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Chris Haffenden

The everything rally continues, as the market participants lay odds of recession, now a rank outsider, with bad economic news once again good news for risk assets. Even big tech laying off workers is positive (not sure how this affects their investing for growth valuation thesis) and, despite disappointing again, Tesla’s EV forecasts are still taken at face value by the Musk-eteers.

This graphic from JPMorgan shows just how far perceptions have changed. Not sure if the Jan 2023 bar in gold is meant to represent the present Goldilocks scenario.

At my old shop, the sales team used to talk about wanting a Goldilocks market — one that is not too hot or too cold — in order to capture as many subscriber types and dollars as they could.

This meant plenty of stressed names and special situations — but not too many blow-ups which caused distressed hedge funds to go out of business. They wanted functioning primary — but not one so strong that even a dead cat could get refinanced, as no-one would bother about our insight and credit analysis. Conversely, if primary was dead for too long, the huge LevFin teams were inevitably pruned back hard, increasing cost per user and leading to a difficult renewal.

So how close are we to the perfect porridge mix for our commercial team to feast upon?

In EHY, the bond bid is back, especially for double-Bs, and even the trickier single-Bs are catching a bid in secondary. CCCs are languishing, as most are there for a reason.

Our screeners show 17 single-B issuers have prices rising by over 10% in the past month, and a whopping 73 borrowers are up over 5%. Biggest movers include Carnival, Tullow (more later), Zayo, Groupe Casino, Douglas, SIGNA Development, IAG, Ardagh, Maxeda and United Group.

But while BB issuers can issue and price within 24-48 hours, a genuine single-B issuer in primary still requires a fair amount of price discovery. Italmatch, the Italian speciality chemicals biz, was a curious one: 11% whispers (denied by the leads, but IPTs were 10.5% area…) made us think there must be something wrong with the name, as our RV suggested nearer to 9%.

Yes, there is low interest cover, with concerns over cyclicality, and elevated leverage which is set to rise in 2023/24. The Saudi investor participating in the capital increase has paid a high multiple, so in theory, there’s a decent equity cushion. But it’s reliant on a few suppliers, a lot of inputs and waste are highly toxic (we assume its not offloading white phosphorus for weapons!) but it does have decent pricing power. In the end, it tightened to 10%, a decent result, all round.

My performing credit colleagues at 9fin report smooth sailings for many recent A&E requests. CLO investors are seemingly lapping up the opportunity to take part cash, and repricing the remainder by 200-250 bps, willing to kick the can for semi-challenged credits. Personally, I think it’s a great opportunity for investors to reassess their exposure, tighten the docs and the structure, and grill the sponsors. But animal spirits are winning out.

Whether this will reduce the number of upcoming restructurings is moot. This bear, while recognising that the market temperature is certainly warming, doesn’t think that a LevFin spring is just around the corner.

The meme stock crowd is often mocked for piling into stocks which appear to be nailed on restructurings and are likely to wipe out shareholders. A good example is Bed Bath & Beyond: its bonds are in single figures (price not yield!) but the company still has a market cap of $382m despite net debt of almost $2bn.

As my former colleague (and co-founder of REDD) Gabe DeSanctis (no relation of Ron) used to say, “there is strong support at zero!”

He also used to say “don’t hassle the Haff” — but that’s another story.

In the last big restructuring wave, I marvelled at how market caps stayed so high, even after a debt restructuring was announced, with the obligatory caution to shareholders that they would be heavily diluted. The chat rooms were full of crazy theories and valuations, and the equity analysts were often little better informed. Betting against them would be easier than playing online poker on Friday night, preying on amateurs coming home from the pub.

Yell springs to mind. The UK directories biz had a market cap of a quarter of a billion, despite having £2.3bn of debt trading in the 30s. After several torrid years, they eventually got a bagel.

Unfortunately, this journalist was unable to act on his strong conviction Yell short (no inside info, apart from some basic credit knowledge) as this wasn’t allowed by his organisation. Otherwise, I would be now sunning myself in my beachfront home in Sicily contemplating how many more big tech shorts to put on, rather than putting these musings to pixels in London’s murk.

Capital structure arbitrage is nothing new — often a distressed bond position is hedged via equity shorts as well as playing around with CDS. As a former convertible bond trader, I’m well versed in out-of-the money equity options and the effects of volatility on bond valuation.

GameStop and other short squeezes are sharp reminders of how difficult it can be to manage equity hedge deltas — Insight have a good primer on convertible bond arbitrage for those who want to learn more.

Given my background, I was delighted to see an excellent post by M&G’s Bond Vigilantes on equity option values for distressed: Capital Structure Gymnastics: valuing the equity of stressed credits using option maths

M&G uses crypto exchange Coinbase’s debt ($3.7bn), trading at around 50 with a market cap of $8.8bn, and outdoor advertiser Clear Channel Outdoors debt at 70, but with a market cap of just $580m as their examples.

As they say, intuitively, the market will ascribe better optionality to Coinbase. But as the discrepancy is so huge, using options maths and Black-Scholes calculators, the theoretical price of the equity options can be estimated.

“Borrowing a key takeaway from Merton’s structural model for credit risk, from this perspective, CYH equity is analogous to a call option on CYH’s assets — with the strike being the total debt, underlying being the asset value, and expiration being the nearest large maturity.”

So what are the inputs for the Clear Channel Outdoors calculation?

Strike: $12.5bn (total debt value, minimum EV to refinance the earliest maturity in 2026)

Expiration: 15 March 2026 (the first big debt maturity)

Underlying price: $10.275bn — the implied EV from the price of the second lien fulcrum debt

Dividends: 7.4% per year (the total interest on the debt until the option expiration)

Volatility: more difficult to assess and you may disagree with M&G’s 40, not the 93 implied vol from the CYH equity — they went for HCA as a comparable conservatively capitalised asset

Risk Free Rate: 4%, this is easier, the three year US Treasury, to match the debt maturity.

Put all these inputs into a Black-Scholes calculator and it computes a $1.4bn market cap, way, way above the $650m current market cap. They add there is a 37% probability that the underlying finishes-in-the-money.

A great way of looking at potential upside (and downside) of all parts of the capital structure. Try it for yourself (a couple of names further down in the Workout are a good start).

There was big excitement at 9fin on Tuesday night when Hindeburg Research tweeted this:

Worldcom was the biggest at $186bn (over 20 years ago), so given the size, this would come from a select crowd.

Probably not Coca Cola or Cisco, our gut feel was it was likely to be a developing market company, perhaps Alibaba?

No, it was Adani, the fast-growing Indian conglomerate with a $212bn valuation.

Unfortunately, Adani is not part of 9fin’s regional coverage, but given the size it would be rude not to take a quick peek.

The executive summary carried a number of the usual red flags for big frauds. These stood out to me (we cannot verify this info):

Listed Adani companies have seen sustained turnover in the Chief Financial Officer role. For example, Adani Enterprises has had five chief financial officers over the course of eight years, a key red flag indicating potential accounting issues.

The independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandharia. Shah Dhandharia seems to have no current website. Historical archives of its website show that it had only 4 partners and 11 employees. Records show it pays INR 32,000 (U.S. $435 in 2021) in monthly office rent. The only other listed entity we found that it audits has a market capitalization of about INR 640 million (U.S. $7.8 million).

Shah Dhandharia hardly seems capable of complex audit work. Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s seven key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures.

The audit partners at Shah Dhandharia who respectively signed off on Adani Enterprises and Adani Total Gas’ annual audits were as young as 24 and 23 years old when they began approving the audits.

Another red flag is the widespread pledging of personal shareholdings for loans, which might bring international banks into the picture. Definitely one to watch out for in the coming weeks.

But we now have another big short closer to home, a issuer with a c.$9bn debt stack (including over £2bn of sterling debt and €1bn of euro debt). But it is less surprising as other short sellers such as the Bear Cave have waved their red flags several times before.

Medical Properties Trust (MPW) bonds on Thursday fell by up to 10-points after Viceroy Research unveiled their report — Medical Properties (dis) Trust

It alleges the Healthcare Property REIT has:

“….engaged in billions of dollars of uncommercial transactions with its tenants and their management teams in order to mask a pervasive revenue round-robin scheme and / or theft. The value of MPW’s assets, as a result of capitalising these uncommercial transactions, are massively overstated. MPW employed an aggressive, debt-fuelled roll-up strategy in order to affect these transactions. We believe the true value of MPW’s LTV is ~85%, creating enormous credit risk. We believe MPW will have no choice but to significantly cut dividends. Substantially all of MPW’s major tenants appear distressed. This precedes the need to engage in revenue round robin transactions. MPW is a subprime asset roll-up generating prime yields.”

This is done in four ways, Viceroy claims:

Sale/leasebacks — overpaying for distressed assets and leasing them back to their over-indebted tenant, paying by over 10x more than fair value.

Cash giveaways — “…various transactions with a common cast of friends in which hundreds of millions of dollars go missing.”

Bailout transactions — spending hundreds of millions on bailing out distressed tenants, by acquiring equity and issue loans “in order to mask uncollectable rent via round-tripping revenues, and consequently, avoid impairment of their assets.”

Capex Assistance and Fake Builds — ”MPW appear to collude with tenants to establish ‘fake’ projects in order to siphon money away from the company.”

Viceroy also takes a swipe at MPW’s straight line revenue model, and doesn’t believe that the straight-line rent (around 20% of total rent) is collectable. The short-seller adds that material amounts of billed rent is round tripped through uncommercial loans and equity investments.

In common with our old friend Orpea, Viceroy thinks that MPW’s aggressive debt fuelled roll-up will come a cropper in a rising rate environment. It estimates LTV is 85.16% rather than 52.58%. It also estimates that cumulative FCF since 2015 is negative -$1.9bn.

The 33-page report is on our weekend reading list, and we eagerly await the company’s response. The shares have fallen around 25% in the past six months, but still have a market cap of $7.5bn. Definitely, one to run through the Black-Scholes option model!

With so much for the distressed/restructuring team to look at, we can often do a bunch of work, but get timed out before publishing. Either the company releases the news, or one of our peers gets the scoop first.

So hats off for Reorg’s story on Flint’s advisor appointments, and for their story on Oaktree looking to put money into GenesisCare. With such loose docs, I hope this isn’t via a priming up-tiering or drop down transaction. For those in the loans, our legal team did the work on the docs for one subscriber last summer and can share if you can show proof of ownership.

Watch out for a piece from yours truly on creditor-on-creditor violence next week; if my spidey sense on GenesisCare is correct, its timing might be prescient.

Tullow Oil is another one that (partlu) got away. A few weeks ago, we were looking at the 2025 SUNs, trading at around 35% YTM, over double the yield of the chunky 2026 SSNs. The failed merger with Capricorn had diminished year-end expectations of a refinancing, and lower oil prices had reduced forecasts of FCF generation. There was also the small matter of Ghana exposure (undergoing a sovereign debt restructuring), where 70% of its revenues come from, leading to a triple-hook rating.

With leverage set to drop below 1.5x, there is the ability under the docs to repay some of the 2025 SUNs ahead of the SSNs. This week’s trading update showed better than expected FCF and management hinted they could consider open market purchases. The bonds are up at 72, from 62 at the start of the year, and now yield 25%.

Another overdue piece is for Lifeways, the UK care home operator bought by OMERs for £207m in 2012. The convening hearing for its UK Restructuring Plan (the first we’ve seen for a while) was last week, with the judgment appearing on Monday (which is straightforward apart from the CEO-turned-whistleblower wanting to be a separate creditor class, a request refused by the judge).

Under the plan, around £100m of the c.£190m of secured debt will be extinguished, with senior creditors led by one large distressed fund taking control, and up to £15m of new liquidity provided. If the plan fails, the cash position on 27 February is projected to be negative £186m.

Orpea has taken a few blows in recent days, after the departure of CDC leaving its fate in the hands of The Guns, slinging their equity demands in front of the court appointed conciliator and other creditors. Tuesday’s creditor meeting gave more details of the numbers and process, but there is still no resolution. There was some good news for the French care home group, with Mediobanca (joined by a rag tag of vigilantes) failing in its attempt to nullify its second conciliation process. The judgment is available in French, or via a Google translation.

But the respite might not be for long. Victor Castanet whose book “Les Fossoyeurs” (roughly translated as The Gravediggers) started the whole saga off with allegations of corruption, fraud and patient mistreatment last January, is set to publish an updated edition, with another 10 Chapters. 9fin has placed an advance order.

We are reliably told that Adler Group released its practice statement letter to creditors on Thursday, ahead of its UK Restructuring Plan. Once we have procured a copy, we will be taking a close look at class composition and for more details on implementation.

Adler Pelzer offered hope of a refinancing, with management telling investors at BNP Paribas’s leveraged finance conference last Thursday that shareholders were considering injecting equity to smooth a deal. 9fin’s Josh Latham reviewed the prospects of a refinancing for the German auto supplier in his deal prediction in early December. 

And finally a couple of restructurings completed this week.

As detailed in last week’s Workout, Matalan used the distressed sale mechanism under the intercreditor to implement its debt/equity swap and disenfranchise the second lien. Ahead of the close, as promised, 9fin’s Emmet McNally ran the slide rule over the restructuring plan and estimated recoveries.

The first lien ad hoc group get most of the post reorg equity, with very generous backstop fees to the new money (not sure if they could get so much under via a UK court-supervised process) meaning that the non-AHG have a decision to make — Are they better off doubling-down or getting out?.

Here’s a clue: the current bid of 47 is below the 57% reinstated debt value, and we project higher fair values under our model, despite a fair degree of scepticism on the business plan.

Vue’s restructuring finally completed yesterday. As our QuickTake outlines:

In return for writing off £225m of its £775m of senior facilities and injecting £75m of new money, first lien lenders to the UK-based cinema chain will take over 100% of the equity.

The remaining £550m of senior debt will be amended and reinstated with unspecified longer dated maturities. The £75m of new money (£81.4m if you include capitalised fees to the Ad Hoc Group) will come in on a super senior basis and should be enough to fund liquidity needs through 2022 and Q1 23 until the group turns cash flow positive later in 2023.


Most of my reading this week was 9fin QuickTakes to edit — Credit and ESG as primary exploded into life. With my brain fried, there was little time for more cerebral content, so apologies for me being careless and please don’t SLAPP a penalty notice.

A great piece in the FT on how tech companies communicated their job cuts to their employees — with a genius title — Sacked to the Future

Microsoft’s communication was done in the “most thoughtful and transparent way possible”. Borrowing from the Incredibles, its missive to employees said it is showtime in 2023 for our industry and Microsoft, and this was an ‘opportunity’ (I’m not sure getting fired is an opportunity, unless you believe the mantra every problem is a solution)

Spotify said it will have conversations with impacted (surely that means fired) employees and reassured unimpacted staff that the business is performing ‘nicely’.

Stripe employees were also impacted, facing a terrifying 15 min wait to be contacted via a notification email to see if their redundancy payments were being processed.

But at least that email was in office hours. Google’s Alphabet managed to fire workers via a late night email (because we all check our company email at midnight and before we come into work). This meant many staff hadn’t read it and turned up to find out their passes didn’t work. It is ironic that they reportedly used an algorithm to make the cuts, rather than base it on performance.

Many of the tech bosses said they took full responsibility for over-hiring in the past couple of years. But is staying in place after getting it wrong being fully accountable and fully responsible?

But days later, after avoiding difficult conversations, Google execs are in the crosshairs of the US Government for its ad trading platform, claiming market power abuse by leveraging advertising technologies. Jason Kint unpicks the suit, and explains why it is so important.

That wasn’t the only blow for large tech companies. The US Supreme Court will consider whether to hear two cases that could end immunity for groups such as Google and Twitter for content posted on their sites.

Some of the best (and bravest) investigative journalism in a while landed this week, with the unveiling of Wagner Inc, the sinister and powerful mercenary army. The FT got most eyeballs for their heavily promoted piece, but I would shout out OpenDemocracy for their ‘Exclusive’ published last weekend.

Creditor-on-Creditor violence victim Serta Simmons finally filed for Chapter 11 this week. It will be interesting to see how the outstanding litigation from primed creditors fits into the process. Pitchbook has a really good overview : “A ruling in this bankruptcy is necessary to finally resolve this issue… because this adversary proceeding will determine the priority status of a number of lenders, its resolution is critical to the development of the Chapter 11 plan of reorganization.”

And the Friday Workout wouldn’t be complete without a Brighton reference. Our World cup winner, Alexsis Mac Allister, goes straight in at no 47 in the World’s Top Male Footballers list, ahead of Christiano Ronaldo and Marcus Rashford. He only became a permanent fixture in our first team just over a year ago!

Let’s hope we can keep Alexsis and Moises Caicedo as their heads are turned by talks of big money moves. We even hear that our manager is being courted by Juventus!

Perhaps we should employ the tactics of Alex Ferguson, arguably the best man manager of them all, who told Christiano Ronaldo in 2008: “I’d rather shoot you than sell you.”

Friday Workout — Everything rally; Distressed Equity Options; Medical Exam

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