the owner) in 2012, it has twice used CVAs to force rent changes on its landlords, the latest during Covid. Travelodge has high operational leverage, with 96% of its rooms concentrated in the UK, with labour costs (36% of total, linked to the national minimum wage) another concern. While leases are long (average 25-years) rent reviews are every five-years, with many linked to CPI (some with caps and floors). On the flip side, occupancy rates and average room rents have recovered well, and net leverage is a lowly 2x. Price talk is 10.75% area. 

The ability of Travelodge to get its deal away, will be closely watched by other stressed sterling issuers, such as Stonegate, PureGym, Iceland, Saga and TalkTalk. After all, the depth of the sterling bid is much less than in Euros, and the outlook for UK rates and the economy less rosy. 

According to 9fin’s screeners, there are 21 sterling bonds from 12 borrowers with maturities due within the next three years (reproduced below) with yields in excess of 10%, casting doubt over their ability to refinance. Note that the bulk of the bonds below are senior secured notes.

9fin will produce a report on sterling borrowers in the coming days. 

This week, as well as working hard on our Groupe Casino webinar (and looking at recent developments with some of the bonds, more later) 9fin’s distressed and restructuring team has been looking at possible additions to our watchlist and going through stressed earnings releases and looking for more candidates which may fail to visit A&E. 

Recent editions of the Workout have been Adler heavy. Some readers will be relieved by its absence this week, but no slow wind-down into the weekend for me after the publication of this missive, as Justice’s Leech long-awaited written judgment will be handed down at 2pm today. 

9fin’s distressed analysts aren’t always looking for the next restructuring and names to blow-up. They often turn their hands to special situations and deal predictions too. 

Nathan Mitchell’s excellent report on EG Group (of the same name as the subhead above) is a good example. This is a highly topical name, with lots of speculation about M&A, asset sales and sale/leasebacks as management seeks to reduce leverage to a mid-4x target for a refi. 

At 9fin, we like to dive-deeper into businesses and their financials and not take numbers leaked into the financial press on trust. 

For example, as Nathan outlines in his aptly headed Sale and LeaseFlak section, the 6.9% cap rate for the recent $1.5bn sale of 415 US East Coast sites “looks a lot worse for when you adjust for EG’s average yearly rent and net proceeds. After $384m tax and fees, EG expects to receive net $1,113m, resulting in a 9.3% annual cost based on the initial $103m rent or 11.2% using the average $125m rent”.

As shown above the deleveraging effect from the S&LB is a mere 0.3-0.4x if you adjust for this. And which debt to repay? As per 9fin’s bond covenant analysis, the S&LB falls outside the scope of both debt and asset sale covenants providing EG Group with the flexibility to decide which debt to repay from the proceeds.

So, even after the jumbo S&LB, just over another turn of leverage is needed to get to EG Group’s leverage target. One option mooted in the press, is that the Issa Brothers could use flexibility at their other LevFin borrower Asdato take some of the strain, by buying EG’s UK and Ireland business, reportedly for £3bn. 

But this figure looks highly optimistic, delving into EG’s own acquisition multiples and those of its peers including Motor Fuel Group, we get to a 8.5x multiple and a £2.1bn price at the pumps. To get to the mooted three bill Asda would have to overpay, and/or find impressive synergies. 

If debt funded, Asda’s net debt will rise from £4bn to over £6bn, pushing net leverage to 4.8x plus, which is toppy for a retailer. This is in turn could lead to Asda having to resort to its own S&LBs too, already being leaked into the financial press as an option. And as Nathan opines: 

“Under the bond docs, Asda is able to complete a S&LB transaction as long as gross proceeds are the lesser of (a) £1.2bn or (b) £1.4bn minus debt incurred under the Qualified Securitisation Financing debt basket, which we assume to be zero. Any S&LB proceeds can be applied in accordance with the Asset Sale’s application of proceeds menu.

One of the options on the menu allows Asda to apply proceeds to investments in any Similar Business, which we expect due to its wide definition would include EG UK&I’s operations. If the group actioned a £1.2bn S&LB this provides around half of the funding needed for EG UK&I, based on the 8.5x multiple.

Due to its pre-IFRS 16 leverage reporting, even if the remaining funds for the acquisition came in as debt, it would still be deleveraging for Asda, putting less pressure on shareholders to inject new money. The new combined group would have net debt of around £5.0bn (£4bn plus the additional debt funding required for EG UK&I) and a PF EBITDA of £1,261m, making net leverage 4.0x.”

That’s a neat solution. But it does significantly reduce the collateral coverage for Asda’s senior debt.

Moving back to EG, the impacts of the sale of the UK&I business and S&LB will reduce EBITDA by almost $500m, with annual interest expense falling by $336m increasing interest cover to 2.7x.

As shown above, the deleveraging effect is still not enough. There are plenty of headwinds too for 2023, such as negative working capital dynamics, and expectations that excessive fuel margins will normalise. EG uses aggressive EBITDA adjustments, real leverage is a lot higher, and investors may be less willing to take on trust if it returns for an A&E or refinancing. 

Using Motor Fuel Group’s A&E as a reference point, Nathan estimates that interest cover could fall to just 1.8x (vs 3.1x at time of issue). We are being generous here, MFG is 1.5x less levered and a 100 bps margin bump assumption could be too low, it may be as much as 150 bps. 

So, TLDR, there are many more risks to EG Group than may meet the eye — it may be running on fumes — and therefore is the latest entry in our Watchlist section of our Restructuring Tracker.

There has been a lot of inbound interest in our upcoming report based on a roundtable hosted by Mayer Brown and 9fin on Private Credit. You may have seen some of teasers on social media in recent weeks. In final post production, the report is imminent, but I thought I would give regular Workout-ers a sneak preview of some of the contents.

My panel disclosed that enquiries to restructuring teams have picked up significantly in recent months, with some businesses facing tougher questions over their ability to meet their growth stories with more focus on cash generation and getting to profitability quicker. They are seeing a pick-up in business that have fallen out of compliance with covenants, have a maturity looming, and have lenders fund constrained in offering extensions and forbearance. 

Most direct lending deals are floating rate and are unhedged, the sharp rise in interest rates has started to bite. Many private credit financed companies will not be able to service their debt on revised terms. Auditors are getting much tougher on going concern opinions. This will lead to more distressed sales, and junior debt solutions such as mezzanine to bridge the leverage gap.

It is not all bad news. Equity value is still available for sponsors and, unlike larger LevFin deals, sponsors in the main will seek to engage with direct lenders early and the conversation is more bilateral and collaborative. Panelists repeatedly talked about the relationship being a partnership and the importance of trust to avoid mutually assured value destruction. Typically, the sponsor will need to inject equity to secure a give from lenders as a starting point, however. 

As the number of direct lenders in deals increases, so does complexity, and not all funds will be able to provide a funding solution. As one panelist said, Fund X isn’t going to refinance Fund Y which is out of its reinvestment period. 

Not all lenders are the same, for example the attitude of banks compared to direct lending funds is very different, many will pass to their workout departments and push for hefty IBRs. That said, it is relatively easy for banks to grant headroom, noted a banker on the panel. 

Some of the larger direct lending shops now have credit opportunity funds (though most don’t like advertising the fact) to provide additional liquidity to struggling businesses which their colleagues lent to at issue. Some are looking beyond captive borrowers for other opportunities. 

Expertise and bandwidth to handle workouts is another hot topic. One advisor said that private credit is woefully set up for prolonged distress. 

Most funds are staffed with LevFin professionals, rather than restructuring specialists, but the greyer-haired ones have some experience of deals, with their teams self learning. If it’s just one of two in a lending portfolio that go bad that’s fine, but if much higher it reduces capacity to lend as most of the team will be tied up in dealing with troublesome older loans. 

From conversations with restructuring advisors, many are saying they are seeing more enquires from direct lenders seeking assistance. There has been a pick up in distressed sales as lenders flex their muscles, conversely new processes such the UK Restructuring Plan are being used to threaten lenders with cram down, noted the panelists. 

This and much more, in the upcoming report. You can get on the mailing list for copy here. 

Groupe Casino bonds have tumbled in recent weeks, concerned over latest moves by founder Nouri, who is seeking to merge the Invivo distribution business with the TERACT SPAC, reportedly putting €500m into the joint venture. Many fear that RemainCo could file for Sauvegarde, or if it avoids that fate, longer-dated Casino bond issues may struggle to see any future value, sitting at the back of the maturity queue. 

Concerned about a possible drop down transaction — the priming of debt by transferring assets out of the Restricted Group (for example, to an Unrestricted Subsidiary) and using these assets as credit support for new debt financing — many investors have been querying the capacity under the baskets to do so. Our legal team will be writing about this in the coming days, but other publications have come up with figures as wide as €700m to €2bn of capacity. 

In recent days, 2026 and 2027 bondholders advised by Perella Weinberg have been floating their own idea, believing that the documentation under their NY law governed notes could give them an advantage to other notes. Holders speaking to 9fin suggest, that under the financial advisors’ interpretation of the docs their permission (together with the term loan holders) would be needed for any disposal over €2.5bn. Their valuation of the assets being contributed is €2.5-3.5bn. 

The Perella group is touting the idea of elevating their claims to the French Asset level (alongside the term loans) in return for their agreement, or to have guarantees from that entity, they say. This effectively puts in place an uptiering transaction. 

It is unclear whether the company has engaged with the Perella Weinberg group, if they agree with their interpretation, and if the PW group has enough on their own to approve the disposal. At the extreme, their uptiering transaction could split the 26s and 27s if they don’t extend their plan to those outside their group. We have very little detail on the new business, and cannot confirm reports that net debt would be less than 2x and that the bank debt would port over. 

Exciting stuff. Our team are working hard on this, and this and more will be included in our webinar, scheduled for next Thursday at 2pm. Sign up here, if you haven’t already. 

Oriflame is another candidate for our Watchlist, with another poor first quarter revealed earlier today, with potential interest in the Russian business (outside the restricted group) the only positive, as the proceeds will ‘trickle down’. Our full earnings write-up is here. Their May 2026 SSNs remain in the low 60’s, yielding over 24%. 

German Real Estate continues to provide newsflow:

Corestate is reportedly seeing interest from hedge funds including Whitefort and Indaba (wise man in Zulu) for a €35m super senior liquidity facility. Last week the company said it would consider an alternative restructuring concept, as sales were delayed further and the liquidity position was worse than expected under a restructuring plan agreed late last year. 

Demire continues to make asset sales to chip away at its bond maturities, announcing this week the sale of a property in Ulm (Deutsche Telekom is anchor tenant) for an undisclosed price, and a day later the repurchase of €51m of its 1.875% October 2024 SUNs. 

Despite a negative equity position, and still lacking an auditor Adler is still going ahead with the release ofunaudited FY 22 accounts next Tuesday. 

And just as it look that we’ve reached the final scene for Cineworld, is there going to a twist, or are we going to be left hanging? Bloomberg reports that a competing exit facility is being prepared by Avenue, Jefferies and Greywolf.

I’ve been mostly reading copy for edits as Primary surged, so the list is skinnier than usual. 

Articles on ChatGPT and fears that it will replace everything and everyone and that we will all be out of job, are everywhere. Personally, I think that augmented intelligence will mean that we will be insanely more productive (as are 9fin users already!) from AI and we can concentrate on where we can value add. 

I’m a lawyer. I use ChatGPT daily. I feel like causing some chaos in my profession. The following is PART ONE of a series I’m calling: “Things ChatGPT can do right now that (maybe) you no longer need to pay lawyers for!”[*Please see the disclaimers at the end]

We even saw ChatGPT appearing in risk factors in an OM this week — for Travelodge — h/t 9fin’s Dan Power. You can screen for others here

As we lose our blue ticks today, at least we can be reassured the cost isn’t as expensive as Elon Musk losing a reusable rocket. Not that you would know if you read their release — it was a mere — rapid unscheduled disassembly. Or should that be an unconscious uncoupling?

Good to see London Underground Staff in Pimlico station channeling Nassim Nicholas Taleb

And finally, I’m looking to another trip to Wembley on Sunday and our team facing the dynamic defensive duo of Harry Maguire and Victor Lindelof, in the FA Cup semi-final. 

Brighton are on fine form, registering 26 shots against Chelsea in a 2-1 away win last weekend, prompting the Guardian to write:

It’s important to stress just how good Brighton were. They were brilliant and that should be acknowledged before getting to the equally obvious point that Chelsea were laughably awful. Scorelines can be the great deceiver: this was 2-1 going on five or six.

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