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Chris Haffenden

After all the irrational exuberance in January, the last couple of weeks were a sobering experience for rates markets. But while CPI in Europe and the US is proving to be much stickier than hoped and government bond yields are surging, EHY spreads have widened only a tad, much less than the 50-75bps or so that we would expected. The iTraxx Crossover (a proxy for EHY credit) closed last night at 416 bps just 2 bps wider than end-January.

The latest macro news and rate concerns — the US 10yr is back above 4%, with 5yr Bunds hitting fresh highs this week (see below), and European terminal rates expectations now over 4% —  have had little effect on the 2023 LevFin resurgence, despite renewed HY fund outflows.

Witness the giant $2.49bn Teva deal this week. It is a name with a troubled history linked to the massive opiod settlements, but it had no trouble getting a jumbo SUNs refi away with a seven-handle and a $500m upsize to boot — a spread to maturity with a three-handle! That’s bull market spreads.

We have even seen the return of dividend recaps for Nouryon and Ineos Quattro, admittedly strong well-known credits, but their timing is interesting given poor fourth quarters for both. Let’s hope that these are just a blip, rather than smart borrowers issuing as the cycle turns.

The heavy flow of amend-and-extends continues with investors still happy to push out maturities for stressed credits for names such as Flakt Woods — we hear of a chunky cheque from the sponsor; and Hurtigruten (despite poor Q4 nos and call). Margin bumps on offer are probably not fully reflective of the risk (650bps for CCC on FCF negative Hurtigruten?), as more margin for CLOs seems to trump refi comps economics. Admittedly, most A&Es have tightened docs giving some more protection and this may mitigate some of the pricing.

Even Jumbo A&Es are doable. Ineos late last year took a first bite at extending out its maturities, as the appetite for €1bn+ deals wasn’t there, before coming back for seconds last month. But this Wednesday Motor Fuel Group felt comfortable to refill its debt tank, unveiling a £1.85bn A&E with a 175bps margin bump and three-year extension (a good price point for fellow petrol station firm EG Group which is widely expected to pursue a similar transaction later in the first half).

And with secondary pricing holding up well, bankers are talking of a bumper pipeline of deals before Easter, with LPC saying 15-20 EHY bond deals to come before Easter.

So, as Owen Sanderson outlines in this week’s Excess Spread, the flurry of CLO issuance has drowned the delicate CLO rally in a flood of supply. Are LevFin bankers in danger of killing the golden goose by force feeding the market with paper?

And even if not, are current prices reflecting the increased macro tail risk? I think not.

After all, cash for the first time in over a decade pays you not to take the risk.

After the double whammy of a much higher than expected January US CPI print at 6.4% and stubbornly high PCE data (a favourite of the Fed) last week, this week it was the turn of European numbers to disappoint. Higher than expected German CPI data was followed by elevated eurozone figures, with some components such as food, still increasing in the double-digits.

So why is inflation staying stubbornly high? After all, energy costs and many commodity prices have tumbled of late and supply chain problems are easing.

But arguably most is already reflected in falls in inflation prints within Q4 22, and the key question is how sticky are the remainder of the CPI components.

The smart guys at M&G have taken a stab at this, with their analysis of US inflation data, with their post Inflation in the US, does 2023 have any nasty surprises in store for markets?

The Bond Vigilantes find that Shelter and Services are the most sticky, as they have the lowest volatility, which is unfortunate as these segments are the highest contributors in the inflation data.

Given the above, it is no surprise, as my US colleague David Bell outlined, the old school metric interest cover is making a return, alongside Fixed Charge Coverage Ratios, and levered FCF to total debt. Leverage and EBITDA isn’t everything, especially if they have been pro forma’d to death.

As I put together February’s Top of the Flops, and hunted for a fresh 9fin screener to highlight, David’s piece was fresh in my mind, so I took an initial stab at gauging the size of the problem in Europe.

If we assume as a rough rule of thumb that interest costs are likely to double for most borrowers, any deal with less than 3x interest cover currently, is unlikely to be refinancable if this drops to below 1.5x.

Running a screener of borrowers with maturities within next three years and < 3x interest cover, this results in a whopping 59 bonds from 33 borrowers. If we reduce to less than 2x, there are 27 bond issues from 13 issuers.

But interestingly, not all are being priced accordingly, as from the first bigger sample, just under half are not indicated at stressed levels (below 8% spread-to-worst), 27 bonds from 15 issuers.

Notable names here include Stonegate Pubs, Pure Gym, Assemblin, Carnival. BMC Software, Saga, Q-Park and Scientific Games. Asda and Iceland are on the cusp, as is EG Group.

This is very approximate, but does give us a starting point. We will be doing more work on this and other debt service metrics, watch out for some deal predictions in the coming weeks.

Adler Group has dominated most of my attention over the past week.

To recap, last Friday’s UK Restructuring Plan convening hearing was unusual to say the least with most of the key issues parked until the Sanction Hearing. Most notably the jurisdictional challenge from the Adler 29s AHG — over the validity of the Issuer Substitution — and the alleged artificial construction of the creditor classes, a sextet, no less, with only one needed to vote in favour to cram down the 29s, and bind any other dissenting SUNs.

We also had the added spice of a purported acceleration by two Adler 2029 bondholders and an application to the Frankfurt regional court “for declarations as to the invalidity of the issuer substitution.”

This throws up fears of a jurisdictional fight between Germany and the UK, and perhaps yet another Galapagos.

Sir Anthony Mann, in his convening judgment mostly sided with the company, going for a short Sanction Hearing starting on 30 March, failing to grant the four days the other side wanted.

With plenty of known unknowns and follow-up angles, as I started to speak to the smartest minds of the Restructuring legal community, the importance of the case and its potential wider implications began to hit home. This is probably the most interesting proceeding in the UK since Virgin Active and gategroup, and could have similar impacts to those rulings.

The German Real Estate company is granting unequal treatment to its pari passu senior unsecured bondholders under its plan. This is despite the relevant alternative being insolvency, under which temporal seniority should fall away with the restructuring surplus equally split between the various SUNs. The Adler Group 2024s in particular get special treatment, as they are elevated to second ranking, behind the €937.5m of new debt and ahead of the rest of the SUNs, which rank third.

However, the court could be persuaded given the cliff edge of the upcoming maturity of the Adler Real Estate 2023s on 27 April, and the projected 57% recoveries under insolvency (the relevant alternative, says the company) versus 100% recovery under the UK RP, to approve the plan.

Courts are often swayed by commercial considerations, despite some proposals being “far from perfect” as Justice Richard Snowden outlined in his Sunbird Judgement in December 2020. It is worth noting that the purpose of the new UK RP procedure is to eliminate, reduce, prevent or mitigate the effects of any of the company’s financial difficulties.

The wider implications if this deal is sanctioned, however, are huge, as this treats pari passu creditors differently and in a highly material way, complain the 29s. It could have a material effect on longer dated securities in the UK, and likely also internationally, they argue as their pari passu nature in insolvency can no longer be assured.

As reported, the 2029 group submitted a counter proposal at the end of January. The dissenting 2029 group is working with FTI Consulting as financial advisor and Akin Gump and Gleiss Lutz. Strategic Value Partners is the largest holder in the group, as reported.

One motivation of their counter proposal is likely to provide another relevant alternative to the court, which the 29s say is a fairer solution for all, and respects existing rights and interests.

But Adler Group argues that this plan is not deliverable, as the company and a majority of noteholders across the classes are already locked-up to the preferred transaction.

As an aside, it seems a long time ago, but when the new UK RP procedure was introduced in June 2020, the relevant alternative was seen as one of its most exciting features, as it opened up the opportunity for creditor groups to submit their own competing proposals.

But apart from the odd edge case such as Good Box (as that was an administration and therefore under the direction of the court), the adoption of competing plans has failed to materialise. This is because the court requires the consent of companies to sanction, and if they are already locked up, they are already bound.

So in brief, if the deal is already locked-up prior to convening, others are locked-out.

But does this apply to all jurisdictions for deals where companies and creditors are locked-up? Could there be more latitude under some of new European processes?

We might be about to find out in France, with the Orpea saga. A splinter group of unsecured creditors to the French care home group has touted an alternative plan to an agreement between the company, a consortium led by state fund CDC, and a SteerCo of unsecured creditors.

The company is locked up to the plan, which has the support of the court appointed conciliator and also the G6, the senior secured bank creditors. So how can the dissenting group gain traction with the court appointee and/or get an airing for their proposal at the Sauvegarde stage, which similar to Adler Group is likely to be used to cram down dissenters?

Gleacher Shacklock, the splinter group’s financial advisor said on a call this week “If CDC/SteerCo don't want to work with the group they will receive hard questioning in court.”

We will have to wait and see if they get their audience, but in the meantime, the “amicable” conciliation procedure opened on 25 October 2022 and scheduled to end after four months on 25 February 2023 was extended for one month to 25 March 2023 at request of the conciliator Hélène Bourbouloux. The announcement said that no further extension can be implemented.

This seems strange. If she is onboard with the plan, and others are locked-up, why extend?

Delving into the release, the reasons are not entirely clear — Orpea said this will allow it to “continue to expand support of unsecured financial creditors who have not been able to accede to a lock up agreement signed on 14 February 2023 (by Groupement and the SteerCo), as well as its discussions with creditors concerned by requests for waiver and adjustment of contractual clauses provided for in the financing documentation concluded by the company or its subsidiaries, in order to enable the completion of the financial restructuring.”

There are several more angles to explore on Adler Group, which also have wider implications.

The 2029s are challenging the jurisdiction of the UK Court, arguing that the formation of the English Plan Company, AGPS Bondco on 23 December 2022 under an issuer substitution mechanism is invalid, and is just a construct to enable a cross-class cram down under the UK RP.

The SUNs are governed by German Law are subject to the non-exclusive jurisdiction of the German Court.

The 2029s say that the substitution is ineffective for two reasons. Firstly that the terms and conditions have transparency requirements which require that the issuer state with clarity the specific requirements under which the substitution clause is to be exercised. Secondly, the substitution of rights must provide equivalent compensation to the right holder, meaning that the holders must not be economically worse off following the exercise.

A member of the AHG is imminently to commence proceedings in the regional court of Frankfurt (the Landgericht Frankfurt; the German Court) against the Issuer for declarations as to the invalidity of the Issuer Substitution.

Unfortunately, these court documents are not public, and quite rightly their advisors aren’t keen to share their submissions and their tactics with us, prior to the Sanction Hearing.

What we do know is, if they can get a declaration that the substitution is invalid, the English court would not have jurisdiction to hear the UK Plan. While the German hearing is likely to be expedited, it would be challenging for such a declaration before the 30 March sanction hearing, notes a German lawyer following the case.

There is some hope for the 29s, continues the lawyer, as the Higher Regional Court of Frankfurt has previously ruled that substitution clauses are likely to be generally inadmissible, as they deviate from the essential basic principles of contract law.

But the case law relates to consumer finance documentation, and there is an argument to say sophisticated investors would be aware of these issues when investing in the bonds. However, if retail investors have bought into the debt, this argument may be to some extent compromised.

German law experts and restructuring practitioners are split. There is general agreement that the language works and should be admissible if the issuer substitution T&Cs are sufficiently transparent and the bondholders are economically no worse off after the substitution. But some argue that bond docs T&Cs should have a definitive list of trigger events.

In Adler Group the original issuer continues to guarantee all the obligations under the bonds, which the company is likely to use as evidence to support that holders are no worse off under the move. But it is worth noting that their substitution clauses do not have listed trigger events.

There is also the issue of the English Court overlay on substitution or similar co-obligor techniques, and their wider recognition, noted another lawyer. In the narrow sense the courts have already agreed that this can happen, but in the broader sense it hadn’t been properly tested. This was due to be heard in gategroup under the Attestor UK RP challenge, but was settled privately by the parties between convening and sanction, they noted.

Watch out for a more detailed piece on the key legal issues for the Adler Group case in the coming days.

While the original Vue CDS question —  whether a restructuring credit event had occurred —submitted to the CDS determinations committee way back on 2 February, is yet to receive an answer, a second request has been put into the committee. This relates to whether there is a successor to Vue International Bidco Plc. In common with the first request, the market participant is submitting the question based on skinny public evidence, a slew of ratings agency announcements, and like the first, this may not be enough info for the committee to decide.

After months of wrangling, there was significant progress in the protracted restructuring negotiations at Takko, the German discount retailer, 9fin’s David Orbay-Graves has revealed. An outline of a restructuring plan, where bondholders (Silver Point, AlbaCore and Napier Park hold over 90%) will take the keys has been submitted to the company. Sponsor Apax will retain a high single digits equity stake in return for ensuring a smooth handover.

Those investors hoping for more information on Hurtigruten’s performance and outlook while they consider its A&E request would have been disappointed by the Q4 earnings call on Wednesday. As Denitsa Stoyanova writes, there were 18 questions, four were on bookings development, four on occupancy rates, four on EBITDA and related adjustments, four on Capex, one on FCF and one on pro forma liquidity, many of which were not fully answered.

Houlihan Lokey and Milbank have been appointed as creditor advisors on Keter, writes David Graves (chapeau for Irene Garcia Perez at Bloomberg for writing it up first). We now wait for the company side (advised by PJT and K&E) to submit a fresh proposal, trying to repair damage caused by its coercive A&E request late last year.

Aston Martin continues to be a cash guzzler. The luxury sports car brand saw a £299m FCF outflow in FY 22, and management has forecast a similar outflow in H1 23 as H1 22 (£234m). As 9fin’s Josh Latham writes “All else being equal, this cash outflow would materially reduce liquidity to £440m and place the group in an uncomfortable position if profitability didn’t turn a corner in H2. Analysts at Jefferies and HSBC have voiced their concerns too, stating that Aston Martin may need a further capital injection.”

Sometimes a headline is just enough — top punnage from 9fin’s Laura Thompson — Hurt through the grapevine, Accolade Wines touches 8x leverage in Dec 22

The 28 February deadline for Aggregate Holdings’ Portuguese subsidiary VIC Properties came and went earlier this week, without any announcement from their German parent. As 9fin’s Bianca Boorer writes local media reports say the sales process for the three development projects were pulled as the bids didn’t hit price targets. This gives convert holders the option to enforce on the shares and with additional claims against other Aggregate assets, it could cause cross defaults.

February’s Top of the Flops was released earlier this week. TLDR, the number of stressed/distressed issues continues to fall, but there is significant dispersion and a number of new names have entered into the list, including 888 and EG Group.

Most of my time this week was spend reading skeleton arguments, judgments and case law.

An old friend of mine, sovereign debt advisory grandee Lee Buchheit with Mitu Gulati has come up with a new idea, a new legal doctrine: treat sovereign debt creditors like the victims of a plane crash — I dare you not to click, after a lede like that!

Yet more allegations of state capture at South Africa’s Eskom, this time from the Daily Maverick:

”Intelligence reports obtained by Daily Maverick link two senior members of President Cyril Ramaphosa’s Cabinet to four criminal cartels operating inside Eskom. Although we cannot yet reveal the name of the Cabinet ministers for legal reasons, we can divulge that the intelligence links the cartels to the sabotage of Eskom’s power stations and to a programme of political destabilisation.”

Attestor wins the competition for the cheeriest distressed fund website (h/t David Orbay-Graves)

Good to see Groupe Casino, the business with the most opaque and complicated group structure in EHY Is keen to talk through its earnings and take questions from foreign investors:

Call which is being held on Friday, March 10, 2023, at 8:00 am (Paris time). Please note that the conference call will be held in French only. A great opening line from my ex-Colleague Jim Reid (head of Macro Strategy at Deutsche):

I hope the parents amongst you survived World Book Day yesterday where schools here in the UK make you send your child to school in a costume that reflects their favourite book. It seems to be getting more competitive each year and a parental arms race has developed. I tried to send my twins as “Irrational Exuberence” by Robert Shiller and “This time is different - Eight centuries of financial folly” by Reinhart and Rogoff. However, my wife decided Harry Potter was more appropriate.”

Hats off to Tracy Crouch MP for her plan to protect the future of English Football (Richard Irving, a good friend of mine and a huge fan of lower league football was heavily involved too). Let’s hope events at Derby, Bury and Portsmouth are now consigned to the top bin of history.

Congratulations to Grimsby, for their excellent FA Cup win against Southampton in the FA Cup. Despite their inflatable fish mascot Harry The Haddock being o-fish-ially banned, many were still seen in the crowd.

And who said that we couldn’t win on a cold Tuesday night at Stoke!

This Mitoma Fan entertained the crowd and the ITV audience as the home side were hard pressed to get hold of the ball, as Brighton slickly passed around them.

Next up is a FA Cup quarter final for Grimsby against the Seagulls at the Amex. The North Stand is talking about putting in a order for 20,000 inflatable seagulls! We are one game away from returning to Wembley, four years after narrowly losing one nil against Manchester City.

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