While rising rates and a slowing global economy have dented the performance of certain industries and hurt deal multiples, the strong recovery in the Leveraged Finance market in 2023 has meant many borrowers and sponsors were able to get refinancings and A&Es away. 

This has more than compensated for the worsening macro and credit picture, and lowered the distressed name count. The rising financing tide seemingly has floated all leaky boats — even Hurtigruten!

To illustrate, as at 30 December 2022, we had 209 bonds from 135 borrowers with a STW of over 800 bps, our measure at 9fin of stress/distress. At the worst point in mid-July 2022, we had a whopping 318 bonds from 199 issues, more than one-in-five (21.3%) of all EHY issues. 

No-one would say that the credit and economic picture has improved dramatically enough since the turn of this year, to result in the list of stressed/distressed bonds being reduced to just 151 from 98 issuers, around one in 10. 

Worrying about having to fill out my own UB40 (this joke will be lost on younger readers) I took a glance at our latest Watching the Defectives report to look at the immediate pipeline for restructurings, hoping that I could still be gainfully employed over the next year. 

While the number of in-progress deals remains high, many large deals are in their final implementation stages, such as Orpea, CELSA and Groupe Casino, with just one new name entering our expected list in October — SIGNA Development (more on this later).

But what about loans? Surely, there should be more names here given their (on average) higher leverage, lower-ratings, and closer maturity walls? 

That was certainly our expectation at the start of 2023. After all, at the end of December 2022, we had 207 loan tranches from 128 issuers below 92 (our measure of stressed/distressed), but only a fraction — 32 loan tranches — were due within 18 months. 

But similar to bonds, this number had halved by end-October 2023 to 104 tranches from 68 borrowers, of which just under half (50 from 32) are distressed (trading below 85), compared to 89 from 56 at end December 2022. 

Surprisingly, despite the raft of A&E transactions (approaching 50 by my count), the number of loans due within 18 months is higher at 53 tranches from 40 companies. That’s encouraging, but our hopes are likely dashed again. Most are not indicated at stressed levels, with only 16 loans from 12 issuers trading below 92. 

The fate of many of these borrowers has already been set. Consider names such as Keter (one-year extension to enable sale); PlusServer (debt for equity swap); Praesidad (debt-for-equity swap); Cineworld (Chapter 11); That leaves ADB Safegate, Tele Columbus, Hans Anders, Arvos Group, Flamingo Afriflora, Alloheim and Iberconsa as the only likely candidates. 

In contrast, the number of bonds with maturities due in the next 18 months is much higher — 191 bonds from 137 borrowers. That is a much bigger ocean of names for 9fin’s restructuring team to fish in. But once again, the vast majority are not trading at stressed levels, just 18 bond issues from 15 issuers are above 8% STW (shown below). 

Many of these names are already being tracked by 9fin’s distressed and restructuring team and are advisor-ed up. These include Atalian, Talk Talk, Pro-Gest and Demire. Of the others Avolon is in the market seeking to refi its PIK Toggles; Vivion has already exchanged the bulk of its 2024 SUNs; and Tullow has been exploring asset-based lending.

So, we might need to look further afield for new restructuring candidates, and at an earlier stage — hence our recent focus on Aroundtown and Atos, still amazingly rated investment-grade — which are likely to follow the same route into distressed territory as Heimstaden and SBB. 

The real estate sector continues to throw up plenty of new names to cover, that’s where the funding sources are most challenging, and the larger situations are to be found. There are large special situations such as Thames Water, Alticeand Stonegate to get our teeth into too, ensuring full employment in 2024, despite the seeming lack of immediate opportunities. 

Exchangers Remorse

In hindsight, earlier this year bankers played a blinder in pushing a number of borrowers to get their amend-and-extend deals away early. 

At the time, CLOs were desperate for greater economics and deal flow as the loan primary market was effectively closed, and even challenged stressed names such as Hotelbeds, EG Group, Upfield Flora, Clarion Events, Zoopla and Altice France got deals away for margin bumps of less than 150bps (often just 100bps), well below margins where we view as being market. 

Admittedly, some names, such as Flakt Woods and Awaze required a sponsor equity injection to get away, but in many years these would be nailed-on restructurings, and the contributions sought from sponsors to keep control would be much larger. 

Many sponsors took advantage of strong demand and loose docs to upsize and use the excess proceeds to repay expensive second lien and other junior debt ahead of the first lien. This increased first lien leverage and help mitigate some of the increased funding costs from rising rates.

Savvy borrowers such as Ineos (is there a better market timer in LevFin?) managed to push out maturities before it became clear that the cycle had turned and the effects of de-stocking at this time were not fully known. The company’s EBITDA has more than halved since then!

And while the loan maturity wall is light for 2024 and 2025 maturities, the A&E pipeline remains full. Barclays analysts believe A&Es will dominate leveraged loan market activity in 2024.

Source: Barclays Research 

Barclays suggests that if you assume that half of the 2026 maturities will be addressed next year — a chunky €52bn — they estimate that just €15bn will be refinanced, leaving the rest to A&E. 

Whether that will be as smooth sailing as in 2023 is the €37bn question — given a much larger proportion of CLOs are beyond their reinvestment period — with AAA investors pushing back against their deferred amortisation. Barclays thinks there are enough nuances in documentation and flexibility in vehicles to mitigate this, citing evidence from this year of sufficient workarounds. 

A number of 2023 vintage A&Es will doubtless get into trouble in the next 12 months, which might invoke some form of exchangers’ remorse and cloud other investment decisions. This is particularly true in situations with bonds in the debt structure, whose maturities have yet to be addressed. 

Lenders have been giving up their temporal seniority too freely and too cheaply IMHO.

With many 2025/2026 bond refis in the ‘too difficult’ pile, we’ve seen a recent trend of issuers taking advantage of the strength in leveraged loan secondary to tap extended TLBs to fund take-outs of their bond maturities (Altice, Ineos, EG Group). Expect this trend to pick up pace into year-end and beyond.

I posit that Hurtigruten should be a salutary tale for CLO investors. 

At the time of the Norwegian Cruise and Ferry operator’s A&E in February (which had no deleveraging save the equitisation of €210m of shareholder loans) it forecast a significant pick-up in EBITDA for FY23 as illustrated below.

And as we pointed out at the time, there was a lot left to prove, given that those extending were doing so for a business with just 1.5 years of maturity runway, and one year of liquidity, leaving it extremely reliant on the benevolence of its ‘very supportive’ sponsor TDR Capital to stay afloat. 

Roll-on to their latest Q2 23 numbers, and the decision by CLOs to roll-off maturities to February 2027 doesn’t look so great. They should have paid more attention to 9fin’s Denitsa Stoyanova’s analysis, and her scepticism of management’s forecasts, which proved scarily accurate. 

The loans are now in a much worse position than the non-extended February 2025 noteholders, who as well as being ahead in the maturity queue, have much better collateral.

We concede that some of the loan doc terms were tightened up, allowing less leakage with limited ability to layer additional debt. But in this situation, more debt isn’t going to solve the problem, and there isn’t any value to leak! 

There could be a destination change for the cruise operator, and lenders could be about to feel an Arctic chill in the air

After putting in over €250m of drip-feed shareholder loans, the sponsor recently changed tack, notes Denitsa, injecting another €62m of liquidity but via asset-based lending, rather than as shareholder loans, which may indicate a newfound reluctance to make further injections. 

We don’t blame TDR Capital — it has provided a huge amount of support, for arguably no gain. Operating performance remains poor, with little sign of recovery in occupancy rates, and travellers baulking at higher price points. Cash EBITDA is still negative, and liquidity remains inadequate — we forecast a €58m funding gap next year. 

The €330m 2025 SSNs go current in February and are secured by the newest and best vessels. We estimate they could withstand a 10% discount to book value before being impaired. Could the bonds be set adrift, leaving the loans to hit the rocks? 

Fürst Principles

On Friday morning, 9fin’s Will Macadam is back in the Rolls building for a hat-trick of hearings, but arguably the first, or more accurately, the Fürst (Aggregate Holdings’ Berlin development) was the most interesting. 

Fürst has been a source of fascination for us at 9fin for some while. Bought from fellow German Real Estate peer Vivion for €876m in June 2021 (it paid €540m for it in 2019) — the financing of the transaction was opaque, paid for €156m in cash and €720m in financial assets. 

Corestate Bank (formerly Aggregate Financial Services) financed the deal. The €151m of non-traded bonds were settled in cash repayments, and in March 2022, Vivion sold the remaining €336.9m of the non-traded bonds to a unnamed third party for €321m. Of this €321m, €112.3m was repaid immediately in cash and the rest (€208.7m) was deferred with a 2% interest rate and was finally settled in March 2023. 

Aggregate had initially issued €220m of the €250m 2024 SUNs to buy the Fürst asset from Vivion (more here). Vivion then returned the bonds to Aggregate as part of the purchase consideration for two Quartier Heidestrasse (QH) assets owned by Aggregate in September 2022. 

But if that wasn’t complicated enough, like other German RE peers, there was also a chunk of debt secured against the development in Kurfürstendamm in central Berlin to deal with. 

We finally had some clarity on the debt picture at the asset level, when the HoldCo for the development Project Lietzenburger Straße HoldCo S.à r.l. launched a UK Restructuring Plan on 16 October. The UK RP is being used to implement a deal put forward by senior creditors and cram down junior creditors against the project, which are deemed to be out-of-the-money. 

The burning platform is €1bn of secured debt coming due on 28 November 2023, but this has been standstill’ed by senior creditors until the end of January. There is little cash at the asset level, with €120m blocked in an Investment Reserve Account for the Fürst project, and senior creditors backstopping €190m of additional funding to complete the project. 

The FY 22 report said the project was targeted to be completed by 2024, with more than 50% already completed. But in this week’s submissions it was revealed that construction works were ‘substantially’ halted in January 2023, and came to a complete stop in May. 

The pictures below (lifted from the written submissions) lead us to doubt the company’s claim that they are 50% completed:

Anyhow, let’s get back to the Restructuring Plan. In total €775m of senior debt will be reinstated, with those participating in the new money elevated via a nice 2 for 1 roll-up. Those seniors not participating are less lucky, as they will only see debt reinstated equivalent to that under a No Worse Off alternative (liquidation, which projects a 50% recovery). 

The remaining tier 2 and junior debt will be written off — they have corresponded with the company, voicing their opposition to the Plan — but didn’t have representation in court at convening hearing stage. 

Two of the company’s junior creditors, Bank J Safra Sarasin and Orchard Global, filed separate cases before the Luxembourg courts to push the Luxembourg-registered company into insolvency, as reported. The Luxembourg District Court dismissed one of those filings on 20 October 2023, but the company has yet to announce the result of the other filing.

Fidera and AXA hold 71.5%, or €553.9m, of the senior debt, of which the larger part is held by Fidera (45.6%). The lending entities under the scheme are Nofe Investment Sarl (Fidera entity) and AXA Real Estate Investment Managers. The two funds’ skeleton argument is here.

Justice Miles wasn’t entirely smiling when he begrudgingly convened the Plan meetings, as like Lord Justice Snowden in the Adler Court of Appeal hearing, he felt there was insufficient time given, adding:

“If that is a practice which is developing I should take the opportunity to deprecate it…it is important that relative creditors are given sufficient notice of a convening hearing. It is not appropriate to treat convening hearing as directions hearing where everything is pushed to sanctions hearing.”

On your Bike Rene; SIGNA’s negative price development

It hasn’t been a great week for René Benko, the Austrian Billionaire, real estate developer and largest shareholder of SIGNA Holdings.

His online sports retailer SIGNA Sports United filed for insolvency after Benko withdrew €150m of equity support. The business had bought online cycle retailer Wiggle from Bridgepoint in 2021, a departure from Benko’s typical real estate focus. 

Handelsblatt reported earlier this week that long standing investors are losing patience and are exercising their put option to exit their SIGNA Holdings stakes, with SIGNA Prime and SIGNA Development board member Claus Stadler announcing his resignation on 31 October.

And SIGNA Development bonds were in free-fall this week, after the release (just hours before the grace period expired for reporting breaches) of its Q2 23 numbers. The cash price on its 2026 SUNs collapsed 44 points to 25 cents on the euro.

In July, the picture was very different, with bondholders reacting positively to news of comprehensive disposal plan of around €1bn in 2023 and selected bond buybacks. The bonds hit the heady heights of the mid-70s. 

With a €310m pro-forma cash balance, the company said that the FY 2021 dividend of €114m, payable last December but delayed due to the negative sentiment, would be paid in Q3 23.

Fast forward four months to the Q2 release, and the picture is very different, as 9fin’s Hazik Siddiqui notes:

“…we realise (not mentioned explicitly, but if you dig in the numbers) that a large portion of asset sales were at deferred payment terms and reinvested into financial receivables. Thanks to little cash collection from the sales, liquidity has dried up (€32.1m cash) and is insufficient to fund development projects.”

He adds: “The inflated financial receivables balance is current which theoretically means SIGNA should realise cash within 12 months, but the report is silent on payment terms and the credit worthiness of the buyers.”

Not all holders would have twigged this, but news that SIGNA Development is in the process of mandating financial and legal advisors, would have been hard to ignore and was the main catalyst for the sell-off. We are chasing down the appointments and note that Bloomberg reported on 2 November that a group of bondholders retained Kirkland & Ellis as legal adviser. 

As is typical for SIGNA Devleopment, there is a big delay between the release of figures to investors’ chance to quiz management, with a conference call scheduled for Thursday 9 November at 2pm CET / 1 pm UKT. We will be there, and you can register here.

Lack of Brevity — What we are reading/watching this week

Too much wordage above, and given that I’m writing this sentence at well past midday on a Friday, there no in-brief section is available this week. 

As well as reading through a lot of skeleton arguments this week, I was preparing a in-house presentation on Converts, Hybrids and Preferred Equity — which should hold us in good stead to cover Aroundtown and other fallen angels in the coming months.

I also found time to record a pod, with our legal restructuring expert Freddie Doust on the Adler Court of Appeal key themes — it can be found here or here

But despite a busy diary, I did have time for this excellent long read from the Financial Times — Private Equity: Higher rates start to pummel dealmakers 

If you read nothing else this week, make sure you read this piece…It echoes and builds on some of the themes that I had mentioned in a previous workout on the difficulties for Private Equity and Direct Lenders in the new higher for longer rates environment. If you are raising Unitranche debt at low double-digits, this has knock-on effects elsewhere, not just in terms of expected returns, but also deal multiples, which leads to a lack of exits, and a need for PE sponsors to find alternative ways of raising funds (NAV loans, continuity funds etc). 

Sticking with the FT. News that a group of US financial journalists is teaming up with investors to set up a trading firm called Hunterbrook, specifically to trade on market-moving news written by its hacks, did pique mine, and Matt Levine’s interest. 

The trading firm would get articles first, giving them first dibs to trade on the intel before they are published wider. 

As Matt Levine notes there is often a similarity between journalism and insider trading:

“You are in the business of finding out things about companies that nobody else knows, so you spend your time developing sources at those companies who will tell you things. If their company has a new product coming out, or is about to announce a merger, or has been doing fraud, they call you to tell you before anyone else knows.”

But from experience of being in this industry for almost 20 years, if this info is not freely available to all — or at least to those who are willing to pay for a subscription (you cannot create barriers to read, apart from price) — regulators will crack down on you hard. Definitely one to watch. 

I didn’t have time to get the full rundown of the SBF trial in NY, nor listen into the minuatae of the Covid enquiry, but will try and take advantage of my spare time in a short week next week to do so, prior to jetting off to New York to touch base with 9fin’s finest stateside. 

This will mean missing Brighton’s home game next Saturday against Sheffield United (up for ticket exchange, you can sit in West Upper with a bunch of very nice people, with great bantz). 

Last Sunday, we were up against our bogey side Fulham. Once again we battered them but only drew 1-1. Making it worse, their goal scorer Joao Palhinha should have been sent off for a forearm smash to Pascal Gross’ head — even more of a red card, than the one against New Zealand in the Rugby World Cup final! Time for our first PGOML apology of the season? 

But there was soon good news, the Prince Albert pub, close to Brighton Station, an excellent beer and music pub and regular Haff stopover before and after games was saved from the developers.

A locals’ petition and a impromptu concert by Brighton FanFat Boy Slim (his Skint record label was a shirt sponsor in the old days) earlier this week in the pub definitely helped.