Time for us to blow our trumpet (or should that be French Horn) as we saw this coming. 

The Workout took the lead in late October, taking the short seller’s view. This was followed by an excellent two-part deep-dive report from 9fin’s Denitsa Stoyanova, available to our subs here. 

Since the publication of our last edition of the Workout, the bonds for the French software company (or if you prefer the company’s own description, “a next-gen tech leader in digital, cloud, advanced, computing, AI and security”) fell by almost 50 points into the high 20s.

Source: 9fin data (note the 2024s are convertible notes)

Now that’s cATOStrophic. Bondholders told us in October they were fair value in the 70s!

So what has caused such a bad ATOSmosphere in the bond market? 

Well, it started last Friday, with Les Echos reporting that the demerger deal with Daniel Kretinsky was in trouble. Yep, we sorta knew that, as the company had pretty much said so a few days earlier. It was struggling to agree a deal with its banks, it wanted to renegotiate its deal with Danny K, and was going to have to sell more assets at fire-sale prices, as the likelihood of a successful capital increase was ”quand les poules auront des dents” — when chickens have teeth! 

But the report also said that there were upcoming last chance crisis talks, and a source close said chances of success were less than 10%. This caused a 10-15 point fall in the bonds, on Friday. 

Then it got worse on Monday morning. 

Le Figaro reported that Helene Bourbouloux, who is known to make gnarled battle-hardened distressed professionals quiver and shake with fear (and is why I couldn’t set foot in France for over two years) was approached over the weekend as a potential Mandat ad hoc or conciliator. She’s got 22 creditor banks to corral, with a whopping €1.5bn of debt coming due as early as 29 January. 

Regular readers of our Orpea content will remember that she gave short shrift to the arguments advanced by foreign holders of the unsecured bonds. She has a formidable reputation as a stubborn and hard negotiator. I was told once by a distressed fund manager that she relishes threatening hedge funds with jail time if they disclose anything wider than to those in the room. 

ATOS was keen to stress that a filing wasn’t a done deal. 

The company “has not filed a request to appoint a mandataire ad hoc or to open conciliation proceedings.” But then added it “reserves the right to use available legal mechanisms.” And no denial that they had a chat with Helene. 

Ouch (Aie). 

And there is little time. A burning platform, a raging blaze, as €1.5bn of TLA is due on 29 January. ATOS has the option to extend the TLA by six months twice until January 2025. It said on 3 January 2024 that “the first extension will take effect on 29 January 2024” [9fin emphasis], giving the impression this is a done deal.

However the press release states that “Paul Saleh [the new CFO] will primarily focus on refinancing the Group’s financial debts” suggesting that talks with the banks are still ongoing and an extension may not be automatic.

Aie, Aie. 

And similar to the screenplay for Orpea, this movie could snuff out returns for the unsecureds. The company has previously disclosed to us that under the negotiations it is likely to grant security to lenders, effectively priming the bonds. And there is also talk of a €300m immediate new money need, as free cash flow missed targets, a figure we suspect could grow further.

What about the demerger deal with Danny K? 

ATOS wants to sell its Tech Foundations business to the Czech investor as the stuffee. He is a serial buyer of distressed businesses, appearing to find value in TFCo (and other duds such as Casino) where others cannot. This would be key to deleveraging the business to below 4x, and a path to an eventual refi. Tbf, our Danny is paying a notional amount (but taking on €1.9bn of on-balance sheet and €7.6bn of off-balance sheet liabilities). The deal was initially meant to close by the end of 2023 but the timetable for completion was pushed out to Q2 24, as reported. 

On 3 January 2024, the company said it is still in negotiations with Kretinsky’s investment firm EP Equity Investment (EPEI) “around the price to be paid, the structure of the transaction and the transfer of a very large proportion of Tech Foundations liabilities.” 

The company cautioned that “As with any negotiation, there is no certainty that these negotiations will result in an agreement.”

And that’s the problem. If these liabilities are not transferred, and the proposed asset sales cannot raise enough cash, will the banks will be willing to extend maturities for a highly leveraged business which isn’t generating free cash flow? 

And for two years? That puts them temporarily behind the converts and one of the bond issues. 

Earlier this week, Bloomberg reported that Atos is seeking €500m more from Kretinsky than in the initial terms, which seems a stretch to us. Les Echos reported that “last chance“ meeting with Kretinsky will be held in the next few days, so it appears chances of a deal are fading fast.

Yikes. There’s more info drip feeding into the market as the French press digs, causing yet more declines in the bond prices. 

Some tidbits from BFM on 16 January:

• The French government is at the negotiating table and is represented by Julien Bracq from Ciri (the ministry)
• Main relationship banks are BNPP, SocGen, Crédit Agricole, CIC, Santander and Barclays
• Atos is asking for a two-year extension on the €1.5bn TLA 
• The banks are demanding that the TLA be backed by Atos’ operational subsidiaries — it is unclear whether this is some or all, and the total value of assets to be pledged as collateral
• Atos has asked banks for €500m financial guarantees to cover bad contracts — our interpretation is that further impairments and write-offs are on the way
• €900m capital increase to be scrapped, seeking €300m cash instead — but from who?
• Talks continue to sell its “historic IT fleet management activities” to Kretinsky — we can only assume this is a poor translation and relates to TFCo. 

This could get very political, which never results in a good outcome for les étrangers. ATOS was a national champion and its IT has sensitive defence applications (includes the French nuclear weapons codes, in the Eviden part of the business). Airbus and Thales are expected to pick-off some of the assets, as the French Government carries the shotgun. 

Our gut feel is that this is going down to the 29 January maturity wire, and if the banks don’t play ball, don’t be surprised to see a filing in the Nanterre Commercial Court by the end of this month. 

Incora – taking several steps back 

In our upcoming 2024 European distressed preview — whose deadline whooshed by again this week — we speak about the lack of creditor-on-creditor violence in Europe. 

This is in stark contrast to the US where the practice is rife. Our journalists say that virtually every distressed loan deal with a 2024 or 2025 maturity has the company and a subset of lenders considering an uptier or drop down. 

European pacifism occurs despite similar docs, clever legal advisors and more aggressive credit solutions funds (no-one wants to be a distressed fund anymore) frequently pitching sponsors with uptiers and drop downs, and other funky structures. 

But everyone over here still wants to know about what is happening in the US courts. As one lawyer said to us this week, what can be done under the docs is always part of the negotiations. It is to establish the art of the possible and will be explored extensively by lawyers at an early stage. So, while rarely used, it is still useful to have in your back pocket. 

And with many of these deals being challenged via the courts, the precedent law is developing. 

So, it was with interest when our new global head of distressed Max Frumes posted an Incora memorandum decision from Judge Marvin Isgur on our shared Slack channel. 

Let’s start with what Incora is. It was formed in 2020 by Platinum Equity merging Wesco Aircraft with Pattonair. Not that you would know that from its website, as a “global provider of innovative supply chain solutions.” 

As you know, just providing solutions gives another 5x of multiple expansion.

Incora was one of the more aggressive and clever uptiering transactions and happened way back in the spring of 2022. Our friends at Petition did an extremely useful and entertaining primer on this at the time, which we profiled in a previous Friday Workout. 

The creditor-on-creditor deal was a upgrade on Trimark, one of the first iterations of an uptier, and was done via series of steps. Under the Incora plan, there was $250m of new money, with Silverpoint and Pimco exchanging their 2024 and 2026 SSNs for $1.2bn of new super priority SSNs due 2026 (effectively amending and extending around $450m of the 2024s). 

This counted as new capital in covenant calculations, in order to achieve the consent thresholds needed to perform a series of follow-on priming transactions.

Silverpoint and Pimco then rolled-up their notes (at par plus the $250m of new money) into these newly elevated super priority notes.

To make this happen, Silverpoint and Pimco were given incremental basket capacity (they issued more notes to regain their majority position). They then agreed to amend the baskets under the indenture and strip the liens away from other SSN holders. This paved the way for the exchange of their old notes and newly issued SSNs into the new super priority notes.

Sponsor Platinum also piled in, managing to uptier their 2027 SUNs into new 1.25-lien notes, leapfrogging the minority SSNs.

So, a big multi-step transaction — our recap pre/post chart is here:

But similar to other US uptiers, this didn’t solve the problem, it mostly just reordered the priority of creditors and Incora ended up in Chapter 11 in June last year. 

As Max writes, after Incora filed for bankruptcy, the debtors filed the adversary proceeding in an attempt “to quash an effort by disgruntled noteholders to unwind a transaction that was plainly permitted by the Company’s debt documents,” according to the original complaint.

This moves us onto Marvellous Marvin who is picking up the pieces of the creditor fight from Judge David Jones, after Jones’s scandal-plagued resignation (the fallout we covered here).

As part of Isgur’s decision, he included discussion on the so-called Integrated Transaction Doctrine. The aggrieved 2024 and 2026 noteholders wanted to the court to consider this as one. 

As Max writes: Judge Isgur noted that Wesco/Incora’s argument was that the 2022 transaction should be viewed separately to subsequent deals:

“Wesco asserts the steps of the 2022 Transaction should be viewed separately, not as one single transaction,” Isgur summarised in the decision. “Wesco argues ‘melding the 2022 Transaction into a single agreement would merge separate agreements (and types of agreements governing different things) between distinct groups of parties…’”

He also made it clear what factors the court will ultimately focus on in order to resolve these claims. Here’s the conclusion of his decision (our emphasis):

“Most of these issues will be based on the parties’ intentions. Summary judgment will not be granted.”

The trial started at 9am Central Time yesterday, 18 January. We will keep you informed, but if you can’t wait another week, contact me to get a US trial, our team out there are crushing it. 

Selected 9fin content

English country code

Tele Columbus has managed to get approval for Scheme meetings despite Mr Justice Hildyard being “initially troubled” by jurisdiction for the German TelCo, writes 9fin’s Will Macadam. This was due to the mishmash of New York and English law in its capital structure. But he accepted jurisdiction on the basis that the company’s debts and intercreditor agreement were governed by English law, or had been validly changed to it. A German STARUG was avoided after the equity injection and consequent documentary amendments were done consensually between Morgan Stanley (which injected the equity) and United Internet (which did not). 

A Grand day out

As he would say, a banger, from 9fin’s Owen Sanderson on Blackstone set to close one of the largest CRE debt deals ever seen in Europe, a €7.5bn-equivalent deal for its last mile logistics platform Mileway. 

He references GRAND Deutsche Annington’s multifamily CMBS as one of the few deals that has come close, which priced in 2006, had an original €6.86bn of debt. 

The hiring of restructuring advisors for the giant German CMBS was one of my biggest scoops. Even better it hit inboxes when the special servicer was on a call updating CMBS holders, who were blissfully unaware that they were being structured around. Cue plenty of WTF emails and phone calls!

Putting on the Riz 

We were graced by the presence of Riz Mokal, the eminently qualified South Square barrister in 9fin Towers this week. Riz is one of the smartest minds within the restructuring and insolvency space (and is a former academic and senior counsel to the World Bank). His Cloud 9fin podcast with 9fin’s Will Macadam and Freddie Doust is a must listen, especially for the part where he expresses his views on the rule in Gibbs. 

What we are reading/watching this week

After burning the midnight oil to bring you Grifols last week, and working late on a bunch of important internal 9fin stuff, I had little time and energy this week for much more than going through the odd ATOS translation. So apologies for the lack of content and to my colleagues, for the loss of my sense of humour this week. For those you may have seen it, I can offer a hefty reward for its return. 

Hopefully, post publication, I will have time to investigate the new UK legislation “to facilitate special administration of Water companies.” It’s an interesting move — presumably, it's to make it easier to deal with Thames Water, which, as we wrote in the Shape of Water, could default on its HoldCo debt as soon as April.

The key changes are (i) the ability to transfer the regulated entity via a hive down (to preserve value) rather than only being able to effect asset transfers and (ii) that any amounts / indemnities provided by the government to the regulated entity in special administration come out at the top of the waterfall. Perhaps some learning points from the Bulb special administration to safeguard the taxpayer in the future.

Kate Stephenson from Kirkland & Ellis has an initial assessment on the legal changes here

Also on my read list, another great FT piece on Lars Windhorst and his acquaintances which include our old friend Cedvet Caner of Aggregate and Level One fame. 

As the Nasdaq retests new highs, while Chinese and Asian tech stocks crater, a reminder in today’s markets on how to drive Alpha:

Brighton are still in their winter training camp in Dubai, but I still have some club news. 

Their Under 21s (which they flood with academy players) are just two games away from the final of the EFL trophy. This will be the first time ever that an Academy side have done so. 15-year old Harry Howell (pictured) scored the winning penalty in the shootout against Reading. 

As the website We are Brighton notes:

“When you then consider that players like Hinshelwood, Jeremy Sarmiento, Julio Enciso, Evan Ferguson, Facundo Buonanotte, Carlos Baleba and Ansu Fati are also eligible for Under 21 football, you realise just how bright the future is for Brighton.”

The seniors are next up on Monday night at home to Wolves, my son Charlie is in the press box.