Primary has returned quicker than expected, albeit at a slower pace with smaller issue sizes — plus many deals require big new issue premia to get away — it’s still seen as a good result to get a weak single-B away in Euros below 10%. 

A good example was Polynt last week, a decent single-B credit which had to pay 9.5% for its 2028 SSNs. This was a spread to worst of around 625 bps, compared to around 450 bps for its 2026 SSNs. Admittedly, there was some punishment for timing, as a profit warning for Lanxess a week earlier highlighted the turn in the chemical cycle, and the sponsor taking a dividend. For more colour, read the deal review from 9fin’s Ryan Daniel here. 

Busy A&E Departments

Where I did get it right was my prediction for a raft of A&E requests for loans. Despite the improvement in prices and sentiment, loan primary is quiet, as the poor CLO arbitrage and inverse yield curves push borrowers into fixed. By my count, we had 26 A&E’s in the first half. 

When the A&E wave began, some CLO managers told us it was a good opportunity to reset relationships with sponsors and for doc terms to be tightened. But speaking to members of our legal and editorial team in the past few days, their view is that this hasn’t happened. I’ve also been surprised at A&E pricing as margin bumps on offer are typically around the 100-125 bps mark, which is well inside where a rare pure play new issue might price. 

With some of the easier names out of the way, and most 2024 and 2025 maturities addressed, we are seeing see more challenging names enter into the A&E department. The appetite for A&E has reduced the number of deals which might have gone into restructuring — one good example of this is Hotelbeds. Some signs of fatigue are appearing, with some recent high profile deals pricing at the wider end of guidance — witness EG Group and Upfield Flora. But then again, few would have thought in January they would be in a position to extend their loans in the first half. 

Speaking to my structured finance colleagues, one interesting dynamic is the rush by borrowers to get their amendments through before more CLOs enter into their reinvestment periods. While pushing out existing loans improves the economics for their vehicles, it does lengthen their weighted average life and puts them closer to their WAL tests. Managers do have some room to extend their tranche maturities, but are wary of upsetting their AAA investors. Some are now becoming more resistant to extension requests (more 9fin commentary to come on this).

Violence kept in check

We’ve yet to see an outbreak of creditor-on-creditor violence on this side of the Atlantic — and few liability management exercises with coercive elements — but we did see an element of this in the the tender for Adler Real Estate 2024s. No uptiers or drop downs, but it is worth keeping a close eye on the Lycra variant, a less aggressive way of raising funds while still stripping collateral and value away from existing creditors. 

In the first half, a number of high profile restructurings entered into their implementation phase. Adler Group and Orpea took up a lot of our time, as the junior creditors fought hard against their restructuring plans. Both failed in their attempts, with Adler setting some important (and in my view dangerous) precedents in the treatment of pari passu creditors. I still can’t get my head around how Adler managed to get to a par recovery for the extension plan — the long dated bonds are still trading in the 30s, suggesting that the market agrees with me. 

Rates are not your mates

Which brings me to Real Estate, which now makes up more than half of the names trading at distressed levels. Whether this is justified is moot, but speaking to those in the industry it is clear that this market is under severe pressure as lenders tighten their standards and buyers retreat, leading to a lack of transactions and making it difficult to find valuation reference points. 

Our distressed/restructuring team has spent a lot of time in recent weeks diving deeper into the sector (watch out for a report on German RE in the coming days). It’s also been a good opportunity to speak to ex-colleagues and former sources. In a past life, I covered the European RE bust post GFC, mostly looking at CMBS restructuring, but this time around it is more likely to hit at the corporate level and spill over into mainstream credit, rather than structured finance. 

Real Estate is one sector which is very interest rates-dependent, and latest moves in government bond yields over the past couple of weeks will hurt cap rates and raise their cost of financing (if they can still get it) even higher. 

Rising interest rates is, in my view, where the biggest disconnect lies in the pricing of risk assets. Over the past two years the Nasdaq was very closely correlated with US Treasury prices — probably due to the effect on the changes in risk free rates to DCF valuations — but this year, they have diverged as AI mania has taken hold.

Source: Crescat Capital LLC

Risk assets are priced for perfection and hopes are high that a severe recession can be avoided, but defaults are rising, and I agree with Deutsche in its 2023: Return of the Boom-Bust Cycle report that “the tightest Fed and ECB policy in 15 years is colliding with high leverage built upon stretched margins”.

Our latest Top of The Flops report outlines the level of implied stress/distress for the names that we cover has dropped markedly since the worst point, almost a year ago in mid-July 2022.

Last July, we had a whopping 318 bonds from 199 issuers at a spread-to-worst of over 8%, more than one-in-five (21.3%) of all EHY issues. This figure is now 138 from 108, just 8.9% of the total, down from the 14.2% seen at the end of 2022.

There is a similar picture for loans. At end-December 2022, we had 207 loans from 128 issuers as stressed/distressed (priced below 92) out of 898 loans and 454 issuers that we tracked. This has fallen to 139 loans from 83 borrowers — 18% of issuers, down from 28% at year-end.

Dealing with distress in private

But while bond and loan prices at face value are indicating there is nothing to see here — everything is fine, move on — there is more distress in private, most notably private credit and private equity investments than meets the eye. 

As we outlined in our Leaders in Private Credit report with Mayer Brown, Private credit financed businesses are facing tougher questions over their ability to meet their growth stories with more focus on cash generation and getting to profitability quicker. There has been a sharp pick-up in businesses that have fallen out of compliance with covenants, have a maturity looming, and have lenders fund constrained in offering extensions and forbearance.

With most direct lending deals floating rate and unhedged, the sharp rise in interest rates means many private credit financed companies are unable to service their debt on revised terms. This will lead to more distressed sales, and junior debt solutions such as mezzanine to bridge the leverage gap. For me this is the biggest trend for the remainder of 2023 and where the best opportunities for credit opportunities funds and special sits investors lie. 

Another worry for Private Credit investors is concentration risk. We’ve seen a revaluation of risk and reduced multiples for many of their favoured sectors, such as software and healthcare. I will be watching closely the outcome of Finastra’s $2bn junior financing attempt via Private Credit— it’s been two months and counting, but it needs to get done in order to get another $5bn of senior away — for clues on whether large Software deals can still get done by direct lenders. 

Don’t let the SUNs go down on Monoprix

Another recent trend is the poor performance of junior debt tranches for distressed companies, and the increased returns to new money providers and incumbent lenders. 9fin’s Emmet Mc Nally outlines this perfectly in his recovery analysis for Diebold Nixdorf, which is available here.

This is playing out in Groupe Casino, where the prices of its junior MTN notes and NY-law governed SUNs have collapsed in recent weeks, on fears that they would be sacrifice(d). 

Last week (28 June), the France-based retailer released details of its proposals to stakeholders in the conciliation proceedings, three days after its Strategic Plan and current trading update. With a large new money need (minimum €900m) and with Casino forecast to run out of cash by the end of the conciliation period at end-October, it has no funds from new money to repay the juniors at a discount. Worse still, the company indicated that it wanted to haircut around 50% of the senior secured Term Loans and RCF. There was better news for the Quatrim SSNs since they would be unimpaired but termed out ahead of sales of their property collateral. 

Casino set a truncated timeline for proposals from stakeholders, with proposals to be submitted by 3 July, ahead of a conciliation meeting on 5 July. 

On 4 July, it issued the details of the two stakeholder proposals, one from Daniel Kretinsky’s consortium which includes Fimalac and offers a steeper haircut (€1.5bn) and more new money, and the other from 3F & Partners — that’s what friends are for. It is an investment company jointly owned by TERACT’s three founders Moez-Alexandre Zouari, Xavier Niel and Matthieu Pigasse; the “Partners” are three hedge funds — Attestor, Davidson Kempner and Farallon — and their offer is more attractive to senior secured lenders, with just a €300m haircut. 

Equity splits for senior secured creditors are similar, but they differ in the mechanics. 

In the Kretinsky plan this is split between debt conversion and provision of new money (€290m reserved for secured creditors), whereas under the 3F plan, the equity stake is achieved via debt conversion. Secured creditors, however, can participate in €450m of new super senior debt which has warrants for 7.5% of the new share capital. 

Under its plan, 3F is providing €175m of new money via equity, with Attestor in for a further €175m, with other RCF and credit funds providing the final €50m.

There was no sign of a proposal from unsecured creditors, and they are notably absent from the two other proposals. They will receive a mere 3.6% and 2.46% equity stakes under both proposals. The SUNs and MTNs are now trading in the low single-digits, reflecting that they are mere option value at this point. 

While the Kretinsky offer is fairly straightforward in terms of debt restructuring, there is a lot more complexity in the 3F plan, which seems designed to appeal to senior secured creditors, and specifically the three funds present in the RCF and TLB.

The only uncertainty may be on debt at OpCo’s most notably Monoprix. 9fin’s David Graves recently revealed that hedge fund Fidera had provided a private placement on 29 March 2023. 

For more detail and analysis on the proposals, see the piece from Denitsa Stoyanova earlier today

Quatrim Theory

One of the most interesting parts of the cap stack is the €553m (outstanding amount) Quatrim senior secured notes which are due in January 2024. Backed by real estate collateral (worth over €1bn at issue, compared to €800m original principal amount ), we were intrigued to see the notes trade as low as 67 last week. 

Under the proposals, the 5.875% cash coupon will be maintained with the maturity extended by four years. Casino says it plans to continue to sell the collateral assets until the SSNs are repaid in full. Disposals are guided to take place throughout 2023-25, without giving further details. 

The bonds have risen by over 10-points to 77.5-mid since the release of the proposals, but that is still a big and attractive discount. David Emeric Casino’s CFO said earlier this year that the collateral pool was valued at €800m-900m in FY 22, which suggests the bonds are amply covered. 

So where’s the catch?

We took a closer look at the docs and the treatment of leases under Sauvegarde to find out. 

The Collateral for the Quatrim SSNs includes a pledge over IGC which at time of issuance owned directly and indirectly various French real estate assets including 30 hypermarkets and 33 supermarkets, as well as various convenience stores, shopping malls, parking lots, service stations and restaurants.

There is a special asset sale covenant that means proceeds (in excess of €50m) are put into a bond segregated account. This funds redemptions or tenders for the Quatrim SSNs.

As at 31 December 2021 there was €145m in the Secured Segregated Account. According to Casino press releases it used the funds in the account to conduct Quatrim SSNs buybacks in aggregate of €147m in 2022. 

So it looks as if Casino has been playing ball on making repayments from disposals. 

Where it is murkier is the value of the underlying real estate, poorly performing Hypermarkets and Supermarkets. A tenant of poor credit quality makes it harder to find willing buyers. 

Casino doesn’t provide much detail on the remaining portfolio. 

This is despite an information covenant suggesting it should provide an annual review of the IGC Real Estate assets. We cannot find any, and it is worth noting that in the OM the risk factor on the IGC assets includes this as the final sentence:

“Neither third parties nor we will provide the Noteholders with revised valuations and we expressly disclaim any duty to update such valuation under any circumstance.” 

Our legal team has also looked at the strength of the master lease agreement of the IGC assets. There is a risk that if the operating subs are subject to insolvency or bankruptcy proceedings the leases could be cancelled or renegotiated. 

We also looked at the ability to grant further liens against the collateral. Here is it less favourable, with up to €800m of debt available to be issued pari passu. 

The Quatrim notes have upstream and downstream guarantees, so will have a say in other entities votes, if Sauvegarde is needed to implement Casino’s restructuring. 

This is just a teaser of our initial thinking. Look out for an in-depth piece soon. 

In brief

More bad news for the German RE sector this week, with the buyer of Demire’s LogPark logistics asset pulling out of the €120m sale. The inability to sell might scupper its plans to deleverage ahead of a hoped for refinancing, notes 9fin’s Hazik Siddiqui. It is also worth noting that logistics assets had been seen as more immune to the wider RE malaise, but could this be changing?

The long running battle between Spanish steelmaker Celsa and its creditors moved to a Barcelona court this week. Creditors are looking to take over 100% of Celsa’s equity, after it defaulted on its €2.8bn of debt at their 2022 and 2023 maturities. In a first under the new Spanish process, creditors are pitching their own plan to the court for sanction. But Celsa’s owners — the Rubiralta family — are hesitant to give it up, claiming they are not impaired. 

On 21 June, Leoni secured confirmation for its restructuring plan, which marks Germany’s largest Corporate Stabilisation and Restructuring Act (StaRUG) proceeding since its introduction over two years ago. For more, our update Restructuring QT is here.

Sometimes a transcript comment from management is too good not to reproduce. Clearly irked by analysts comments, Iceland’s CEO told bondholders bluntly that “[you] will get your bloody money back, do not panic”. Find a transcript of the call on 9fin here.

We revealed last Friday, that Strategic Value Partners was seeking to build a stake in Schoeller Allibert and may have already built-up a blocking position. 

What we are reading/watching this week

My reading list was reduced this week due to a trip to Cornwall for a friends wedding, so apologies for a shorter list than usual. 

Elon Musk’s decision to reduce the number of tweets can see and rate limits imposed caused carnage last weekend. While we await the cage fight between him and Zuck, there were plenty of verbals this week when Facebook launched its Twitter competitor, Threads. 

As out FinTwit observer noted, this will have further exasperated holders of hung Twitter debt

There was a cracking piece in the FT from Pablo Triana on Berkshire Hathaway’s huge derivatives bet between 2004 and 2008. At its peak the firm had $40bn of equity index puts and $30bn of long term CDS. With all the contracts having expired, it is estimated that he collected $9bn of premiums and paid out around $4bn. 

Newsflow around Thames Water’s financial health continued this week. The head of Ofwat was in front of a Lords committee, saying Thames Water probably needed more than £1bn in equity funding, but the company had more than £4bn in liquidity and that insolvency concerns had been “overstated”. Placing Thames in the Special Administration Regime, was “not something that would be done lightly” but this indicated the threat was focusing minds. 

The key problem is getting Thames’s gearing to 55% from 80%. According to one broker, assuming an unchanged regulatory asset base (RCV), Thames would need £2.8bn in equity to achieve the 55% target at the Class A level and £5.7bn to achieve that at the HoldCo level. Ouch. 

Jenny Ping from Citi suggests that we should Let Thames Water die to teach everyone a lesson. I also enjoyed Dieter Helm’s piece on Lessons from the Thames Water debacle. 

Finally, there is just one month to go until the start of the Premiership season. It has been amusing to see Brighton being linked with £40m-£50m signings and competing with Arsenal and Newcastle for signatures of emerging talent. With Declan Rice going to Arsenal for £105m, we are holding out for £100m for Moises Caicedo, who had Declan in his pocket in our two games last season where we won at an aggregate 6-0. 

While we still await our new home shirt, I’m pleased to see that one of the traditional away shirts in green and black stripes has been revived. Will have one on order with an Europa League patch.