Bored by corporate restructurings, which were becoming too predictable in the aftermath of the GFC, I gravitated to the more complicated securitised workouts such as Four Seasons Healthcare, and, after positive feedback on my content, I was persuaded at the time by my Debtwire bosses to launch and head-up a European ABS product in late 2010. By this time, the regulators had gotten a grip on the securitisation market, leading to a dearth of CLO issuance for a few years, until managers came up with ways to adhere to risk retention rules, better known as having skin in the game (either via a horizontal or vertical slice). The importance of the regulators was so high that Global ABS by this time had moved to Brussels, and conference participants hung on their every word. 

It was only when I started to cover Punch Taverns’ protracted restructuring, from its strategic review in March 2011 to its close in October 2014, that I came across Whole Business Securitisation (WBS) structures. (Actually, I did play a peripheral role covering the first WBS bust, Welcome Break in 2005, but didn’t dig into the debt structures at the time). 

WBS are effectively hybrids. They have some features and structures in common with securitisations, but rather than be securitised by just cash flows from receivables they are based on the whole business (the clue is in the name) including its assets. 

Proponents of WBS say they impose cash discipline on their borrowers, and minimise business risk. As such, they are especially attractive to regulators of key utilities companies providing key infrastructure such as water, electricity, and airports. When things go wrong the ring-fenced assets go into cash trap mode, stopping distributions to shareholders and HoldCo noteholders. In the extreme, WBS holders can appoint receivers to run the business for their benefit, making the structure bankruptcy remote. 

But they can also be gamed, as the higher the regulated asset base, or regulated capital value — the more debt they can issue and bigger the profits — the regulators typically allow operators to earn a certain return on weighted average cost of capital. 

So what about the paper sitting outside securitisation ring-fences — how should these be assessed from a risk-adjusted basis? After all, most are entirely dependent on the securitisation structures allowing dividends (from excess cash) to flow from the ring-fenced group. 

My colleague Owen Sanderson earlier this year produced an excellent two-part series titled Securitisation for High Yield Investors. This was focused on HY borrowers such as NewDay, Together and Very Group, that use traditional securitisation. 

But there is a another set of HoldCo HY deals with large ring-fenced securitised structures above, for Gatwick, Heathrow, Thames Water, Anglian Water and Stonegate. 

Many of these borrowers issued HY bonds specifically to provide faster payouts to their sponsors rather than invest in their asset base. Effectively borrowing against future dividends, seeking to reassure investors with typically 18-to-24 months of interest sitting in escrow accounts.

Thames Blood Barrier

This week, there was a scramble to look at WBS structures and their HoldCo docs after news broke that Thames Water might be nationalised — or at least put into special administration (similar to Bulb Energy) — with its HoldCo bonds dropping 35-points. 

This followed the CEO departing earlier this week, after her turnaround plan failed to deliver. Doubts are rising as to whether the shareholders will be willing to put in the second £1bn tranche of equity, which was soft committed via an equity support letter in June 2022. 

It is worth noting that despite all the press noise about hefty dividends paid out to shareholders, they haven’t taken an equity dividend for over five years. I can see why they are wary. 

The biggest fear is that the equity and the HoldCo bonds could be wiped out if the government decides to intervene without touching the securitised part of the debt structure, which could be the easiest and least costly option. Our initial analysis suggests that this is a plausible scenario. 

As my colleague Owen Sanderson wrote yesterday, the latest news should not have come as a surprise. Arguably it was a grey swan event, rather than a black swan. 

In March, the regulator Ofwat announced new powers allowing it to take enforcement action stopping payment of dividends if they are not linked to performance and/or risk the Water Company’s financial resilience. 

And then there is the ratings issue. 

From April 2025, the regulated OpCos (ie the ring-fence where the WBS resides) must be Baa2/BBB and without a negative outlook, otherwise dividends are blocked. 

Even without this noise, the headroom at Thames Water’s WBS was diminishing, raising the risk that funds could be trapped in the ring-fence. Gearing is above 80%, above the Class A covenant at 70% restricting additional debt incurrence. The event of default covenant is set at 95%.

Movements in the WBS bonds so far have been more muted, which we suggest reflects their protections and high expectations they would be left in place. 

After all, Conservative governments are rarely in favour of full nationalisation. But what about Labour? It has talked in the past about nationalising the water companies, but its 2019 manifesto said that they would leave the debt in place and honour it in full, and Keir Starmer has been wary about making commitments towards nationalisation this time around. 

According to a briefing from Clifford Chance, even if a government sought to remove some of the stringent covenant packages imposed by WBS on these businesses, to avoid conflict with their investment plans, in order to do so they would have to pay a significant yield premium via a make-whole (Spens) to securitisation holders. There is also the question of accompanying swaps and hedges which could result in hefty termination payments. 

An Act of Parliament could override these, but that could open up years of litigation and the associated rising cost of financing for other utilities could ruin funding models for key infrastructure. It’s worth noting here that foreign investors are better placed to sue, as they could use bilateral investment treaties and other agreements as their basis. 

For those at the bottom of the structure, you are in murkier waters, your protections are limited.

As Owen outlines, there were £560m of private placement bonds issued from Kemble Water Finance plc, an entity outside the WBS, above Thames Water Holdings and Thames Water Limited, but a guarantor of the HY bond entity.

The nationalisation clause in the private placement notes grants a put option in the event of nationalisation of any part of the group (including at Thames Water level). If the government acquired Thames Water at the Thames Water Limited level, this would trigger the put.

The Kemble HY bondholders would therefore see £560m of private placement notes with temporal seniority plus a claim on any cash and assets outside the group — such as property. 

Not a great prospect for the HY notes. But my gut feel is the latest leaks are being used to assert pressure shareholders to commit funds, and there will be no further blood in Thames Water. 

Subs Standard Recoveries

It has not been a good week for owners of subs. 

One of the features of the year so far has been the poor recoveries for subordinated debt holders, as evidenced by Matalan second liens, and Diebold as their situations imploded. 

Prices of several subs tracked by the distressed team have dived sharply in recent weeks, as their prospects of recovery became even bleaker. 

Sinking fastest are those from Groupe Casino, the troubled French retailer, trading at just option value in low-to-mid single digits.

Earlier this week, it issued a release cleansing some of the SUNs discussing the provision of new money in the court-supervised conciliation process, detailing its strategic plan and current trading update. 

Casino wants at least €900m of new money in the form of equity, debt conversion into equity “of at least all unsecured debt” to achieve a sustainable capital structure. 

Most of the above shouldn’t come as a surprise, but current trading was even worse than seen in the first quarter, with the hypermarkets and supermarkets once again the poorest performers.

Forecasts for 2023 were tres terrible, with a cash shortfall envisaged at the end of the conciliation period at end-October, with a huge €1.129bn cash burn (before disposals) for FY 23. EBITDA at the French perimeter will fall to €439m in FY 23 from €686m in FY 22. 

Some observers had previously hoped at least some of the proposed new money would be used to finance a discounted offer for the SUNs. Plus ça change.

On the flip side there was some punchy estimates for FY 25 and FY 28, as shown below:

But there was worse news to come for Casino creditors. 

On Wednesday evening the company unveiled its proposals to stakeholders. As well as the unsecured debt being fully converted via a debt-for-equity swap, it also wanted to equitise €1bn to €1.5bn of the senior secured debt (RCF and TLB) which is more than half the drawn debt. The remainder of the loans and the €550m (outstanding) Quatrim SSNs would be extended — with the latter paid down via Real Estate backing the notes being sold over time. 

As reported yesterday, prices of the TLBs and RCF tanked into the low-to-mid 50s on the news. 

With just €300m being pledged by a group of investors, creditors are being asked to stump up the balance, with the expectation (as in Orpea) of more favourable terms in the equity splits. But the timeline being set for offers is extremely short, next Monday (3 July). 

Yesterday, the SUNs dipped in the low single-figures, indicated at 5.5-mid. No surprise that the TLBs have also dropped sharply into the high 50s, yesterday morning. 

The most interesting piece of debt in the cap stack could be the Quatrim October 2024 SSNs. Under the company plan there is no intention to haircut them, but despite this they are now indicated in the mid-60’s. The property backing the notes (€553m outstanding) — mostly hypermarkets and supermarkets — was valued at around €1bn in 2019. 

Look out for a piece from us on Quatrim in coming days. 

Adler Raided; Aggregate loses Track

Yet more drama for Adler Group this week, with 175 investigators from the German Federal prosecutors office and criminal police reportedly searching 21 properties across Europe — which included offices, apartments and a law firm, according to Handlesblatt. It was not just in Germany, but also properties in Monaco, Luxembourg and the UK. 

The German newspaper said there was seven suspects including a former and one current manager (subsequently named by Adler as Sven-Christian Frank their Chief Legal Officer) as well as Cevdet Caner, his wife Gerda, and his brother-in-law Josef Schrattbauer. 

Luxembourg-based Adler Group confirmed the raids, including of its own offices, saying: 

“The investigations are taking place against the background of business transactions at ADLER Real Estate AG in 2019, which extend into 2020. The business transactions in question relate to the ‘Gerresheim’ project and the relevant accounting as well as payments under two consulting agreements with one of the defendants.”

The Gerresheim transaction is one of Adler’s most contentious property transactions and was highlighted in Viceroy’s short seller report in October 2021. Not only are the prosecutors looking at the transactions, but BaFin too, with the German regulator issuing a report last summer agreeing with KPMG on the over-valuation. Adler continues to challenge their view. 

To recap, the 2019 sale of the 75% stake in the development project in Düsseldorf-Gerresheim was for an implied total value of €350m, But the buyer only paid €36m upfront with €132m of bank loans arranged by Adler, including a bridge loan for capex spending. 

Adler booked this as a receivable, but after terming-out repayments, it finally reversed the transaction in 2021, with a €145m mortgage (up from the original €90m) and the €75m loan unpaid. The site remains undeveloped, without planning permission with its neighbour Deutsche Bahn objecting to its plans.

KPMG Forensic, hired by Adler to investigate the Viceroy allegations, said in its report (last April) whether the brother-in-law acted on behalf of Caner “could neither be verified nor refuted”. It added that the agreed sales price was 80% higher than the company’s internally calculated value, and there was a lack of documentation and due diligence despite the presence of an alternative bidder.

More details of the transactions, including the two payments under consulting agreements, allegedly made to Cevdet Caner, are to be found on pages 74-76 of the KPMG report.

Viceroy alleged that the sale of a 75% stake in the project company in September 2019 was made indirectly to the brother-in-law of Cevdet Caner, which resulted in a €233m fair value gain. 

The infamous Austrian real estate ‘expert’ is alleged to have controlled Aggregate Holdings for several years. Over the years, his family trust built up a large stake in Adler Real Estate, “funded by a small German bank”. Aggregate in turn had held a 29.9% stake in Adler Group, but lost a 20.5% Adler share stake after Vonovia enforced on a margin loan in February 2022.

Caner, a Monaco resident, which he claims was to avoid Austrian military service rather than tax, is suspected of being behind a number of related party transactions involving Adler and Aggregate, quietly pulling the strings behind the scenes. 

As reported, I first met Cevdet Caner in 2008, shortly before the collapse of his Level One empire, which Debit Suisse lent €1.3bn for the former East German prefab apartment blocks. His only previous business experience had been an Austrian call centre business, which also failed. 

To our surprise, after years of keeping out of the public eye, last July, Caner was unveiled as Aggregate’s new CEO.

Caner said he was invited to buy a 20% stake in Aggregate by the owner and his friend of over 20-years Gunther Walcher. While he greatly enjoyed working as an independent advisor and dealmaker, “I will now gladly move from the passenger seat into the driver's seat for one simple reason — I decided to become CEO to make a difference,” he said in the press conference. 

Despite his glossy sales pitch at Aggregate’s relaunch in July, in reality Caner has been struggling to avoid default on a month-to-month basis at the German Real Estate firm since taking the chair. 

This March, VIC Properties’ convertible bondholders took over Aggregate’s Portuguese subsidiary for an enterprise value of €670m, as reported. The consortium of investors were led by AlbaCore Capital Group, Mudrick Capital Management and Owl Creek Asset Management.

In May, it bought itself some more time, after securing consent from bondholders to uplift and defer coupons and relax covenants on its €250m 5.5% 2024 SUNs and its €600m 6.875% 2025 SUNs. The maturity of the 2024 SUNs extended until November 2025 from May 2024.

But this week, the Aggregate announced that Oaktree has enforced on its share pledge on the Lux PropCo which owns the Quartier Heidestrasse (QH) Track project.

Aggregate said it “is conducting a detailed review of the implications of this action, but this specific event does not constitute a cross-default in the Aggregate 2025 and 2024 bonds”.

The company said that “the very challenging situation in the global real estate market” has led to “cost overruns and delays to QH Track’s completion”.

Aggregate said it had been in discussions with Oaktree and the senior lenders on resolving these issues in order to fund the construction through to completion. The group has been undertaking a sale process for QH Group, from which six out of seven segments were successfully sold for around €1bn, well short of the €2.5bn to €3.4bn Gross Development Value from JLL’s appraisal in July 2021, and the €1.7bn residual value. 

But QH Track was the biggest asset from the seven segments of its trophy Quartier Heidestrasse complex, as reported. At FY22, QH Track had an appraised residual value of €1.018 billion and a GDV of €1.277bn, with construction ongoing.

In April 2022 a junior debt facility related to QH Track was refinanced and increased from €110m to €370m, with the €260m of new funding provided by a large global credit fund, according to the group’s FY22 report. The primary uses of the new funding were a substantial pay down of mezzanine debt at QH, and the funding of interest and other project cash reserves.

Loss of Support 

Our inboxes were full of press releases from The Support Club in recent days. The disgruntled Orpea unsecured creditor group has been fighting hard in the courts in recent months. Not just against the company but also the SteerCo, the group of unsecured creditors providing some of the new money alongside CDC and a group of French investors. 

First we had news that they had persuaded a US court to force the SteerCo, specifically Anchorage and their advisors PJT Partners to release of documents showing communications between them and the other stakeholders, with 14-days given to provide the information. 

Then a minor win, a ruling from the Court of Appeal in Versailles that a subclass of creditors should be created given cross-holdings of secured and unsecured bank debt, two days before voting on the restructuring plan was due to take place. They hoped this would delay the vote, and that cross-holdings would now be disclosed. 

But the vote when ahead as planned, seemingly without changes. Six out of 10 classes voted by the required majority(two-thirds) and three others had over 50%. The restructuring will now be implemented by cross-class cramdown under Sauvegarde Acceleree “in the coming days”.

There was some good news for Orpea subs. Two expert reports gave a going concern estimate of €6bn to €7bn to the court, which suggests recoveries in the mid-to-high 30s. 

In brief

There was some relief for SBB sub bonds this week, after the beleaguered Swedish real estate company said it was in talks to sell the remainder of its education portfolio to Canadian asset manager Brookfield. SBB said it has entered exclusive discussions to sell its 51% stake in EduCo — a joint venture it formed last year with Brookfield — to the JV partner. SBB said that SEK 14.5bn (€1.24bn) of vendor financing that it provided to EduCo would be repaid, and that it would “retain the right to acquire shares in EduCo in the future”. No additional financial details were disclosed.

Stonegate delivered a flat set of Q2 23 results. But while this might be small beer to investors, their appetite was whetted by confirmation that preparation for a rumoured up to 1,000 pubs disposal is now underway, with management expecting to launch the sale after the summer break. With a looming 2025 maturity wall and a need to deleverage, in addition to disposal proceeds, the pub group has unveiled a strategy to boost EBITDA by £80m to £100m in the next 12-24 months. A refinancing would be launched soon after the sale event, added management. Our latest (Not So) Blessed to be Stressed piece here explores Stonegate’s maturity wall in further detail. A transcript and playback of the Q2 23 earnings call is available here.

As 9fin’s Josh Latham quipped Q1 Performance doesn’t meet (Ideal) Standards: eroding margins and excessive cash burn has been an ongoing theme for the Belgium-based bathroom manufacturer. And although Ideal Standardmanagement said in Q4 22 that positive pricing benefits should impact top-line going forward, the group posted a 4% revenue decline in the first quarter of 2023. As 9fin reported, a €25m term loan signed in Jan 2023 provided a much needed lifeline. This allowed the group to finish Q1 with a healthier liquidity balance, despite recording €16m of cash burn. Looking forward, however, declining residential construction output in most geographies paints a bleak picture. We still maintain belief that management are considering longer-term liquidity solutions or liability management exercises to survive the downturn.

What we’ve been reading/watching this week

One of my areas of interest is sovereign debt restructuring — not quite yet on 9fin’s coverage area — although I was asked this week about most favoured creditor clauses this week by a subscriber! 

The emergence of China, or more specifically China Exim, as a creditor has added another layer of complexity to negotiations. Zambia’s protracted debt restructuring was seen as a test case, and the agreement brokered by France between it, China and the IMF is seen as a breakthrough. 

Many of the terms are undisclosed, but as Brad Setser tweets, there is an element of contingency, official creditors will get a higher interest rate after three-years if Zambia’s credit quality improves and a lower interest rate if it doesn’t.

Full disclosure, I travelled to Zambia to work on a project with the WWF (wildlife not wrestlers) and loved the country and its people. I hope the plan enables them to get back on their feet. 

Last week, we showcased it was 10 years since the SEC launched its leverage loan guidelines. In the same vein, how has the LevFin market evolved since the GFC? 

No wonder liquidity is so bad

Now that UK debt-to-GDP is over 100% and our inflation is above Emerging Markets average, does that mean that we are officially a sub-merging market? Is it time to cover my UK short?

BofA wasn’t pulling any punches last week: 

“Heard anyone say anything good about the UK recently? No, nor have we. "Stagflationary sick man of Europe", strikes, crumbling NHS, 6% mortgage rates, UK yield curve most inverted since 2000, yields so high differential with even Brazil set to narrow toward historic lows (Chart 19)...buy humiliation, sell hubris! UK mid cap stocks (MCX) cheapest versus global stocks since 2003 on trailing P/E of 13x (Charts 9 & 10), just needs "peak gilt yields" to trough (Chart 18)…UK assets cheap & reviled, UK mid caps great contrarian investment to tuck away for a few years (hedge sterling).”

They say it is always darkest before the dawn. Time for pens down, pack for a wedding in Cornwall, and put on Test Match Special for the long drive, and hope we can level the series.