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Chris Haffenden

Before all the hype over Crypto and ChatGPT, we had similar excitement for the digital revolution. 

New technologies would lead to much more productive businesses leading to a new economic super-cycle. The move towards e-commerce would lead to asset-lite businesses with no need for costly HQs and bricks and mortar showrooms. Companies with the best new ideas, first mover advantage and having the slickest websites, would be the winners that take all in the new digital world.

Corporates embraced the digital revolution in their droves, spending huge sums and building out specialist teams in the 2010s. But most digital transformations were a disaster. Blake Morgan wrote in Forbes magazine in 2019 that a staggering 70% of digital transformations fail, with many failing to integrate with existing company architecture. 

Most thought digital transformation was just infrastructure and IT. "It's not. It's about the company culture, it's about DNA, and it's about business models,” said Antony Edwards from PSG (growth equity, not the home for galactico footballers) in a recent article in TechTarget. 

“And if you don't approach it from that kind of business and customer experience perspective, it's going to fail," he cautioned. 

The retail sector has seen enormous growth online, which has transformed the way we shop forever. The failure to adapt to the digital revolution has arguably led to the demise of household names such as BHS, Wilko and Debenhams. 

At this time of year, online shopping certainly relieved my festive stress — I max out at two hours of high street shops — before searching for a man creche (also known as a pub). 

The digital revolution has certainly created some retail behemoths. 

Amazon is the biggest beast on the retail savannah and an arch predator, producing turnover greater than the GDP of many G20 countries. It still struggles to generate FCF despite Jeff Bezos’ fixation with it, but having at least some FCF arguably saved it during the dot com crash from Webvan’s fate.

Its FCF and margins were much less than bricks and mortar stores (the logistics and delivery costs put paid for that) for decades and it wasn’t until 2020 that it finally matched Walmart’s numbers. 

But the main reason for Amazon’s continued success was its focus on reinvesting in the business, and while it dominates online retail, most of its profits come from new ventures such as AWS and Alexa, not deliveries. 

Investors have lost a lot of money over the years searching for the next disruptor, but very few have grown to a similar size. Even Uber and Tesla flirted with bankruptcy before getting there. 

This year, we’ve seen a number of businesses that were floated at stratospheric valuations come down to earth. 

Put simply, many of their business models and projections were just too farfetched.

Some even ended up borrowing via European levfin, how have they fared since issue?

The Hut Group had a market capitalisation of £5.4bn when floated in September 2020, but is valued at just £1bn as at yesterday’s close, with activist shareholders pushing for a break-up. 

Late last year it raised a £156m 2025 TLB via a subsidiary, which temporarily primed the existing £600m 2026 TLB, leading to a downgrade by Moody’s and an explainer from our legal team on how the company managed to incur the additional debt under the docs. 

A former stock market darling, THG had bet big and early on digital retailing and wowed investors about the potential of its Ingenuity e-commerce platform. But it has arguably failed to deliver on its investment. 

THG is forecasting £120m of EBITDA for FY 23, as the beauty division returned to growth in August after being held back by short-term global de-stocking. It cited a number of key wins and strong pipeline for its Ingenuity division, which the company says is a proprietary complete e-commerce platform that powers digital experience and retail for its own brands and is also a third-party e-commerce solution. 

But performance from Ingenuity has been disappointing, with THG now seeking to pivot to larger enterprise clients and exit a number of existing deals. THG is yet to generate sustained cash flow, and Moody’s has adjusted gross leverage at over 8x, coming down to around 6x by the end of 2024, when its RCF comes due.

One questioner on the H1 23 conference call summed up THG very well:

“But you’ve got half of your capex each year on intangible assets, which I think relates to Ingenuity. But if anything, Ingenuity I think reached its peak in 2021, and has been declining even after you strip out the kind of non-core and contracts you are trying to exit. So could you help me understand how you spend over two, four, six or seven hundred million of capex [in total] without any obvious EBITDA benefit from Ingenuity and kind of other growth?”

Ocado had a market capitalisation of £15bn when the pink un turned its attention to its cash burn in July 2020, noting that a cool £574m had been toasted since its IPO in 2010. As I wrote in the Friday Workout in October 2021, I didn’t hold back on my criticism of the HY deal — upsized £500m of SUNs paying a whopping 3.875%. 

Sure the LTV was 9%, and the food delivery business was producing okay profits. But the bonds were secured on Ocado Solutions — a smart platform providing “an end-to-end solution enabling existing grocery retailers to build their online offerings.” 

This division was set to become the Microsoft of Retail according to James Lockyer at Peel Hunt (in 2018), who gave it a lofty £10bn valuation. 

Yes, the market was valuing Ocado as a tech business, but unlike Microsoft it wasn’t flush with cash. The new platform required hundreds of millions of capex to pay for their robots (subject to multiple litigations from competitors) and a huge investment in infrastructure and warehouse space, with very few captive advance orders to mitigate the risk. 

As I said at the time, it was HY as Venture Capital funding. Worst still, over 90% of revenues and 97% of the EBITDA sat outside the restricted group. 

Fast forward to today, the market cap is down to £6.2bn and the bonds yield just below 10%, after hitting 14% at one point. The Ocado Solutions business finally turned EBITDA positive in the first half of 2023 generating £6m of EBITDA compared to negative £102m in FY 22. 

The bubble was already close to bursting for grocery delivery businesses when Delivery Hero issued its $825m and a €300m TLB in April 2022 with the latter pre-placed to Apollo — it was marketed as ARR (annual recurring revenue) financing — as the business was very EBITDA negative, but revenues were growing strongly. 

As 9fin’s former colleague and podcast starlet Kat Hidalgo commented in her analysis piece Delivery Heroics in summer 22:

“…negative EBITDA is a dish best served with measure and balance and management was keen to be realistic in their expectations. They have dropped their forecast for their adjusted EBITDA/GMV margin to -1.6%, down from 1.5%, pro forma for the Glovo acquisition.”

GMV or gross merchandise value is an interesting concept, and is presumably there as an inflated alternative revenue measure. DH explains it is the total value paid by customers, including VAT, delivery fees, “other” fees and subsidies and excluding subscription fees, tips and delivery-as-a-service fee. Management forecasted it to grow it from €35.4bn in FY 201 to €250bn-300bn by 2030. For those who prefer revenue under IFRS 15 it sat at just €6.6bn in 2021.

DH has failed to live up to its lofty forecasts, but it did manage to generate positive EBITDA for the first time in H1 23, albeit a mere €9m, with €250m forecast for FY23. It had burned €897.8m of cash LTM to June 2023, but hoped to be FCF positive by year-end. 

The term loans remain above par, but this week the shares resumed their downward trend after it announced it will close hubs in Taiwan and Turkey to cut costs. 

The company tried to put a positive spin on it:

As Bloomberg noted earlier this month, Just Eat, Delivery Hero and Deliveroo have lost 75% of the market cap ($50bn) since their September 2021 peak. 

And post the layoffs announcement, there was further bad news as South Korean President Yoon Suk said he would step up enforcement against e-commerce companies, naming Delivery Hero’s Wooha Brothers amongst others. 

South Korea is their largest market, and Delivery Hero shares fell 10% yesterday to give a market cap of €6.94bn, compared to a peak of an incredible €41.09bn in April 2021. 

Earlier this week, I was pinged by an advisor keen to advertise their role in the FarFetch restructuring, announced earlier this week. The impression given was many late nights to get the rescue for the London-headquartered and NYSE-listed luxury online marketplace over the line. 

Not a fashionista, I completely missed its fall from grace. So, before we pick apart the deal, which to me is one of the more interesting deals of 2023, a quick summary of events:

Another company keen to highlight GMV rather than revenues, FarFetch was valued at $6.2bn just over five years ago when IPO’d. Founder Jose Neves sold himself to investors as a tech entrepreneur with a taste for fashion and with a contact book full of industry giants. His idea was for an online marketplace for luxury goods with technology that could be licensed to third-parties. It claims to connect consumers with 1,400 brands, boutiques and department stores.

The shares plunged over 40% in August after a poor set of Q2 results, projecting $4.4bn of GMV for 2023 (down from $4.9bn). To bolster liquidity it issued a $200m add-on to its $400m TLB and embarked on a series of cost cutting measures, with the aim to break even in 2024. 

But just weeks later, on 28 November, in a very short statement the company said that it would not publish its Q3 results and withdrew previous forecasts and guidance amid concerns about liquidity runway, and aborted tie-ups with partners such as Richemont. Despite this, there remained plenty of industry talk that the founder was seeking to take the business private financed by some of his powerful friends. 

With the shares now worth a fraction of their former value, ratings agencies expressed concerns about the company’s ability to raise further funds and cast doubts over the sustainability of the capital structure. The market cap was $4bn when the TLB was issued in September 2022, compared to $300m when Moody’s downgraded the CFR to triple-hook on 12 December.

Okay, so what was the deal announced earlier this week? And what is interesting about it?

Korean e-commerce giant Coupang together with its financial partner Greenoaks are providing a $500m bridge loan paying 12.5% PIK and due on 30 April 202, and issued out of a new TopCo. For more detail, see the SEC filing here

But that isn’t just a rescue financing, it is also a route to taking control of the business. 

A sale process is being run by JPMorgan. If the bids do not cover the existing debt and the new bridge, the business will be sold to Coupang/Greenoaks via a English pre-pack sale (run by AlixPartners) to the TopCo with FarFetch limited being left behind. The bridge loan will be fully equitised. 

So, in effect the sales process is being run to confirm the impaired business value and provide a support argument for the pre-pack. The 30 April maturity provides the burning platform. 

With materials already in place for past aborted M&A, the process should be relatively short, says my source. The timeline is more driven by regulatory and anti-trust approvals, he adds. 

Why are the Koreans interested, what is their relationship with Greenoaks?

According to my source, the Koreans see value in the platform and are seeking to target Asian markets, with strong synergies with its existing e-commerce business. Greenoaks is an existing investor in Coupang. The parties haven’t disclosed their equity splits in the TopCo JV. 

An ad hoc group of TLB lenders representing 80% of the debt have signed a transaction support agreement (TSA) under which they will any waive change of control and release security over the shares and assets in the event of a pre-pack sale. An offer will then be made by Coupang to repurchase 10% of the term loans, post transaction. 

According to my source, the lenders have agreed to roll their debt into the new TopCo in return for being de-risked. The TSA forbids them from entering into a competing transaction. 

And in the term sheet, there is a route to repayment as under the terms of the TSA, $125m of Italian VAT receivables are placed into a segregated account and to be applied to the term loans on an agreed schedule. Asset sale and dividend language is also tightened up. The AHG are getting some chunky fees (7.5% of the outstanding principal amount of their holdings) too. 

The $300m convertible bond issued to Richemont as part of the Chinese JV would be left behind in a pre-pack sale as an unsecured claim. The two parties have agreed to terminate their JV agreement, and Richemont has already said that it doesn’t expect the convertible to be repaid. 

Following the pre-pack, FarFetch will be delisted from the NYSE, leaving the equity (including the founder B shares, 17% of the total equity, but with 70% of the voting rights) with a bagel. An incredible destruction in shareholder value, over $6bn in five-years. 

And I almost forgot, who were the advisors burning the midnight oil?

Latham represented the company; Kirkland & Ellis represented Greenoaks Capital; Sidley Austin represented Coupang, Milbank represented the Ad Hoc Group of Lenders to Farfetch with AlixPartners lined up for the administration pre-pack.

I am a fan of Hindenberg Research short-seller reports. As well as providing insight and exposing scams, they are also great entertainment value. 

Who can forgot their expose of Nikola’s truck stunt, showing the prototype the Nikola One running under its own electric power on a public road in the Arizona desert? The company was subsequently forced to admit that it had the truck towed to the top of a hill on a remote stretch of road and simply filmed it rolling down the road.

And in these pages, I previously highlighted excerpts of Hindenberg’s short-seller report on Tingo, Fake Farmers, Phones and Financials — The Nigerian Empire that isn’t — released in April. The follow-up letter to the board with 38 questions was damming:

I had published the above mostly for entertainment value, but if true it was clear this was a massive (and obvious) fraud — certainly plenty of evidence in Hindenburg’s tweets this summer.

Tingo Inc incredibly had a market cap of $7.23bn at its peak last year, and its founder Dozy Mmobuosi was bidding to buy Sheffield United last summer.

But this week, prompted by the Hindenberg report, the SEC issued an indictment against Dozy Mmubuosi et alalleging massive fraud.

“The complaint alleges that Mmobuosi and the entities he controls have fraudulently obtained hundreds of millions in money or property through these schemes, and that Mmobuosi has siphoned off funds for his personal benefit, including purchases of luxury cars and travel on private jets, as well as an unsuccessful attempt to acquire an English Football Club Premier League team, among other things,” states the SEC release. 

Tingo has been well and truly tangoed by the SEC.

And the auditors,Deloittewill be certainly under pressure for this:

In the complaint, the SEC said that Mmobuosi refused to give full bank statements, instead giving just a single one-page screenshot for Tingo Mobile which the SEC said was a transparent forgery “crudely doctored by super imposing credits and debits onto real bank statements…” The aim was to show deposits and withdrawals in hundreds of billions of Nigerian Naira.

In addition to acknowledging the excellent sleuthing work of Hindenburg, chapeau to the FT for flying out to Nigeria and Dubai in May to quiz Tingo staff. 

And for discovering Tingo’s executives include Chris Cleverly, a cousin of the James, UK Home Secretary. According to his chambers, he has experience of working on white-collar fraud and organised transactional crime cases. 

Perhaps, if convicted, ‘on’ may need to be revised to ‘in’! 

While European levfin was in seasonal mode, there was no respite for 9fin’s distressed team with plenty of proposals landing, plus an number of corporate actions and earnings. 

As this edition of the Workout was being finalised, AnaCap, the debt purchaser dropped its restructuring proposal on the last working day before the seasonal break. Our team will be providing a review of the deal later today — the working title is “the Grinch that stole Xmas”. 

Its clear that formulating the proposal went down to the wire, with the RCF maturing next week, a bridge loan to replace it was only put in place yesterday. Arrow is to acquire 51% of the business, with SSNs to get the remainder, with a six-year maturity extension to their existing notes. And by our rough calculations, post-transaction the LTV will still be 90% — a Xmas miracle. 

There was also seasonal cheer for Altice SFR, after a €350m private placement SSN due 2007 was announced to part repay its early 2025 SSN maturities. But it came at a price, as my colleagues Ryan Daniel and Nathan Mitchell explained in their analysis piece, more than 200bps cheap to the existing curve, which one investor said was “extraordinarily wide.” 

Why come to market now? They had said that they would use asset sale proceeds and RCF to repay the early 2025 debt. Perhaps to give a signal to auditors over market access ahead of over €1bn of debt about to go current? Goldman Sachs, the placement agent and bookrunner weren’t telling (either on-or-off the record) — apparently their whole team is off this week!

A relief rally for Petrofac bonds after their trading update earlier this week. There was positive news of a second $1.4bn contract with TenneT, the Dutch transmission firm, bolsters the group's backlog — now at $8bn for the year. 

However, on the Q&A session, analysts pointed out that while the growing backlog and new contracts are positive signs for the longer-term, the current balance sheet and weak liquidity and failure to provide bank guarantees for the newly won contracts — an important requirement for Petrofac to receive advance payments from the contracts. 

It was notable that while it was able to secure two performance guarantees, this was only by pledging around $100m of collateral, a situation which management said isn’t sustainable, reinforcing the urgent need to strengthen its balance sheet. 

Troubled German RE firm Demire has announced that it has finally found a new buyer for its LogPark logistics park, HIH. The previous buyer at a €112m sale price pulled out in July, causing a collapse in its bond price. No sale price was disclosed between the two parties, so we will have to wait for the Q4 numbers for us to back solve. For more on LogPark and Demire click here

Troubled Benelux DIY chain Maxeda is feeling the heat after another poor quarter which it blamed on unseasonably warm weather, which dampened demand for heating and insulation products. Its bonds remain one of the worst performers in EHY retail, with its October 2026 SSNs in the mid-70s, to yield just over 17%. 

Another poor EHY performer in 2023 is Consolis, the French building materials firm which has seen its May 2026 SSNs trade down into the high 40s from the mid-70s earlier this year. About to enter our Restructuring Tracker, 9fin’s analysts Alexandros Chatzigiannis and Denitsa Stoyanova have produced a Stressed QT for those who want to get up to speed. 

And finally, I would also recommend reading Owen Sanderson’s piece on Lowell Group’s latest re-performing loan securitisation Wolf 3 and how it helps adapt their business model to a higher rates backdrop. It highlights how our expertise in securitisation can provide insight into some of the more arcane parts of European levfin. 

Wrapping papers were my main focus this week. Not presents, but editing end of the year reviews and online content for 2024 preview (to be produced in early January). 

Essential holiday reading are 9fin’s Distressed year(s) in review — the legal one (don’t worry its light on the legalese) is here — and the Credit one is here

For those who want to gorge themselves over the holiday period on macro forecasting, The Long View has an extensive list of links

Sobering reading is CBRE’s European RE debt funding gap research, which says that it totals 27.5% of debt originated since 2019. 

The biggest pain is coming for offices. Bloomberg illustrates this with 5 Churchill Place in Canary Wharf, the iconic building formerly tenanted by Bear Stearns which is being sold on behalf of lenders. Bids are so low that they are half the rent owned by tenant JPMorgan over the life of its lease, which means they are ascribing negative land value, concerned about investment spend. 

Remember the old days, with just senior secured and junior unsecured debt? Now, we have 1.5-lien tranches (surely this is 2L, pushing the 2L to 3L?) and funky debt instruments and ranking, partly to create something which looks like debt, but is really equity. 

A great example is AMC, which this week is exchanging its Cash/PIK toggle second-lien subordinated notes into equity

It’s been a tough week for Brighton, who were beaten by Arsenal 2-0 last weekend — it would have been five or more if it wasn’t for the heroics of our Captain Lewis Dunk — which means our 32 game scoring streak came to an end.

Hit by a huge injury list, our manager wants 3-4 signings in the January window. The lack of players was evident in our 1-1 draw last night at our big rivals Crystal Palace. 

Yours truly will be at the home game against Spurs on 28 January, and away at West Ham on 2 January. 

Whatever your affiliation, I would like to wish you season’s greetings, a relaxed break (advisors please don’t ruin our break with last minute deals) and the Workout will be back in the New Year.

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