So yet another potential pivot — ignoring the higher for longer noises from central banks — markets are betting big that lower rates are on the horizon, and begin in early 2024. 

They now expect four Fed funds cuts in 2024 and another two in 2025, two more than previously. This has resulted in a reversion of the two-year/10-year yield curve steepener. We are back into yield curve inversion mode as the short end appears entirely rate expectations dependent. 

Showing renewed risk appetite, real rates are falling fast as traders curb their inflation expectations. According to Deutsche Bank, 10-year German breakevens are at 2.12%, the lowest point since January and in the wider eurozone, while the 5y5y forward inflation swap is the lowest in six months, at 2.43%. But this is against a backdrop of higher consumer inflation expectations if the ECB survey is to be believed, rising to 4% in September from 3.5% in August. 

With the iTraxx Crossover index over 60bps tighter than in late October, it didn’t take long for European LevFin borrowers to take advantage with four bond deals announced on Monday alone. And for once, there was something for everyone, a chunk of single-B issuance to look at — as well as a couple of double-Bs, and some shorter duration paper, as French recycler Paprec (with outstanding governance issues) split its offering into four-year and six-year paper.

The most interesting issue was petrol retailer EG Group, trying its luck with a chunky $1.59bn of dollar and euro-denominated SSNs, hot on the heels of a $500m TLB add-on last week to address 2025 bond maturities. As 9fin outlined earlier this week price talk was expected come in around 10-11% , but at this level many investors were wary of filing up. It is notable that the other single B issuer International Design Group ended up pricing at 10% — albeit giving some juice for it to trade up on the break. 

After a delay, EG finally released price thoughts this morning at the wider end of investor expectations, at 11% for the Euros (smaller size than expected) and 12% for the dollars. The slack is being taken up by a $500m FRN “privately placed with two high quality investors at S+750/97.0 OID with maturity of Nov-28”, according to those price thoughts.

And in the US, an interesting deal for Infrabuild — priced at 14.5% at 98 — which could fund a dividend to Sanjeev Gupta at GHG and in turn make payments to Greensil (hat tip to Rob Smith and his colleagues at the FT for spotting this). The funds from a $350m ABTL earlier this year remain in escrow, and as Moody’s notes (our emphasis in bold):

“While the company had previously stated publicly that the proceeds of the term loan were expected to be used to pursue growth initiatives, including the potential acquisition of Liberty Steel Group USA (Liberty USA), another entity independently owned by the GFG Alliance (GFG), the terms and conditions of the proposed notes would allow for a material distribution to its owner. Therefore, Moody’s expects the USD350 million of funds from the ABTL, if released from escrow, will likely be directed toward shareholder returns. The agency expects that this would require amendments to the ABTL and would be subject to lender approval. Moody’s will continue to monitor the use of proceeds from the ABTL and any further financing transactions that InfraBuild pursues. Moody’s would view executing a large shareholder return as credit negative demonstrating the increased linkage to the broader GFG Group, as well as the ongoing contagion risk for InfraBuild from the credit issues facing GFG.”

There was further carpet bombing from the ‘pink un’ on Victoria Plc and the ex-gang members it has purportedly done business with. Another item of concern to put on the deep pile — but while the FT continues to pull on loose threads, it may not be the next Wirecard, which one short seller famously quipped had more red flags than a Chinese military parade. 

Rising Signa-to-noise ratio

But most of our attention at 9fin London HQ this week was spent on the fast-developing and rapidly-unfolding situation at the Signa Group complex. 

Last week, we had the insolvency of NY-listed Signa Sports United after founder René Benko withdrew €150m of equity support. Then long-standing Signa Holdings investors exercised their put options to exit. There were board resignations and a letter calling for Benko to step down as Signa Holdings chairman. Last Friday, there were unconfirmed reports that control had been handed over to Arndt Geiwitz, an insolvency lawyer, best known for his role in the insolvencies of Galeria Kaufhof-Karstadt department stores (more on this later).

Geiwitz’s appointment was confirmed by Signa Group on Wednesday, in a statement which said he will organise the restructuring of the entire Signa Group from within Signa Holding. 

“Signa now needs peace and order,” said Geiwitz in a statement. “We will approach these important tasks carefully and sensibly. It’s important to find long-term solutions… The quality of the Signa Prime portfolio is excellent, the development prospects of the development projects, which are located in top locations in German-speaking cities, are very good.”

So what exactly does the Signa complex comprise, and what approach will Geiwitz decide to take? We have some answers on the former, but none yet on the latter. 

Signa Group is divided into two segments: real estate and retail. Under real estate, it has Signa Prime, Signa Development, Signa RFR US and Signa Luxury Hotels. Under retail it has Signa Premium, Signa Department Store Group and Signa Food & Restaurants.

We know most about what is happening at Signa Development (due to its EHY bond that recently tanked into the high 20s) and which we will return to in a few paras, but other Signa assets (and the size of debt) may surprise some Workout readers. 

After buying two of Germany’s largest department store chains Kaufhof and Karstadt, in 2019 Benko bought the Chrysler Building in New York (with Aby Rosen) and in early 2022 paid a reported £4bn for Selfridges Group via a 50:50 JV with Thailand’s Central Group. Other co-ownerships include the KaDeWe in Berlin, the second largest department store in Europe, once valued at €1.1bn. He also owns a conference venue favourite of mine, the Park Hyatt Vienna — the former HQ of Bank Austria. 

Our initial sleuthing (special mention to 9fin’s Owen Sanderson) reveals a £1.7bn loan against Selfridges Properties limited from Bangkok Bank (to London Oxford Street Invest Ltd) paying SONIA plus 3.5% and is coming due next year. The 11 investment properties were sharply revalued higher by CBRE’s desktop valuation to the tune of over a billion in 2022. Womens Wear Daily says Central and SIGNA split the business into property and retail, and we assume via an OpCo/PropCo style deal, as the latter now pays rent to the former. 

Central is controlled by the Chirathivat family, whose fortune mainly comes from retailers in Thailand and Vietnam, and in a statement (as reported by WWD) Central has expressed support for its joint investment, and could take over Signa’s stake. 

Selfridges’ sale could come early this year!

And the crunch point for Signa might be upon us. 

Neue Zürcher Zeitung has reported that Signa Prime requires €100m to €200m of fresh liquidity in the next couple of weeks. Local press reports suggest Signa Prime has €10.8bn of debt, while there is €2bn of short-term debt at Signa Holding.

But who is in control? 

It is unclear whether Benko and his family trust have any say or influence over what is happening at Group companies — it appears that Geiwitz is acting as a trustee (for shareholders or lending banks is unknown) — but there is no clarity if voting rights were transferred to him. 

So far, the local press and ourselves have managed to uncover White & Case (legal) and Rothschild (financial) for Signa Development and Prime. But these have yet to have been confirmed, with Signa Development saying yesterday (9 November) that it is “in the process of mandating legal and financial advisors”. 

The Signa Development Q2 23 earnings call yesterday lasted just 12 minutes, with no Q&A — not even for those submitted in advance. We and (likely) most of the others dialling into the call had wanted to know about the huge receivables balance which jumped from €463m at end-Q1 to €659m at end-Q2 — mostly as consideration for recent disposals. 

Eyebrows would have certainly been raised — ours almost hit the ceiling — when management said these receivables were created through the ordinary course of business with Signa Group.

Thankfully, Signa Development has now stopped cash management operations with other Signa Group entities, and it says that €100m of cash could be returned in the near-term. But the risk is that most of the value may have already leaked elsewhere, presumably to shore-up other parts of the Signa complex. There was no news if the planned €114m dividend distribution would be still paid. 

Along with its new (unnamed) advisors, Signa Development said it plans to “develop a holistic and sustainable liquidity and financing concept” and that the “short-term focus will be the reduction of financial assets, in particular receivables against other entities in the wider Signa Group, stemming from ordinary course of business cash management operations”.

But without liquidity to build out development assets (most of its yielding assets are now gone), similar to Aggregate Holdings, the risk is secured lenders to Signa’s trophy development projects might take the keys leaving little residual value to bondholders. 

There are also knock-on effects for other German RE companies we cover. Signa Developments offloaded troubled furniture retailer Kika/Leiner earlier this year, providing much needed cash, but management were forced to file for insolvency just a month later. It will be a tenant for a number of German asset managers. 

Galeria, the German department store owned by Signa and in insolvency since 2022, is German RE peers’ Demire's third largest tenant. Demire said yesterday that they have taken a hit of €1.3m of annualised contractual rent from Galeria already exiting one site in Germany town of Celle. We suspect that there is more to come with other sites too. 

Letters of Debit

The other big event in the past week in the world of distress was the Chapter 11 filing for WeWork (full disclosure 9finis a tenant in London and New York). 

Or as the company said it had initiated “a strategic action to significantly strengthen [their] balance sheet and further streamline [their] real estate footprint”.

We won’t go into the torrid history of the office space disrupter, nor reprise Community Adjusted EBITDA (or hypothetical EBITDA) nor the $16bn pumped in by SoftBank, nor the We Company IP leased to it by the founder — for that I would recommend the entertaining (and also informative) post this week by Petition — but there was one element that interested us, a chunky payout that Softbank had to make under letters of credit.

So, why did Softbank pay out $1.5bn to Goldman Sachs and other lenders just days before it filed for Chapter 11? The answer is in the bankruptcy filing. 

It relates to a $1.75bn of letters of credit (LCs) that Softbank co-signed as an obligor alongside WeWork in October 2019, when it was trying to retain the confidence of bankers/investors and was forced to put in another $3.7bn into the company via debt and equity. As the FT revealed, Softbank’s series of delayed draw loans and LCs gave WeWork multiple mulligans to aim to achieve the turnaround, and follow the blue arrow upwards to the top right hand corner. 

The LCs were drawn to cover payments outstanding to landlords of about $809m the FT explained, without detailing what constituted the balance of the $1.5bn payment. 

In the past few weeks, LCs have been a frequent topic of conversation between 9fin journos and lawyers. They were present in the McDermott International UK Restructuring Plan, where their UK subsidiary CB&I UK Limited (which is proposing the Plan) said that, absent a maturity extension of the relevant debt facilities, it will be required to post cash collateral for roughly $2bn in Letters of Credit facilities on 27 March 2024, which it will be unable to do.

The proposed restructuring would see the maturity of all the Letter of Credit (LC) facilities and the Make-Whole Term Loan extended to 30 June 2027. There is also new money secured by McDermott’s storage tanks business, which super senior LC providers can migrate on a dollar-for-dollar basis up to $162m of their facilities to a new Tanks Senior LC facility, with the option to migrate a further $92m of their exposure to the tanks business in a second tranche. Some $66m of the Senior Secured Escrow LC was also migrated to the tanks business.

But the main purpose of the UK RP filing, as we’ve pointed out previously is to effectively wipe-out $1.7bn of arbitral awards, with the beneficiary Columbia’s Refineria de Cartagena (Reficar) opposing the deal. It and an ad hoc group of LC creditors representing $200m made additional submissions to the court last Friday. 

I suspect that cost wasn’t the only factor to use the UK to implement the restructuring — the lack of an absolute priority rule in a UK RP is extremely handy.

As 9fin’s Will Macadam writes, Reficar were successful in extending the number of days for the sanction hearing by two days plus another day of pre-read, pushing back the sanction hearing from 27 November to mid-February. 

But the LC’s failed in their attempt to secure an order for discovery relating to the disclosure of “Working in Progress” balance per each construction project the firm was engaged in, letter of credit schedules and past, present and future financial projections on a consolidated and business line basis. Their submissions are here and here.

To complicate matters further, Reficar has the benefit of a pledge from lenders under a 95m LC to contribute pro rata to any call made by the company, and McDermott has insurance policies with a remaining cover limit of $213m that may cover a portion of the claims. So Reficar may still get more than the nominal $4m maximum they are allocated under the UK Restructuring Plan. 

In a previous Workout, I mentioned the importance of letters of credit and bonding (guarantee lines) for energy services businesses. This is because they are capital intensive and each new project requires letters of credit or performance bonds to support the performance obligations under a project contract. 

Typically, energy services firms will have to make a down payment of around 10% of the contract value, and the presence of LCs are important to unlocking funds for this cash advance. This wasn’t seen as a problem as in the past they were rarely called upon and were cheap for banks to offer in a zero interest rate policy environment. 

But that has changed in the past couple of years:

As JPMorgan analysts wrote yesterday in a daily note, referencing Petrofac: Takeaways from the JPM Global Energy conference:

“Petrofac is yet to secure bank guarantees for E&C orders won in 1H23 ($3.4bn 1H23 order intake). According to the company, the industry has been facing delays in recent years due to an aversion by European banks to increase O&G exposure, and Middle Eastern banks after Abu Dhabi Airports called on >$800mn of bank guarantees in 2021.” 

The analysts added:

“The contractors’ financial health is also a factor and Petrofac does not score high here. Offering these guarantees to customers is a crucial step for contractors, like Petrofac, to be paid the initial advance cash. Petrofac remains in discussions with its banks and clients to resolve the situation.”

But it not just energy services firms that have big exposures to guarantees. Atos has €4.8bn of contract-related performance guarantees which it is seeking to offload to serial buyer of distressed businesses Daniel Kretinsky, as part of the €7.6bn of off-balance sheet liabilities included in the TFCo sale. 

A peripheral and more arcane part of the banking world, LCs and other guarantee facilities may become central to many upcoming restructurings. Watch out for educational pieces on the subject in the coming weeks. 

Bricks for Brains

A busy week for company earnings, and still quite a few for us to catch-up on early next week. 

Our main focus was on German Real Estate with the aforementioned Signa Development top of the list, but we also had DIC Asset (renamed as Branicks — this change almost fooled us, but not quite) plus we had Q3 numbers for Demire whose 2024 bonds have just gone current. 

Branicks (transcript available here) didn’t give much fresh info. It is checking all options for financial maturities in 2024, with management adding that they are negotiations with banks and investors regarding a mixture of repayment and refinancing via new debt instruments. Another €200m of the expensive bridge loan (relating to a logistics business purchase) was repaid, but this was via a shareholder loan, whose ranking and recourse is unknown.

Branicks management are still hopeful that another €300m-400m of disposals can be completed by end of this year, at a 4-7% discount to book value. They hope to push through rent rises of 2-4% for the next two years for their office properties, and tried to reassure those on the call that the 1.8x ICR incurrence covenant (2.3x currently) will not be breached. 

But why rename as Branicks? It doesn’t sound that Germanic or very real estate. 

According to the company: “Branicks represents an exciting transformation: the introduction of a cohesive brand strategy under a strong name. The new name, Branicks, exudes self-assuredness by cleverly blending the English terms ‘Brains’ and ‘Bricks’. It symbolises the minds that passionately and competently create what can arise from solid foundations.”

As we alluded to earlier, the main takeaway from Demire’s Q2 2023 release was the impact of the Galeria insolvency and the consequent increased vacancy rates. As Emmet Mc Nally writes there was no update on the progress of the bond refi, despite the October 2024s now going current. Final negotiations with possible buyers of the LogPark asset in Leipzig (read more here) are in hand, but management stressed on the call the company would not sell at “a price which is not aligned with our strategy and with our plans”, nor could they provide any expected timeline. 

And what about the mortgage loans due next year? Similar to the last quarter, management said they remain in constructive talks. As one call participant said, there may be reticence on the part of banks or lenders to agree to a refinancing now in light of the challenges relating to the bond refi. Management responded that they are looking at three to five-year mortgages at rates of around 5%, a marked increase from the current average cost of debt of 1.74%.

We were also hoping for numbers from Swedish accounting and capital structure gymnasts SBB, but the under pressure property company decided to push their release to early next week, citing a revised timetable for the completion of the new structure for quarterly reporting. More pain for analysts to reconcile the various moving parts of the business, with new EduCo and ResiCo verticals established. 

But we still had some drama, after the company disclosed last night that one bondholder had decided to accelerate claiming a breach of the consolidated covenant ratio. 

As we revealed in early June, the bonds under the EMTN programme do not have a trustee, and instead rely on a paying agent to perform the various administrative functions relating to the bonds.

“As such, there is no need for holders to meet a threshold to accelerate the notes if an event of default should occur, and there is no trustee to indemnify — making it much easier for a bondholder to act unilaterally in calling a default..”

Those with good memories will recall that SBB revised its Q1 2023 statements, initially covertly, before fessing up. It first published statements on 27 April, which appear to show the coverage ratio at 1.06x — which would result in a breach of the 1.5x covenant. 9fin’s calculations in red:

But SBB subsequently removed these financial statements from its website, and on 29 May replaced them with revised accounts that no longer break out the “Profit before financial items” line item, making it hard to assess what the revised ratio (as defined in the EMTN prospectus) now comes out at.

We are chasing the law firm representing a group of holders (it seems to be just a single holder of €46m who has accelerated) to gauge their appetite to push this further, given that SBB has firmly rejected the notice and considers it ineffective. 

Could the accelerating holder(s) push for a directions hearing in the English courts on the matter? The notes are under English law, so it would have jurisdiction. 

If that happens then, as David Graves wrote previously, this could open the floodgates with individual holders pursuing repayment as it creates a prisoner’s dilemma. 

What we are reading/watching this week

Most of my week was spent reading German and Austrian local press reports and over-relying on the google translate chrome extension, leaving little time to read about and digest the latest macro musings and post mortem’s on the sharp bond rally. 

I still have an bunch of research reports to go through too. Top of my list is Exchanging Contracts — European Real Estate from Barclays, which examines the potential for exchange offers in 2024. 

Here is a taster from their front page

And reinforcing the pain being felt by secured real estate lenders,Deutsche Pfandbriefbankissued an update this week (h/t Johannes Borgen).

We love tech investors and tech journalists enthusiasm for all things new, but sometimes their total addressable market and total market cap estimates can begger belief. TAM DAMM

A more sober results presentation from SoftBank, but it couldn’t resist at least one slide to amuse us — after ARM and WeWork, is its goose finally cooked?

Another week and another VAR decision that cost Brighton three points, this time away at Everton, as defender and Captain Lewis Dunk’s volley was ruled offside, when they drew the line from his arm (which is not a goalscoring part of the body) rather than his armpit (which is). 

This is the actual picture that those at Stockley Park were basing their decision on. 

But yesterday evening, a 2-0 away win at the Johann Cryuff arena over Ajax in the Europa League more than made up for the disappointment. Another assured performance was marred only by a number of injuries, including Dunky himself who has had another England call-up. And congrats to our striker Joao Pedro who has been called into the Brazil national team squad for the first time. 

As the next international break looms, who would have thought ten years ago while mid table in the Championship, that a decade later we would have two Dutch players, one Brazilian, One German, One Spanish, one Argentine, one English; one Irish, one Japanese, two Ecuadorian, one Paraguayan, one Ghanian, one Ivory coastian and one Scot, as international players in our squad. 

Similar to Premier League Football, the Workout is taking an international break, travelling to New York to brainstorm with 9fin’s finest. It will return on 24 November.