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Chris Haffenden

So, the Margaret Thatcher wannabie is for U-turning after all. Last seen touring the tea rooms and committees on a charm offensive and seeking to change her name by deed poll to Liz Truce. As I write, sterling markets are recovering sharply on talk that the mini budget will now be reversed, and be undelivered, undelivered, undelivered.

For now, all we know is that her chancellor travelled back a day early from the IMF meeting for his sacking amid talk that his corporation tax plans might be amended or scrapped.

Reducing the fiscal damage would be a welcome relief for Gilt-ridden market participants as inflation numbers in the eurozone and US this week once again surprised to the upside. But markets took it in their stride, and after an initial sell-off most ended up with their best day in weeks yesterday.

It is not all gloom and doom. A shout out to Deutsche Bank’s research team for only good news charts this week, recognising we are reaching our limit on dealing with bad news and looking at far too many Axis of Evil.

Despite Truss issues, HY primary remarkably remained open this week, and not just tweaks to the capital structure refis, we had the first proper LBO bond deal since the summer with Fedgrioni.

The Italian high-end packaging and label maker is a good and familiar name with a decent credit story. But Price Thoughts are at the high end too, at 11.75%-12% for the SSNs (2.5-3 pts OID) and the FRNs slightly inside at E+600 bps at 90-91, a ten-handle all-in yield, substantially higher than the 4.125% margin paid in March 2020. My colleague David Orbay-Graves goes into more detail here for 9fin clients. 

The €1.025bn bond package (split between €300m SSNs and €725m FRNs) is more sizeable than recent offerings. The market backdrop isn’t getting any better, so the sticker price reflects the need for a quick sale. Interestingly there is an additional €300m subordinated shareholder loan inserted since the LBO, to take some of the strain. At one point the banks had also indicated they would keep €150m as a TLA or senior secured equivalent, but this portion has now been added to the debt on offer to investors. Both moves suggest some flex from the leads and sponsor to get a deal done.

With just over a month to go before Thanksgiving, a time when the market traditionally shuts down for the year, it’s if a number of borrowers and sponsors have finally decided to make their move. Most notably Bain Capital, which has now tried its luck with Inetum, House of HR, Stada and Fedriogni since the summer break.

So, some are deciding that deal pricing, interest rates, and market access is not getting any easier, and could get even worse. But is it better to refinance, to amend-and-extend, or for more stressed names to use their loose docs to put pressure on their creditors?

Bain’s Stada this week decided to head to the A&E department.

Stada is the more interesting of the two. The two year extension on offer for their 2024 SSNs throws up interesting questions on deal economics and the issuers motivations.

Holders of the €200m 3.5% and €1.685bn 3.5% senior secured notes (SSNs), both due September 2024, have the chance to exchange into new 7.5% SSNs maturing August 2026, according to an investor presentation.

The “leverage neutral” exchange offer envisages a minimum of €500m of the outstanding bonds being exchanged, at par, into the new 7.5% 2026 paper. In addition, bondholders get another eight points. As of 30 June 2022, Stada’s cash and equivalents stood at €340m, of which €93.4m was held in Russia (€40m was repatriated in August). If the full amount is exchanged, that’s around €150m of cash spend, a big chunk of its unrestricted cash.

The outstanding bonds prior to the exchange were indicated around 8.5%, and factoring in a new issue premium and a longer maturity, we would have thought a new primary bond would print around 10%. So, there is a 2.5% per year saving from the A&E, but eight points payable upfront.

Put another way, it’s the reverse of doing a primary deal with a big OID, which has a big payment at the back end of the deal, here you are paying up on day one, for cheaper economics over the rest of the deal’s life.

As one analyst noted, in a rising interest rate environment you normally hang onto cash to minimise carry on debt, keeping paying lower coupons on your old debt for longer while earning more on your cash as rates rise.

Then there is the question of why they didn’t address the 2025 September SUNs alongside the 2024 SSNs or start with the juniors first.

It means that the capital structure is now backward — normally the senior secured debt is ahead in the maturity queue — plus it means a huge maturity wall in 2026. Admittedly, there is a springing maturity back ahead of the SUNs if they are not refinanced by June 2025.

Leverage is on the high side at around 6x, so maybe it might be easier to take out the subs in a couple of years’ time. In secondary, the subs were around 250 bps back to the SSNs prior to launch, which doesn’t suggest too much concern from investors.

FinTwit was full of opinions on the move, mainly questioning why was it was necessary to offer such a large cash payment. It’s clear that the new paper won’t trade as par paper, we calculate fair value is probably around 92-93. The company NRS doesn’t give many clues, just saying it was a proactive liability management exercise.

My thoughts are that after the difficulties seen with fully covering the books of Inetum and House of HR, as a sponsor you might be sensitive to avoid negative publicity of having to pull or widen pricing on a primary deal.

Yes, there are uncertainties too on what is the right pricing for A&E deals. But at least you can keep coming back to market for more and chip away at your maturity wall.

Take a look at Groupe Casino and its liability management over the past couple of years — btw a strange name for a retailer, but strangely apt. Imagine how much worse a position they would be in without the plethora of exchanges and buybacks? Their CDS blew out this week, after a downgrade to triple-hook after hours last Friday.

We are running our slide rule over the Stada exchange offer economics and will be speaking to investors on their thoughts. If you want to join the debate, email david.graves@9fin.com

Creditor on Creditor Violence on the rise

Another trend we are seeing is the escalation of lawyer notes, presentations, and webinars on creditor on creditor violence. Yes, I’ve been prattling on about this for over a year, but it is now happening in Europe it is not the exclusive jurisdiction of the US.

Btw, the best event will surely be this one from Simpson Thacher, yours truly is moderating.

Yesterday, I joined late into Akin Gump’s The Evolving Private Credit Market in London webinar. They were about seven minutes in, and the discussion was on creditor on creditor violence. As the chat evolved, I thought I had joined the wrong session. I think Private Credit was mentioned only once. For a good perspective on restructuring and private debt our 9Questions with King & Spalding is here.

There is open talk that sponsors are looking at the docs to amend terms, provide emergency liquidity lines, without creditor consent. They are likely to use loose docs to their advantage when seeking waivers or amendments. Drop down financing, up tiering transactions, and coercive exchanges, you might not be familiar with them yet, but in the next few months, you will.

Admittedly in Europe it is not just about contractual security, you have legal frameworks, director’s duties, jurisdictional and regulatory issues to deal with too, which are not uniform. In short, there is less certainty than in the US.

While most of the market focused on the pulling of Apollo’s Brightspeed financing last week and journos were writing their post-mortems, Brian Dearing, our co-head of European High Yield Research channelled his inner Matt Levine in this excellent piece (chapeau too for Owen Sanderson for a great edit). If you are not a client but would like to request a copy you can do so here. 

He might have even coined a new term — Savage Subordination — the headline isn’t bad either:

If you think we are exaggerating, the old notes were downgraded by six notches with noteholders organising and threatening to go legal claiming the buyout was in breach of their bond terms.

The Embarq unsecured notes were IG rated at issue in 2006. By stepping over Embarq and providing these guarantees to the Brightspeed Debt, the old Embarq Notes become structurally junior to the Brightspeed Debt, putting them in a much worse position. They would sit behind $4,865m of new debt. Their position is even worse when considering the fact that the Embarq Debt is due 2036, whereas the Brightspeed Debt is due 2027/2029, so they would also be temporally junior.

This is only possible because the old Embarq Notes had virtually no covenants.

“But the threat of structural subordination (or collateral dilution) exists in other structures where Restricted Subsidiaries have significant capacity to incur debt without providing guarantees to the original issuer, or where Restricted Subsidiaries can guarantee or secure (via Permitted Liens) parent level debt like in the Brightspeed transaction,” notes Brian.

There is much more for lovers of documentary savagery in our report which is available here.

Is it time to look at fallen angels over here, to see if there are any European candidates?

Surely, you will say, most sponsors I regularly speak to won’t do this, they don’t have it in them, it’s all about maintaining our close relationships.

But as Stanley Tucci’s character in the excellent Inside Man (a professor of criminology on death row who brutally killed his wife) says:

“Everyone is a murderer. You just need a good reason and a bad day.”

When lawyers mention the Envision deal or other transactions such as Neiman Marcus, they often concentrate on the final violent act, but less on the series events building up to it.

Many had a series of exchange offers, often coercive, which stripped lenders of rights, pitted groups of lenders against one another and removed creditor protections piece by piece.

Another benefit (to sponsors and their clever lawyers) of loose docs is that you can secure amendments and changes to deal terms at a lower cost. Having a bigger stick counts. If you can add a bit of hunger games theory into the mix, to further scare your creditors, that’s even better.

We’ve been waiting for the A&E proposal for Keter, the plastic sheds and garden furniture products maker for some time. We thought the sponsor would have to put in a triple-digit sum with a significant bump in margins. But we didn’t factor in loose docs, smart lawyers, and some subtle coercion.

Reportedly (from LPC and Reorg), the transactions is roughly as follows:

Sponsor BC Partners will put in €50m with €250m of the €1.2bn term loan being repaid at par, the balance mostly funded by a new dollar 2025 first lien (and small second lien) provided by existing lenders but also open to third-party providers. The remaining first lien will be extended for two years with a 100 bps margin bump, with some of the first lien exchanged into 2L.

There is a twist. If over 80% of lenders consent, they can strip the covenants and security. This means that if you fail to exchange you are left as junior debt, sitting behind the first and seconds.

However, you are still temporarily senior, and might get repaid in full at par in a year. Given the deteriorating performance of the business whose Covid tailwinds are long gone, a full exit might be better. But the risk is that they decide to come up with a more holistic solution for the debt stack by next October, and you are now sitting at the back of the queue.

Clearly there are a lot of moving parts to the Keter deal, and without the full details it is difficult to properly assess the economics. But from the headlines, the cost of the A&E looks cheap for BC Partners, who preserves their optionality for a relatively low cost.

Our lawyers are on the other side of the wall and do have the full details and can provide their assessment on the A&E for those which can prove access to the Keter SFA.

Trustpilot for Keter UK doesn’t inspire confidence. For some customers it is not Sheds Heaven.

In briefing the editorial team on Keter, and explaining how these processes work, I was reminded of the wave of amendments requests after the GFC.

Sponsors launched a series of increasingly egregious amendment requests. They sought to take advantage of CLO investors inability to act and their relative naivety in amendment negotiations in comparison to gnarled distressed investors. Many funds were told that if they pushed back too hard, they wouldn’t participate in new deals. In hindsight the prices for consent were laughably low.

The tactic was to sound-out and get the largest lenders onside before launching the request. If you had the majority onboard already, could give early bird consent fees to cash starved CLOs, and create the illusion of momentum, you were a fair way towards the finishing line.

The amendment process is handled via agent bank, who also controlled all the information flow. It was often within the same institution as the lead bank working with the sponsor (often for a nice fat and undisclosed fee) on the amendment. The process made it difficult for lenders to communicate and to voice their concerns and form a group.

Calling me and my colleagues to air their grievances was one option, but we were very wary of giving too much airtime to the angry mob if there wasn’t any organised pushback behind the noise and venting.

The leads were always keen to tell us how well the deal was going, saying that we would look stupid if we published comments from the dissenters, as it is almost there. Some even exerted similar pressure on us as they were doing with lenders to acquiesce, in exchange for continued access to bankers and sponsors.

Even if there was concerted and organised pushback, I saw at first hand the last minute divide and conquer tactics used by leads banks. In one case, a side deal over the weekend post consent deadline, with one lender to sway the vote and a surprise win announced on the Monday.

Angered by this one particular deal, I was asked by two funds whether I could come up with a tech solution help them redress the balance of power.

Using off the shelf social media and data room software, and employing one of our software engineers, we built a basic tech solution. I went on an investor tour with my CEO to scope out the interest, with one large CLO manager so interested he wanted to invest in the equity PA.

But I was also told to outline the idea by email to an MD of one of the largest LevFin houses which was leading the bulk of these requests. I then had to turn up to their fabulous Art Deco London HQ for what turned out to be one of the most uncomfortable meetings of my life.

His opening line was: “I will work tirelessly to ensure that your product isn’t launched, and if it does emerge, I guarantee that you will never work in this market ever again.”

I’m still here over 10 years later, but I have a feeling that history might be about to rhyme.

And what happened to the product? If you buy me a beer, I will tell you. Perhaps it’s time to dust it off again.

Yesterday, we launched the beta version of our Restructuring Tracker to 9fin subscribers. It has major ongoing, expected, and completed restructurings in the European LevFin universe since August 2020.

You can review restructuring timelines and upcoming milestones, access key information, such as pre- and post-restructuring debt amounts, creditors, and advisors, and read our QuickTake analysis all under the dedicated Restructuring tab on the 9fin platform.

You can use our Restructuring Tracker to:

View our list of expected restructurings — e.g., Takko, Keter or Lycra, all of which are unlikely to be able to refinance instruments with upcoming maturities;

View 9fin’s Watchlist — early-stage names being actively tracked by our reporters/analysts;

Get the whole story on recently completed restructurings, including 9fin analysis, Restructuring QuickTakes, with relationships between key stakeholders, timelines and source documents, on a single page — e.g., Nostrum Oil & Gas or Haya Real Estate;

Follow situations currently in progress, such as Vue, and access news, price movements and instrument data in one click.

A shout out to 9fin subscribers whose feedback led to the development of the tracker. Big thanks too for the hard work and input from 9fin’s engineering, product, editorial and analyst teams.

Its launch is timely, it is already helping with our own surging distressed/restructuring workflow, we hope it will do the same for you.

The press is suggesting that there are plenty of shoppers heading for Matalan.

Not only are the Hargreaves family teaming up with Elliot Advisors; we have Mike Ashley, the serial acquirer of distressed retail businesses; and Apollo’s Alteri with second lien lenders. First round bids are due next week.

But will bids be enough to clear the first lien, who are driving the sales process? Views on EBITDA forecasts and stressed sale multiples are very mixed, giving a wide variance to expected recoveries amid doubts whether the first lien will be covered.

In the first of a two part research report 9fin’s Emmet McNally attempts to pick apart the company’s bullish forecasts and looks for clues on valuation comps. 

Hurtigruten is another on our expected list.

As 9fin’s Denitsa Stoyanova outlines, the Norwegian cruise operator may struggle to address its large capex needs amid ongoing free cash flow burn. Sponsor TDR Capital continues to be supportive, however, by drip feeding funds ahead of an anticipated 2023 recovery. While covenant waivers from lenders have afforded time to ramp up services, profit recovery is still elusive. A large capex hump coincides with the maturity of €174m of bank loans in June 2023.

Management hopes to defer some of that investment by a few months, but this will do nothing to ease the total liquidity shortfall, which may exceed €400m according to 9fin’s estimates.

After weeks of reports of sellers being frustrated by a seemingly watertight whitelist, a €2m piece of GenesisCare 2027 TLB traded this week at 35, via JPMorgan, as revealed by 9fin. Lenders concerned over poor US business performance, cash burn and loose docs have recently hired Houlihan Lokey and Akin Gump to be “prepared in case something happens.”

The Veon CEO has today written to stakeholders, saying they have had “made good progress to optimize the Group capital structure for the longer-term, taking into consideration the challenges that we face in the current environment. Today we invited our 2023 noteholders to contact VEON Ltd. in order to engage in discussions with these noteholders, with the aim to maintain a stable capital structure in the longer-term, which we consider in the interest of all stakeholders.”

This raises a number of questions, most notably why just the 23s, and whether a liability management exercise is in the works. There is also a Reuters report that the Russian Telco business may be up for sale.

I’m not sure whether anyone outside of 9fin editorial team still cares about Amigo Loans — it was the subject of our writing test for shortlisted applicants — but the UK guarantor lender has finally got approval from the FCA to resume lending. It will be interesting to see if it returns to HY.

So, as Central Banks embark on QT, which could lead to further rises in Government Bond yields, what happens to their $30trn of bonds? Do their mounting losses really matter, asks the FT.

A good analysis piece from my old shop Ion Analytics on how Private Debt is providing leverage to Private Equity by providing Net Asset Value Loans secured against the value of the PE Funds underlying investments. What could possibly go wrong?

ESG was a hot topic this week, with the release of an anti-ESG ETF The God Bless America ETF (NYSEARCA:YALL) Strangely, the largest holding was Tesla.

What next — an anti-capitalism ETF, or anti-growth ETF?

My colleague Sam Stevens spotted this in an ESG report, its true, work does kill:

I’m a big fan of Brad Setser’s analysis. The former US Treasury official and senior fellow at the Council on Foreign Relations has written in the FT about how Zambia’s Sovereign Debt Restructuring could set the global financial architecture. I confess an interest in the outcome, having spent two weeks in the Country on an assignment with the WWF, and am a huge Sovereign Restructuring nerd. How Chinese institutions are brought into the old London and Paris Club architecture is arguably the biggest challenge for several sovereign debt restructurings.

As we at 9fin gear up for the biggest restructuring wave since the GFC, The Man Institute details the composition of global debt and how much is trading at distressed levels.

One of the biggest risks is the unravelling of the Chinese property boom. This FT series is a must read. The first part looks at the role of the local government funding vehicles which have provided the main impetus behind the investment-driven growth boom. But they were heavily reliant on land sales, and many will have to be bailed-out by the Chinese Government.

And finally, some recognition of BofA Research’s pun game

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