And this week’s distressed coverage is brought to you almost entirely by the letter A. 

Not only did we have the long-awaited Adler Group hearing in the Court of Appeal, we also had legal shenanigans at its real-estate peer Aggregate Holdings to pick part, and initiated coverage on fallen angels, ATOS and Aroundtown, plus published a series of legal Q&As for Altice. 

If that wasn’t enough A-listers, we also had leads to chase down on Accolade Wines and Arvos. 

What’s the alternative for Adler? Applying the theory of relativity

But the main screening was in the Court of Appeal for Adler Group — for those who want to watch the entire series back-to-back — the Court of Appeal video nasties are here.

An ad hoc group of Adler Group 2029 bondholders (2029 AHG) brought the appeal — heard in front of Lord Justices Nugee and Snowden, and Sir Nicholas Patten. It pitted South Square’s best against each other — Tom Smith KC for the 2029s, Daniel Bayfield for the company. 

The appeal relates to Adler Group's UK Restructuring Plan (UK RP) which was sanctioned and implemented earlier this year, creating some disquiet among practitioners given its departure from the pari passu principle in liquidation — the relevant alternative to their UK RP. 

The bondholder group lists eight interlocking grounds from appeal, saying the judge erred in matters of law, and failed to properly exercise his discretion, but the crux of their argument is:

• The most likely alternative to the restructuring plan was a liquidation of the group (this was common ground)
• If that happens, all unsecured group claims would rank pari passu
• The company departed from this under the plan, but can't do that without justification; the 2029 AHG asserts there was no such justification.

9fin’s Freddie Doust was present for the three-day screening marathon, and produced a series of end-of-day summaries, here, here and here. 

We won’t reproduce all of the main points in the Workout, but our key takeaways were as follows:

The lens of the relevant alternative is an important concept in Scheme and UK Restructuring Plan land, and it runs deep through the legislation. In short, it's what's most likely to happen if a scheme or plan fails. For Adler Group it's common ground that it's a liquidation, and also common ground that there was unequal treatment between the classes, but was it fair? 

In sanctioning the plan, Justice Leech viewed the risk the 2029s were shouldering under the plan through the lens of their contractual rights. That's to say, he weighed those positions and determined that, on balance, the risks they were taking on under the plan (which departed from the pari passu principle under the relevant alternative) were low and the upside was much better, meaning it was appropriate to sanction.

But that's the wrong way round, Snowden said. You need to look at what the 2029s are getting under the plan — a riskier position — and weigh that against what they would get in a liquidation (the relevant alternative) — ie pari passu treatment. Snowden's view was that that divergence must be justified through that relevant alternative lens.

What is fair? In exercising its discretion to cram-down a dissenting class, once the jurisdictional hurdles have been surmounted — the dissenting class is no worse off under the plan than the relevant alternative and which one in-the-money class has approved — the court must determine whether cramming down the dissenting class is fair. This question around fairness was central to the broader debate, and the appeal court judges had a fair amount of sympathy for Smith’s view that a majority of votes across the classes should not form part of the fairness debate. 

No worse off, or much better off? Justice Leech put far too much emphasis on the satisfaction of the 'no worse off test’, Smith argued. Leech, in one breath, said that there was no presumption of sanction where the test is satisfied, but then seemingly did not follow his own guidance. It is just a jurisdictional threshold which must be satisfied before moving on to determine whether it is fair to sanction — rather than something which itself feeds into the fairness analysis, he argued. 

Bayfield agreed there is no reason to sanction just because the no worse off test is satisfied. But it is a relevant consideration, he argued, and it is not merely a case of the creditors being no worse off — on the balance of probabilities, they will be repaid in full and will be much better off.

Divergence from pari passu treatment — why should security be granted to the 24s and not the other SUNs? The new money negatively effects the 2029s (maturity wall in 2025), why are shareholders retaining equity given that bondholders are bearing all the risks?

Lord Justice Snowden made a number of important points:

• The no worse off test is just a jurisdictional gateway; it is not sufficient for the purposes of fairness.
• Clearly nobody wants the relevant alternative to happen. The difference between the relevant alternative and the plan realisations is the ‘restructuring surplus’. The heart of this question is, what is a fair allocation of that surplus — and any risks attaching to it 
• It follows that if you are doing anything other than what would be the result in the relevant alternative — pari passu treatment — there needs to be some reason for that
• Crucially, the explanatory statement (given in advance to creditors to assist) does not deal with the fact that there is a deviation, and what the risks connected to that deviation are, in any great detail. All the appeal court judges took issue with this

What do the AHG want to achieve?  At the end of Tom Smith’s submissions, Lord Justice Snowden asked the question all of us wanted to know from the outset — if successful, what do the 2029s want to achieve?

Smith said the AHG would like the Court of Appeal to set aside the sanction order if successful and then:

• The SUNs will revert to their unamended form before the sanction order, and the SUN holders will be entitled to accelerate on the basis of the negative pledge breach 
• Elements of the restructuring which were extrinsic to the plan — i.e. the new money injection — will need to be worked through by the company and the group

Effectively this brings everyone back to the negotiating table. But around €800m of the €935m of new super senior money was disbursed to repay the Adler Real Estate 2023 and 2024 bonds and are likely to remain in the debt stack. In any event, the Adler RE bonds were structurally senior, their repayment removes near-term maturity risk. 

The question is how to apply the pari passu principle if the court directs that it should be applied. One option is harmonisation of maturities into one, with sale proceeds paid pro rata. Or keep the old maturities in place and find another mechanism to repay the debt with the same effect.

Snowden slams short schedule

As Freddie Doust reported earlier this week, Lord Justice Snowden took some time before lunch on day two in making clear his views around how it is unacceptable to hold the judiciary over a barrel and say: sanction this plan in the extremely tight timeframe we require, or there is armageddon.

As I remarked in my Adler coverage of the convening hearing in February:

“Given the lateness of information disclosure to the 2029 AHG group by the company and their advisors, most of the substantive issues, including some which are normally heard in the convening hearing, were shifted to sanction hearing stage.” 

And as I reported at sanction hearing stage:

“…the sanction hearing had a tight three-day timeline, further compressed by evidence submitted late on day two. This meant that closing submissions were compressed, with both sides preparing written notes to assist the judge, and the main points were rattled through during last Wednesday afternoon, with the hearing ending just before 6pm.”

I went on to say:

“Leech’s ruling was driven by a hard deadline of 12 April, to allow Adler Group (the co-guarantor) the nine business days necessary in the event of a confirmed plan to release funds to repay Adler Real Estate 2023 notes due on 29 April.”

In the present case, given the complexity of the matter, and the extensive expert valuation evidence presented, significantly more time should have been allotted, Snowden said on Tuesday. He went on to say that it cannot have been government’s intention that the courts would have to sanction unfair schemes or plans because everyone would be worse off otherwise, in the armageddon scenario. 

He asked Bayfield to take him back to the convening hearing and explain the back and forth on the timetable. Bayfield said that he didn’t take over the case until sanction and therefore he was unable to help (surely he would have known this was one of Snowden’s hobby horses and this issue would have cropped up, and been prepped ahead of the appeal?). 

I’m 100% in agreement here with Richard Snowden. 

To me it was clear at convening hearing stage, that the company was deliberately exercising time pressure; it could have brought the case much earlier, if it wanted to. And in any event, there appeared to be no attempt to secure forbearance from the Adler Real Estate 2023 bondholders (which they were likely to grant for a fee) to allow more time. 

It is worth noting that Adler had reached agreement over an outline restructuring and had commitments to new money way back in November 2022. It secured consents from most of its bondholders to amendments on 20 December, with just the 2029s voting against. At this point they had expressed a high level of confidence over an alternative implementation route. But the convening hearing for the UK RP was more than two months later. 

At the end of the three-day appeal, Lord Justice Snowden requested a full chronology; as Freddie notes, presumably to better understand how badly the court was jammed when requested to sanction the plan in the compressed timeframe back in April. 

Snowden is fixated on this point. We anticipate significant discussion on it in the judgment, to be handed down remotely. It will likely be some weeks before it arrives.

Atos’ digital transformation

The next-gen tech leader in digital, cloud, advanced, computing, AI and security, says Atos on its website. Some of its recent press releases appear impressive, such as the launch of its Generative AI Acceleration Program.

This is the image that Atos is trying to sell to its equity (and bond) investors, who have taken a quite battering in the past couple of years. The French tech group has a plan (outlined in the summer of 2022) to offload its troublesome Tech Foundations business (along with significant liabilities) and drive growth at the new Atos, enabling it to refinance bonds coming due in 2025, which are in the 70s, and yielding over 20%, and remarkably are still rated investment grade.

Luckily, it has found a stuffee, Daniel Kretinsky, the serial buyer of distressed businesses, who appears to find value in TFCo (and other duds such as Casino) where others cannot. He is paying a notional amount (taking on €1.9bn of on-balance sheet and €7.6bn of off-balance sheet liabilities) and part subscribing to a €900m rights offering at Eviden — the €5bn spin-off, focusing on professional services, bringing together the digital, big data and security divisions. 

For more on the spin-off plan, our update piece is here

Eviden would be around 4x levered post spin-off, and is projected to de-lever to 3x in FY24. Atos says that it has a provisional BB- rating. So why are the bonds trading at such distressed levels? 

We got some answers recently from a short-seller of the equity — we caveat that this might not be the most objective view — but it does help frame the risks. 

Firstly, we have the cash burn, at over €1bn in the first half. On a more positive note it is estimated to be flat in H2 23, and will come in under negative €1bn for FY 23), but this is much higher than analysts had expected at the start of this year. 

And that wasn’t all. In the first half earnings call investors were told there needed to be around €1bn of working capital normalisation as part of the TFCo deal — effectively Atos was asking customers to pay early and pay suppliers late over the reporting periods to boost the figures, and despite this, still recorded a €1bn cash outflow! 

To fund the working capital normalisation, Atos will seek to raise €900m via a rights issue — led by BNP Paribas and JP Morgan (underwriters of sorts) with Kretinsky subscribing for €180m to give him a 7.5% share stake in Eviden. 

But why does it need the cash? It had a €2.6bn cash balance as at H1 (it didn’t give a figure on the Q3 update). It admits some cash is trapped at foreign subs (without giving a quantum) with cash reserved for a litigation award in favour of Cognisant (to the tune of $570m). 

And with the share price a shadow of its former glory and shareholders in litigation mode, getting the rights away won’t be an easy ask. The ‘underwriters’ — how firm is their support? — they may end up owning a lot of the stock, or it may offer short sellers a means of covering. 

In addition, €1.9bn of off-balance sheet liabilities such as reverse factoring came back onto the balance sheet during the first half. Analysts doubt the double-digit EBITDA growth forecasts touted by the company. It's looking mid single-digits at best. 

And while this is going on, Atos is negotiating with the banks to extend €1.5bn of term loans. These were used to repay commercial paper, a route not open to it, given that it expects a BB- rating post spin-off. The banks are likely to want security (easy as the IG bonds just have a negative pledge) and reduce their exposure, suggests the short-seller. With leverage projected to hit 4x at FY 23, it will bust the 3.75x leverage coverage in December. 

You also have to add execution risk into the mix. The (delayed) deal is politically sensitive, given Atos provides IT support for the French nuclear deterrent. If the spin-off fails, you have a highly-levered business which is impossible to refinance. There are certain similarities to Orpea, with BPI France mooted as a potential investor, and banks seeking to grab security and jump the priority queue in the event that the group might have to be restructured further down the line. 

We are keen to get in front of Atos in the coming weeks. Talking to distressed funds, they think that the 25s are fairly valued in the low 70s. 

In (not so) brief

Sticking with the letter A, Aggregate Holdings is Fürst up in this section. 

The Berlin development project of the same name is being taken over by senior creditors, after the loan against it went into default. On 17 October 2023, Bloomberg reported that credit fund Fidera was among the senior creditors backing Fürst’s restructuring plan, set to be implemented via a UK process (we assume a UK RP, more on this below). Junior creditors to the project failed in their attempt in the Lux courts last Friday (20 October) to put the LuxCo sub into insolvency (there is another junior case today). 

As 9fin’s Bianca Boorer writes, this is the third key asset it has lost this year as it struggles to refinance debt at its development projects, with its last remaining assets also in default. We are intrigued to find out how Aggregate retains an equity stake — Fürst in, last out? (sorry for the dad joke). The seniors are putting in €150m to complete the project, so what is Aggregate contributing? 

We assume UK RP will be used to cram the juniors, and with no absolute priority rule, the shareholders could get the chance to retain a piece. We won’t have long to wait for the answer, it's scheduled for 1 November — unless something untoward happens in Luxembourg today. 

Ever since, Patrick Drahi’s presentation to Altice International lenders, where he said that absolutely everything is up for sale (at the right price) there has been investor concern about potential leakage to Altice France. Our legal team have produced excellent Q&A pieces for each (International here, France here) and today, 9fin’s Nathan Mitchell has released an in-depth analysis which looks at the sum of the parts at Altice International, debunking some of the values being touted in the press. A must read, we will go into more detail in next week’s Workout.

As 9fin’s Emmet Mc Nally writes in his intro for Aroundtown, the name “has been on 9fin’s radar for some time despite its investment grade (IG) rating placing it outside of our main scope, for now. That’s because it’s been one of the real estate names mentioned most to us, owing to its large exposure to structurally weaker commercial properties, the stressed trading levels of its cap stack and concerns around governance and key stakeholders.”

Not only that, it has some actors in common with other 9fin real estate companies such as Vivion, as Emmet outlines in part one. The cast list is shown below. 

Part one deals with its convoluted and complex corporate structure, with part two looking at its vast cap stack (the biggest cap table we’ve ever undertaken) and its looming maturity wall, before moving on to the credit profile, financial metrics and KPIs.

Accolade Wines is decanting a restructuring proposal which will result in its debt being fully equitised in exchange for 100% ownership by lenders, as we reported earlier this week. Part of the debt will be reinstated at Holdco level, but the amount of debt that will be reinstated is still being discussed but a substantial haircut is expected, a source close to the situation told 9fin. 

The Carlyle-backed Australian winemaker has a £301m term loan B due 2025, an AUD 150m (£78.2m) RCF due in May 2024 and non-current bank debt of AUD 526m (£274.1m) and current debt obligations of AUD 114m (£59.4m), according to its FY 22 statement.

And finally, in a departure from the first letter of the alphabet theme, some other 9fin coverage of note:

While other cruise operators such as Royal Caribbean and Carnival have recovered well since the pandemic and have been frequent travellers to the bond markets to refinance expensive bond debt, Hurtigruten is proof that a rising tide fails to lift all boats. 

As 9fin’s Denitsa Stoyanova writes the Norwegian cruise operator was recently downgraded by S&P on liquidity and covenant breach concerns. This move hardly came as a surprise to us at 9fin. Running out of cash is nothing new for Hurtigruten, it is reliant on its sponsor TDR Capital to drip-feed in support, as and when it is needed. But after putting in over €265m of shareholder loans, it recently changed tack by providing another €62m of liquidity, but this was via asset based lending. This should help with interest payments and capex, but we estimate there is a €85m funding gap for 2024, with its February 2025 bonds (backed by two of its newer ships) going current early next year. 

Another interesting TDR company is Stonegate, the UK pubs group. My colleague Owen Sanderson produced an excellent analysis this week — Crafty Option, or just dregs – which as well as being a rollicking read, outlines the choices available for the group, which has £2bn of high yield bonds maturing in 2025, yields in the high 12% range, and negative free cashflow. Its options are restricted by the presence of a whole business securitisation into which it had to drip cash into the structure. 

Owen says the choices boil down to the following:

1. Hope something turns up; clear EBITDA improvements in 2024-5, better UK macro, investors suddenly hog-wild for sterling HY credit, inflation disappears and rates slashed
2. Sell assets and use the proceeds for deleveraging
3. Prime existing bondholders
4. Break open Unique, and see if refinancing the whole business at once works better.

Difficulties in selling a 1,000 pub portfolio has led to Stonegate resorting to putting the assets into an SPV and inviting private credit lenders to have a seat at the bar. If it can raise £600m against the pubs it does help with the refi needs, but takes away a lot of collateral from the SSNs, and doesn’t move the dial much on its deleveraging plans. Performance is far from Stella, and next year Stonegate must renew its beer contracts. Collapsing the securitisation might be key. 

Another UK borrower, which needs to find a way of unlocking value to refinance its debt is TalkTalk. Disappointing proceeds from its B2C sale and uncertainty over its demerger have led to bondholders organising and appointing advisors, reports 9fin’s Bianca Boorer. 

What we are reading/watching this week

Most of my reading and watching this week was related to Adler in the Court of Appeal, so the list is skinnier than usual. 

I have also been reading up on Converts (I was, in a past life, a busted converts trader), hybrids and preferred equity for an internal Fireside for 9fin-ners. Watch out for an equity-linked Workout piece in the coming weeks, where Bloodbath and Beyond death spiral converts, may return. 

For years Germany’s economy has benefited from the troubles of the rest of the Eurozone, but as the FT’s long read outlines this week, its economy is stagnating, whereas almost every other country in the economic block is growing. 

We are loving Moody’s new disclaimer:

As Wordline tanks, Johannes Borgen makes a good point about the FinTech payments sector, their valuations and crazy total addressable market claims:

I’ve always been attracted by the thought of living in New Zealand, but this has changed my mind. This is my idea of hell on earth — speaker battles, playing Celine Dion. 

Finally, a mixed week for Brighton. A credible 2-1 loss at Man City, but with a likely ACL injury for Solly March who has impressed of late as a makeshift left back. 

But last night, a cracking 2-0 win against four-time Champions League winners and perennial Dutch Champions Ajax last night in the Europa League. Some disrepectful Cruyff turns from Pascal and Mitoma, the result wasn’t unexpected, and was almost too easy. 

A reminder of how far we’ve come: in 1995 when Ajax were winning their fourth European title, we were firmly stuck at the bottom of the English second division.