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Private Credit 

Chris Haffenden

Since the last Friday Workout just under a fortnight ago, some semblance of calm has returned to risk markets, with participants sleeping much more soundly after the nightmares of SVB and Credit Suisse three-to-four weeks ago.

Indeed, when compiling the latest Top of the Flops (based on end March data) I was surprised to see only a mild increase in the number of deals indicated as stressed or distressed post SVB/CS. The mental impact from the March 2023 waking nightmares appears to be short-lived — with volatility dropping markedly. The iTraxx Crossover closed end-March at 436 bps, almost 100 bps inside the wides post the shock — and is now consolidating around 470 bps.

The lack of visible trauma means LevFin can fall back into its regular buy movement, seeking to emotionally process and repair the damage from its enforced period of sleep, which it hopes will result in healthier market developments. 

The impressive performance of the Banijay A&E this week (which includes a chunky dividend), is illustrative of its improved health. My colleagues covering Primary for 9fin say LevFin banks rosters post the Easter rest break are healthy and even include a jumbo sterling retailer! 

But often damage is hidden deeply in the subconscious, leaving subjects more susceptible to later triggers. Not all names and sectors have recovered from irrational fears over rates impacts, with Commercial Real Estate and the Retail still badly affected. 

The depression in their bond prices has led to some borrowers using short-term remedies to alleviate their symptoms. Aroundtown and Groupe Casino both used tenders to buy back some of their shorter-dated bonds at decent discounts. But market fears remain, with Groupe Casino 2027 SUNs barely recovering, fearfully awaiting another debt-ly visitation from Nouri (see below):

The bifurcation in the market is leading sponsors and founders to find more innovative ways of addressing their maturities and funding problems. We’ve previously mentioned EG Group’s sale/leaseback as a prelude to an A&E or refinancing (9fin’s Nathan Mitchell is working on a prediction here). This week also saw Saga’s founder provide a forward start revolver to deal with its May 2024 bond maturity and Ranjit Boparan’s Private Office buyingBoparan’s Bakery business. 

But the biggest news of the week, taking up almost all of my time and interest, was the Sanction Hearing for AGPS, the English substitute issuer for Adler Group. The UK Restructuring Plan could have much wider impacts than for just the German Real Estate Group, including the pari passu treatment of creditors in insolvency. 

Yours truly has been burning the midnight oil, covering all the legal issues crammed-in to a mere three days (at least a week would have been preferable), as the Plan company seeks to cram-down a group of dissenting 2029 holders. 

For those who want to dive into the legals, Day One, Day Two, and Day Three are now available. 

Below is my take on the events, the key issues, and why it matters — we believe it could be one of the most important European Restructuring decisions in the past few years. 

It will come to a big surprise to many distressed investors reading this, but under the UK Restructuring Plan, the Adler Group SUNs are projected to get Par recovery — yes, you’ve read this right — from managed asset sales in the next 18-months to two-years. 

This doesn’t tally with the market perception of the value of Adler’s assets, if you take the bond prices as a proxy. The longer-dated bonds have sunk from the low 80s into the high 30s during the past year and haven’t recovered since agreement was reached with a SteerCo last October. 

This is despite €937.5m of new money coming in, which removes short term default risk, used to repay 2023 and 2024 maturities at the Adler Real Estate subsidiary level, with the remainder being used to fund stalled development projects to enable time to sell yielding assets by end 2024, with the rump being sold by end of 2026. 

Then again, following short-seller reports and queries raised by previous auditors (Adler still doesn’t have one currently) on valuations and related party transactions, the confidence of investors is shot. There is also a big maturity wall in 2025 and new priming debt for the longer-dated SUNs to overcome too. 

Short-dated Adler Group bonds, most notably the 2024s, being elevated under the new plan (more on this later) have rallied sharply, however, from the low 40s to the high 60s. 

To get to par, Adler is relying on a Boston Consulting Group (BCG) comparator report, which uses a market model based on valuations given by CBRE and NAI Apollo in June 2022. It assumes that German property values will continue to decline until the end of 2023 (with average fall of 10%), and begin to recover in 2024, growing at 3% annually. The result is a €400m surplus. 

But the AHG contend there are plenty of problems with this approach. 

Firstly, it takes existing valuations from long-standing Adler Group valuer CBRE which are nine-months out of date as its basis, and then it applies unrealistic assumptions on future interest rates (which effects the multiplier) and uses too low Gross Investment Yields, they contend. 

Tom Smith KC, acting for the AHG, spent a lot of time during the three-day hearing pointing out inconsistencies in the BCG report and its assumptions, most notably ECB reference rates. He sought to whittle away the surplus and create doubt over the par recoveries: with just 2.7% of headroom, and little visibility in values beyond 2024, there was little margin for error. 

Why weren’t the valuers (CBRE and NAI Apollo), whose inputs were used by BCG for their report, not given a chance to review the evidence, particularly in light of a sharp deterioration in property prices in the nine months since their summer 2022 valuations, asked Smith.

Daniel Bayfield, KC for the company, honed in on one of the property clusters in Duisburg, referred to in the AHG Skeleton as providing 58% of the rental income of Portfolio 1 (euphemistically called the Cosmopolitan Portfolio by Adler), whose sale process was abandoned in Q3 2022 due to lack of attractive bids. Knight Frank’s cluster assessment approaches for the AHG counter, and their high level valuation evidence, was dismissed by the company as a “finger in the air”. 

Knight Frank’s had said “the assets within the Portfolio 1 are somewhat ‘burnt’ in the market for some time, implying a discount might be necessary to sell the asset in the near-to-mid future.”

Knight Frank queried the 5.02% Gross Investment Yield used by CBRE for the Duisburg assets. They suggest that a GIY of 6.09% for Q2 2022 is more appropriate and this yield should be much higher in 2023 as rate rises hit.

“I do not see a justification for the GIY of the CBRE Q2 2022 valuation (5.02% — turquoise marking) is 167 bps below the average GIY of the stronger years, 2020 and 2021, when refinancing costs increased already in Q1 and Q2 2022? Our perception of the property quality in the portfolio does not imply it should be 170 bps below the average of better years, as this results in 33% higher value than when applying 6.7% [the latest public figure],” said Knight Franks’ Christoph Erlinger in his report.

But it may be harder to disagree with their expert’s views on the development assets. 

After all, Erlinger had worked on valuing eight of them (out of 26 in total) for a prospective buyer. The 50.2% discount for these assets is concerning, and if applied to the wider portfolio would certainly be enough to destroy the par recovery scenario.

Source: Knight Frank report, reproduced in AHG Skeleton

Just two developments are completed and two more are “in some stages of active construction.”

“For the remainder, construction never started or most construction activity stopped years ago... The delays and project abortions appear to be due to a mix of reasons including financial and organisational restraints of the landlord Consus /Adler RE, technical difficulties as well as outstanding zoning or planning permissions,” the AHG claimed. 

The company side counter that a proportion of new money would go towards developing these assets, thereby increasing their value. Delays in developments are irrelevant to determining the “market value” under the Red Book, Bayfield said in court.

Bayfield also noted that some of the Knight Frank valuations are below the land value of the sites.

So why was an inordinate amount of time spent during the hearing focusing on valuations and, in particular, whether there would be Par recoveries?

“The asserted par value figure is, however, critical to the justification for the plan,” says the AHG in its skeleton. “This is because the plan company appears to wish to argue that if there is, in effect, a solvent outcome in which the 2029 notes are paid full, then the differences in maturities, security and other rights that the plan creates amongst SUNs do not matter, notwithstanding that all SUNs would rank pari passu in a liquidation as unsecured creditors.”

The AHG are also keen to address the company’s “pale into significance point” that the plan would lead to overall better recoveries for all creditors and, if all receive par, the differences in treatment for the various classes of SUNs matters less.

In order for Justice Leech to approve the Plan, there must be absolute certainty that they will receive the same recovery as the other SUNs, Tom Smith suggested.

Under the sale plan, the best assets would be sold first, and, being placed at the back of the maturity queue, primed by the new money and the elevated 2024s and converts, the 2029s are taking all the execution risk, they claim. 

The company counters that the 2029s are protected by new LTV covenants and relief pricing mechanisms that prevent assets being sold at a deep discount to their valuations. 

But the AHG in turn says this can be easily waived and amended. They express concern that the appointment of a notes representative (common in German law deals), with wide ranging powers to act for the SUNs as a whole, further dilutes their options.

While insolvency as a relevant alternative is not under dispute from both sides, the use of a UK restructuring plan to implement Adler Group’s restructuring is contentious. Not only the use of six classes — why not use just one for the pari passu SUNs (after all they all have the same contractual rights) — but also its use to cram down the dissenting creditors.

Adler says that as the holders of the SUNs within each series will have different rights after the plan becomes effective — including maturity extensions, and, in the case of the Adler Group 2024s (53% of which are owned by the SteerCo), an elevation to second ranking — the division of holders into six classes was prudent and conservative.

At this point, it is worth mentioning that courts are typically loathe to interfere with the results of votes, taking the view that creditors know what is in their best interests and will vote accordingly. In addition, there have been a number of cases where the courts have taken a commercial view and approved proposals which might be flawed, if this means that value is preserved. 

One of the main arguments from the company is that a large proportion of SUNs (84%) across all classes have voted in favour of the plan (75% approval is needed in a class to pass). This includes 62% of the 2029 notes.

In their skeleton, the AHG say it is not difficult to find why there is “unfair and egregious” treatment of the 2029 notes. The SteerCo are more weighted in the earlier notes (57.25% of the 2024s) and also hold substantial holdings in the Adler RE bonds that are being repaid under the plan, and 18.42% of the convertible notes, elevated under the plan.

The AHG are trying to create a narrative around the SteerCo, that they dictated the terms of the plan in favour of the its members, said Felicity Toube, KC, acting for the SteerCo. This is untrue: it is a broadly diverse group, some of which have widely divergent holdings across the SUNs, and therefore have different motivations, added Toube who revealed that as well as holding €229m of Adler Group 2024s (to be elevated to 1.5 lien under the RP), they SteerCo also holds €219m of the 2029s. 

The new UK RP process is a compromise arrangement for a company in financial difficulties to eliminate, reduce, prevent or mitigate their effect, and help it to carry on as a going concern. Smith outlined, this isn’t the case here, it is not a solvent reorganisation, but is a planned liquidation or wind-down to maximise value, with a formal insolvency as the alternative. 

“There isn’t a third [going concern] option.” There is just a Plan Liquidation or a formal liquidation.

Smith highlighted they would be worse off under the Plan, as even if the AHG loses on the valuation point, there is a departure from the pari passu principle under the Restructuring Plan, where temporal seniority falls away in a liquidation scenario, this is only deviated from in rare circumstances to preserve a going concern, such as paying suppliers in full.

“It is therefore critical therefore to get home on the par recovery point, if they lose this, the whole edifice falls away,” claimed Smith.

The company disagreed, stating in their concluding notes that if there is an enforcement process (from a subsequent default in say 2025): “there is no reason whatsoever to believe that the SUNs would be repaid solely in accordance with their temporal priority in a shortfall scenario where there is insufficient funds to repay all the SUNs. Instead it is much more likely that some form of acceleration would occur so as to render the maturities irrelevant.”

There were a number of other issues raised during the hearing, such as the validity of the issuer substitution to move to the UK under German law, and whether two of the 2029s could accelerate their notes on the launch of the UK RP (deemed by Justice Zacaroli as an insolvency process), but relatively little time was spent on these issues. 

The admission of late evidence submitted by Rudiger Wolf from BCG made matters worse in keeping to the compressed timeline. It was seemingly prepared by PJT Partners, not by BCG, with the company subsequently admitted that it was produced “in collaboration” with its FA.

Justice Leech decided to admit some as evidence (but not all) with an adjournment of over an hour to give Smith time to prepare his cross-examination of Wolf, placing further constraints on an exceedingly tight hearing timeframe. 

This meant that closing submissions were further compressed, with both sides preparing written notes to assist the Judge, and the main closing points were rattled through during the afternoon, with the hearing ending just before 6pm.

The company’s closing submissions have been written (a mere 122 pages!). We have requested the AHG notes but did not have them at the time of writing.

Justice Leech said he will deliver a verdict next Wednesday morning (12 April), deciding whether to deliver a sanction order, or to dismiss the application. He added he would not give any reasoning at the time, but should produce a written judgment quickly afterwards.

The tight time for a decision is driven by a hard deadline, as Adler Group (the co-guarantor) needs the plan to be confirmed and funds released in order to repay Adler Real Estate 2023 notes due on 29 April. 

We have sympathies with the argument that this time crunch might have been engineered to some degree. It is also disappointing that this high profile and potentially very significant case wasn’t heard by one of the top judges, such as Zacaroli, Trower or Snowden (now an appeal judge), who developed case law since the introduction of the UK RP in the summer of 2020. 

The German law issues around substitution and acceleration deserved more scrutiny, notwithstanding the reticence of English courts to interfere in matters outside their jurisdiction. It would have certainly benefitted the AHG to have be armed by determinations from the German Courts prior to the Sanction Hearing, to cast more doubts on jurisdiction. 

Restructuring lawyers suggest that it is highly likely that AGPS will eventually end up in the Court of Appeal, regardless of the decision by Justice Leech on 12 April, which he says will be delivered as a simple yes/no. 

As such, his written reasoning (expected a few days later) will be closely examined.

Not much space in this week’s addition to look beyond Adler, but here is a summary of other events in the past fortnight and some of our coverage. 

Orpea, as we predicted, filed for Sauvegarde Acceleree on 24 March, which has its own version of cram down, which is expected to use the vote of senior secured creditors to force the deal on a large group of dissenting unsecured creditors. We still await the verdict from a court challenge on the validity of the lock-ups, which was held on the same day. 

As we predicted, Cineworld abandoned its sales process, and the agreement — summarised by 9fin’s Bianca Boorer, is little different from what we revealed in February. Group debt is reduced by $4.53bn, with a $800m right issue and $1.46bn of exit financing. 

Perhaps reflecting the lack of confidence that Groupe Casino would repay its January 2024 notes, over €400m of the notes tendered, with €100m accepted at a price of 94. That leaves holders of €550m of the Quantrim notes sweating on what could happen to the balance. 

As mentioned earlier, we produced our latest version of Top of the Flops this week, with a bonus section on stressed/distressed Real Estate names. Of the 61 Real Estate bonds from 27 borrowers that 9fin tracks, around half, 30 from 15 saw their prices fall by more than 2% during March, with 18 from eight falling by more than 5%.

In total, there are 27 bonds from 14 RE companies trading at stressed/distressed levels. Only three, Corestate, Adler RE and Adler Group  have gone through processes, with Aggregate Holdings remaining in a precarious position. Demire (our earnings review is here), DIC Asset, SIGNA Development, Medical Properties Trust and Vivion are trading at distressed levels.

More news in the past fortnight for the Monaco Resources complex, with Metalcorp failing to meet its bond amortisation payment and R-Logitech given more time by its bondholders to repay, in return for a package of protections. 9fin’s David Orbay-Graves is all over this, so drop him a line if you want to know more. 

As we predicted in our deal prediction in March, Saga Chairman De Haan has stepped in to underwrite Saga’s refinancing plans, to help repay £150m of 2024 bonds.  

The Chicken King appears to have alleviated liquidity concerns at the end of 2023, using Boparan’s Private Office to buy Boparan’s Bakery business, after a bidder stepped away. 

We have recently produced the following reports:

Following on from EG Group’s announcement of its $1.5bn sale/leaseback 9fin’s legal team discusses the implications of the transaction which it views as falling outside of the scope of both the debt and asset sale covenants. 

9fin’s Emmet McNally explored Kloeckner Pentaplast’s refinancing risk ahead of its earning release, which disappointed some as 2023 guidance was delayed amid a CEO change. 

Emmet also took a look at Diebold Nixdorf’s stub exchange (the deadline is tomorrow) with a potential Event of Default looming. Look out for a more detailed report in the coming weeks.

Most of my week was reading skeleton arguments, my hastily written notes and closing submissions, so apologies for the slightly smaller list than usual. 

We read with interest that JP Morgan and Goldman are looking to start trading private credit loans. I’m not sure borrowers will be that happy: so much for the special, bespoke and bilateral relationships! Looking forward to seeing sponsor discussions on replacement lenders.

Best April Fool from last weekend: Revealed, where banks are (literally) warehousing their swaps

Our tech team are known for producing great and intuitive interfaces. Hat tip to our CEO for sending over this — in 2017, a group of developers competed for who could create the worst volume control interface.

While we mull whether to pay for our blue ticks, Elon Musk is considering changing the company’s logo.

While our tech team mull the advantages and disadvantages of ChatGPT4 and Google Bard— I prefer the Brighton Bard:

On a more serious note, I wish Graham Potter well. Before jumping ship to Chelsea, he transformed Brighton and was a big reason why we are now in our elevated position. 

Myself and my son are lucky enough to have FA Cup semi final tickets, and before April 23, there is real hope that we can use our games in hand to get into the Champions League positions. Spurs are our next victim on Saturday.

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