Events at Lycra, the spandex manufacturer is the hard proof. Its stretched senior financing (pun intended), signed just one week before the 1 May maturity of its SSNs, is probably the most expensive piece of refinancing debt that we’ve seen at 9fin. All-in, it pays mid-20s for 23-month paper! (please contact us via the usual channels if you know a worse instance).

And that was not all, the unknown providers of the private placement also gained some undisclosed IP at the expense of existing holders via a drop down transaction, in a financing with some novel features (more on this later). 

So, how did we get here? How did they get it so wrong?

Let’s first revisit the events over the past year, which was certainly an eventful one. 

First, a change of ownership as mezzanine creditors to former majority shareholder Ruyi (90% stake) took charge in H1 22, with the debt burden increasing as noteholders were paid in bonds to waive a change of control. By the time of the Q2 22 earnings release it was clear that trading was ugly and arguably the worst was yet to come, as we outlined in our piece of 7 September. 

But management seemed relaxed and almost blasé about the imminent maturities of its RCF in March 2023, and its SSNs in early May 2023. They placed their confidence in JPMorgan to find a solution by the end of Q4, adding that their new shareholders remained supportive. 

Fast forward to December 2023, and there was little sign of progress and management gave little away regarding progress on their Q3 call. Incredibly, there was no mention of the looming maturities or refinancing in the presentation materials. 

It was down to Bloomberg to reveal in early January, that the company had finally entered into negotiations with creditors, with K&E company side and Gibson Dunn for the bonds. But as a cleansing presentation revealed on 3 March, talks had broken down. 

The company had rejected the ‘holistic’ refinancing of the group, and delivered a counterproposal to the AHG on 22 February.

Under the company plan, new 2028 notes would be offered to the 2023 and 2025 SSNs paying 10% cash ranking behind a reduced $50m super-senior RCF ($100m). A limited amount of equity was available with 15% held in escrow and allocated on the release of FY23 results. 

In addition, every $ equivalent of existing notes not exchanged into the new 2028s would be written off in full in return for a pro-rata allocation of 44% of pro-forma equity. 

Narrowly avoiding a payment default on its RCF, Lycra announced a new $108.9m super senior term loan at a undisclosed OID to repay the RCF. But this came at a cost, at SOFR+800 bps/9% PIK (old RCF paid SOFR+700 bps). The providers of this facility were not disclosed. 

This brings us back to earlier this week, and news that it had issued €300.2m of senior secured notes (SSNs) due 1 April 2025. The last gasp refi came at a hefty cost, with the new stretched senior paying a whopping 16% coupon (5% cash, 11% PIK), with a chunky 20-point OID. 

In addition, the super senior term loan was increased by a further $30.1m to $140m, at a undisclosed OID. This is higher than our calculated super senior capacity ($125m), and may need clever use of other baskets and provisions definitions to get there. 

No information was given on the identity of the provider(s) of the new private placement, which also benefits from $75m of “certain intellectual property assets” (IP) expected to be transferred out of the restricted group to an unrestricted subsidiary via a proposed three-stage drop-down.

The new notes (whose indenture was entered into on 25 April 2023) share the same collateral package as the group’s outstanding $704.5mm 7.5% SSNs due on 1 May 2025. But, after the drop down is completed, they would also benefit from security over the $75m of transferred IP, as well as a guarantee from “IPCo”, with the $SSNs losing out.

As 9fin’s Brian Dearing points out in his excellent analysis — Lycra dropped some assets, who picked them up? “Simple drop-downs get a lot of attention as they often feel wrong, but in reality they are just using the documents in perfectly expected ways.”

Brian continues: “But unlike many drop-down financings, Lycra’s financing isn’t outside the restricted group, it is inside. As a result, the new debt will benefit from the same security and guarantees as the existing debt, after all they were simply refinancing some other existing debt. But the new debt also gets a sweetener in the form of security and guarantees from the assets that were placed outside the group.” 

He further explains that this sweetener is possible because the “Limitation on Liens” provision in the existing debt no longer applies to the unrestricted subsidiaries. Therefore, the Lycra variant of the drop down is fairly novel and it could be used elsewhere. 

Some nice work by clever lawyers, but if the IP was worth just $75m (for a $300m piece of paper) is this a price worth paying, giving little additional benefit, and is likely to irk existing 2025 SSNs? Given a lot of Lycra’s asset value is intangibles such as patents and formulas, how is this IP valued?

The identifies of the funders are unknown. Could they be in the 2023s and less motivated for a holistic solution? Or is it a third-party provider who named their price? Or could they even be a related party to the shareholders? Lycra isn’t telling. 

So, for now we have a lot of questions and few answers. 

What we do know, is that while they may have extracted a hefty price, with Lycra’s debt compounding at a double-digit rate, considerable refinancing risk remains and there is now a debt cliff in April/May 2025, leaving little time for a business turnaround. 

Lycra will need to show that it is making progress to triple EBITDA by FY 26 (as per its 2022-26 plan), to refinance by that time. Even if it decides once again to leave it to the last minute and refinance in early 2025, using FY24 estimates it will still be over 6x levered at this point. 

Talk about stretched senior!

Lots of questions, but no answers

Lycra is not the only company where we have lots of questions but few answers.

In the middle of earnings season, a number of stressed companies have provided earnings updates that were economical with pertinent information. 

The most notable was Groupe Casino. 

Their bondholders have been spooked lately by a number of recent announcements. There is a proposed JV which could leak value away from the restricted group; a shareholder injection proposal (but only after a substantial debt write-off); and a consent solicitation to allow a conciliation process, which could be a prelude to a court-supervised debt restructuring. 

Bondholders were hoping yesterday’s release and call would provide more information. But as we wrote, they received none with the company saying while they would keep the markets informed of progress, there would be no further comments made on the Q1 23 earnings call, held at 7am (yesterday) BST.

The conference call was scheduled for an hour-and-a half, and was thankfully in English this time. But it lasted just under 20 mins, with no slides and detailed financials — we had to make do with a 14-page press release.There were just two questions before the call was wrapped up, with the operator claiming there were no further questions.

Without any further detail on the proposals, investors will focus on the business performance during Q1. Arguably a quarter to forget, particularly for its hypermarket division, as shown below. Note these are absolute changes, unadjusted for the rampant double-digit food inflation in France seen during the quarter. 

Asked if the company had already entered into the conciliation process, the CEO said that the “group wishes to examine the possibility”, adding that there would be no further comment to the statements that the group has previously made.

For more detail on Groupe Casino and the challenges it faces, a replay of our recent webinar — Groupe Casino — Gambling with the capital structure, is available here.

We also reported that the company has kicked-off informal discussions with creditors ahead of a possible conciliation process, and a potential restructuring of its unsecured debt.

Atlalian management at least confirmed that they had tapped advisors for its refinancing plan. But as 9fin’s David Orbay-Graves wrote, CFO Bruno Bayet refused to be drawn on specific details for its bond refinancing, saying that the France-based facilities management company aims to present more information to creditors in Q3 23, possibly in October.

Management says they want to complete a refi by 28 February 2024, but this doesn’t give a lot of room, given €625m of SUNs are due in May 2024. Their plan appears to be to wait for new strategic roadmap and allow the new CEO to bed-in — Maximilien Pellegrini starts this week — replacing Franck Julien, also the company’s main shareholder, mired in an alleged embezzlement scandal. 

Engagement with bondholders will happen in Q3, they said. But that didn’t stop one analyst on the call seeking to negotiate in public. “It would be better to engage earlier rather than later”.

Some of the options available could potentially include offering security (the existing bonds being unsecured) or potentially offering a “small slice” of equity to bring down the refinancing rate, they said. “The last thing we want — any of us on this call — is to get blindsided with some kind of […] restructuring when there is enough here to do something where you can avoid that.”

Atalian is sitting on around €608m of cash, following the sale of UK, Ireland, Asia and Aktrion units to CD&R. But this was only after two months of near farce, where a previous notice of redemption to bondholders was revoked, after a deal to buy the entire business fell through.

It has also flip flopped on the use of proceeds, previously saying it would repay the majority of the 2024s, but in late February it said they would be used to repay the RCF alongside a broader deleveraging of Atalian “in particular within the framework of the partial reimbursement of the €625m of senior bonds maturing in 2024”.

At least Atalian took questions. Earlier this week, Diebold Nixdorfmanagement didn’t. Their Q1 23 earnings call writes 9fin’s Emmet McNally, took place without a Q&A session, with management for the ATM manufacturer attributing its omission to ongoing discussions with lenders and banks to address short-term and long-term liquidity needs.

It was revealed in the earnings release that any “deleveraging transaction will substantially or fully dilute shareholder equity”. But as the market cap is around $66m any new equity injection effectively wipes out existing shareholders, suggests Emmet.

Nothing was said about the ongoing attempts to exchange the $72.1m stub SUNs or any contingency plans. Management offered very little with regards ongoing talks with lenders. There is a hard deadline of 4 June 2023 to reach an outcome, when the recently raised $55m FILO ABL facility matures and certain waivers with regards to exceeding borrowing base limits roll off.

Standard Slips

Just as we thought Standard Profil (SP) was getting to grips with its higher input costs and their ability to pass through to their OEM customers, their fourth quarter numbers were yet another setback. The Germany-headquartered automotive seals provider posted negative -5.6% gross margins despite a 27% revenue growth YoY as raw material costs rose again. 

Gross profits were impacted by €17m due to IFRS accounting rules, but even after stripping out the one-off effects, margins are in the low single digits, as SP struggles to exercise pricing power.

SP says that it is in negotiations over further price rises, and announced its shareholders had contributed €10m of additional equity ”in the context of the ongoing negotiations with our customers in April 2023.” On the conference call yesterday, management said that the injection was a signal to show that commitment from shareholders and wasn’t requested by the OEMs.

But the auto supplier has failed to gain traction on increasing prices and hasn’t secured increases on cost bases beyond Q2 22. Management admitted that OEMs are more resistant on pass-throughs, but added they are hoping to get compensation for cost increases in May. 

Commentary in the financial report states that Q1 23 revenues are above Q4 22, and the all-time high order backlog of €3.1bn should provide some reassurance, but liquidity is waning.

As 9fin’s Josh Latham outlined, the cash position was just €18.3m at year-end, and while there is now a €30m RCF provided by Credit Suisse to access further liquidity, it is unclear whether it is still in compliance with minimum cash and EBITDA covenants — which the company does not disclose. In the meantime, leverage is approaching double-digits.

Source: 9fin 

It was no wonder that the bonds resumed their journey south after the release, they are now trading in the mid-50s, to yield around 29%. 

Naviera experiences that sinking feeling (again)

Not all restructurings are successful, and the deleveraging achieved is often not enough to get the business back onto an even keel. Not all ‘conservative’ business plans will come to fruition, after all many are best guesses, not hard-coded projections.

When we analysed the Naviera Armas restructuring in 2021, we thought that the reduction in senior secured leverage for the troubled Spanish ferry operator from 8.3x to 5.3x (based on FY22 estimates) didn’t seem enough. The subsequent sale of five vessels and the Balearic Island route to Grimaldi, did however, provide further deleveraging, to a more shipshape 3.8x. 

Fast forward 18-months to yesterday (4 May), a second restructuring was unveiled alongside FY 22 earnings. The ferry operator says agreement (with an AHG representing 82% of bondholders) will help it to implement its “realistic but ambitious” business transformation plan.

“Clearly, this company has faced in the last years very significant headwinds,” said Francisco Garcia-Ginovart from Houlihan Lokey, financial advisor to the company, during the call. “And I think despite all, this company has been able to overcome these complexities and find a consensual path that once and for all provides a solution and ensures the viability of the group.”

Naviera blamed a negative €45.8m deviation in FY 22 EBITDA to budget on: a late start of the OPE (open crossing the straight) Moroccan routes; the Spain-Algeria geo-political situation; Omicron effects for the Canaries routes in early 2022; and a decrease in Cargo revenues due to discounts and the La Palma volcano crisis. 

The new 2023-2025 business plan envisages revenues increasing by €61.3m to €569.3m in FY 25, with EBITDA growing from negative -€9.6m in FY 22 to €51.6m in FY 23 and “a gradual increase” to €76.1m in FY 25. This will be achieved by a turnaround plan full of commercial and operational initiatives (the majority of which are already launched), and “optimisation” of its cost structure. There will be decreased fuel costs and a new optimised fleet plan. 

So, how much more pain in Spain are the bondholders taking under the new restructuring?

There is €73.3m in new money super senior financing (€100m of new money was put in 2021 by bondholders), backstopped by the AHG, and a debt-for-equity swap, which will lead to a 60% reduction in the outstanding pre-restructured 1.5L SSNs. 

In return, bondholders will see their equity stake rise to 94% (in the prior restructuring, holders gained 65% of the shares, but the Armas family retained a voting majority). The Armas family will retain 6% of their equity to “ensure their future support.” 

In brief

Yet more pain in Spain, with poor results from troubled Spanish real estate servicer Haya Real Estate and details of Telepizza’s restructuring plan being revealed, with recently restructured Codere reporting. Elsewhere, there was also further evidence of the downturn of the German RE market in the second half of 2022 as Vivion reported its FY 22 results, and updates for 9fin Watchlist occupiers HSE24 and Ontex. 

Haya Real Estate’s restructuring was effectively a managed wind-down of the servicer, with its restructuring last spring, complicated by the loss its main contract with Sareb, the Spanish asset management agency. A key element was quarterly cash sweep to pay down bondholders, with Haya having to maintain a minimum cash balance of €30m. 

Performance has been behind plan and as a result, there is no cash sweep related to December 2022 (it paid down €19m during the year). The intention is an exit in 2023, with M&A advisors to be appointed by May 2023 — if local media reports are correct, Swedish debt servicer Intrum is offering around €150m for the business.

Telepizza finally revealed the full details of its restructuring, including equity splits under the debt-for-equity swap and for the new money. 9fin’s David Orbay-Graves reveals that the debt will be reduced by two-thirds with the reinstated debt paying 12.125% PIYC, in return for 75% of the equity, with the rump going to the new money (€60m super senior term loan). But the interesting part is the implementation, via the new Spanish Restructuring Plan which will be used to cram down the ICO-guaranteed loan, David explains. 

Vivion’s FY 22 conference call takes place after publication, but luckily they released their figs and slides late last Friday, giving a glimpse of the state of the German RE market in the second half. The portfolio valuation declined by €317m (-7.4% LfL) during the year, which the company said was mainly a result of market conditions. In the UK, the prime yield for London hotels rose 100 bps to 4.5% during the year, leading to a 7.7% decrease in gross asset values. In the German market prime yield for offices rose 32 bps to 3.83%, and non-offices values fell due to increased interest rates and rising construction costs. With its August 2024 SUNs indicated at 74-mid, investors will be keen to establish funding options in today’s call, with Muddy Waters short-seller report weighing on sentiment. 

HSE24, the Germany-based shopping channel had to resort to flash sales and heavily discounted promotions to shift inventory in Q4 22. This preserved cash, but with interest payments around the corner, liquidity remains a concern, writes 9fin’s Nathan Mitchell. The bonds are in bargain basement territory, at 52-mid, 28.6% YTM.

It might be finally nappy ever after (sorry for using that pun again) for Ontex, with yet another decent print in Q4 22. Improving mix, cost savings, and management are confident they will be able to meet the 4.75x maintenance covenant when it is retested in June (waived in 2022). 

Moving onto private situations, it looks like Laberyie’s goose might be about to be cooked. The French fine foods producer has been struggling with increased input and labour costs, but as 9fin’s Laura Thompson reports, they are sitting ducks, as increased salmon prices and bird flu weigh, and as liquidity diminishes, there is need for further funds to rebuild inventory. A covenant waiver is likely, as lenders gear up for a potential restructuring. 

French funerals operator OGF is struggling to grow EBITDA to refinance its TLB which is due in October 2025, after a protracted A&E process in late 2021. Leverage is 6.41x through the senior and 7.42x through the PIK provided by Rothschild’s Five Arrow’s private debt fund, writes 9fin’s David Orbay-Graves. Cash burn (or should that be cremation?) is also concerning. 

What we are reading/watching this week

Most of this week was spent reading through investor presentations and listening to conference call transcripts. There was also a cursory look at Central Bank statements which sought to reassure markets about the health of the banking sector, while at the same time trying to sound hawkish about reducing rates by year-end. 

9fin’s internal transcript tool is impressive, but a heavy accent can sometimes trip it up, sometimes with hilarious results. I particularly liked the one for Haya Real Estate:

“This process has entailed the repayment of 55.5 million euros to moth haulers and the issuance of a new bond for an amount of 368 million euros, maturing in November 2025.”

And after the company had delivered its presentation: 

“Thank you very much for your time and attention, and now we can move to the kidney.” 

As a republication with a royalist fiancee, I will be avoiding the coronation this weekend and catching up on my reading instead. 

High on my list is Hindenberg Research’s short-seller report on Carl Icahn’s holding company Icahn Enterprises — The Corporate Raider Throwing Stones from his own Glasshouse. A ballsy move to take on the renowned corporate raider and his close financial relationship with Jefferies and my old boss Rich Handler. For those who don’t have time to read the lengthy report, the FT has a good summary here.

I will also be doing more reading on Groupe Casino, and working out potential further angles (our legal team is working on an update too). For those who want to know more about Daniel Kretinsky, the second largest shareholder, who is seeking to inject up to €1.1bn into the group, there is an excellent interview in Le Point.

As the local council elections come in, a message to conservative voters spotted in the shires (h/t professor Cary Cooper)

And finally, its been quite a week to be a Brighton fan. We feared the worst for our tired team as RDZ rested our biggest stars for the home game against Wolves, but in our best performance of the season, we won 6-0 and were 5-0 up after 48 mins.Some of the goals are belters, especially the third, with Pascal Gross’ impression of Le Tiss.

It got even better last night, getting FA Cup Semi revenge against Manchester United with a 99th minute penalty to win 1-0. Well worth getting home at 12.30am for. We go sixth, with games in hand, and have a long-shot for the Champions League. Next up is Everton at home on Monday.