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Chris Haffenden

Markets emerging from a bear period are often said to trade on a wall of worry. While ongoing fears are real and not imagined — such as the health of US banks after the collapse of SVB and First Republic — and now the US debt ceiling talks, they can still rally notwithstanding.

As my former head of trading at Barclays Capital liked to say: “Armageddon rarely happens.”

It can pay to take the other side when others fear the worst, especially if there is significant price dislocation. For example the recent blowout in US Government CDS spreads, and the purported 7% yields on offer for very short-dated US T-Bills. 

But not all events have to be cataclysmic to have deep impact, there are plenty of fat tails and risks that are not normally distributed, nor symmetric. As Nicholas Taleb says in Fooled by Randomness, when picking up pennies in front of a steamroller there is a small (but highly damaging) chance that it might flatten you.

This bear has been surprised by the sudden reawakening of risk markets this year, and their resilience to bad economic news amid a number of emerging crises. In hindsight I had underestimated technical factors. I still think there is a risk of wider spreads, but I recognise the direction of prevailing winds, and have been primed for a breakout for a while now. 

But rather than seeing a renewed Bull market for risk assets, it’s turned into a Bored market.

Arguably this is no bad thing, as some of the big market distortions are unwinding and we are finally seeing some normalisation in pricing. For example, the bonkers euphoria around H2 23 rate cuts, acute pessimism around growth in the US and Europe, and perpetual pivot predictions.

OIS curves are now forecasting less than two rate cuts by January 2024 in the US and for two more hikes for Europe. Two weeks ago, they were expecting 100 bps of cuts in the US, and for European rates to be lower. And in the UK, some forecast terminal rates of 6% (remember the Bank of England signalled 4.5% tops after it mopped up the LDI mess after the Truss-ter-f*ck). The sick man of Europe, UK 10-year Gilt yields are over 50 bps higher on the week, at 4.375%. 

Are we are in for a period of slow growth, with a shallow recession at worst and/or stickier and higher than inflation than first thought? Think Stag, not Bull or Bear. That may mean elevated rates for longer, a return to historical level of defaults and less abnormally high returns. 

However, a new paradigm is always being peddled somewhere. The latest frenzy around AI has reminded me of past excesses, and while I don’t doubt ChatGPT is a transformative technology, whose adoption has come in record time, the expectation that big tech will win out without suffering any collateral damage, could be misplaced. The forecasts for timeline, impacts, benefits and likely winners and losers will undoubtedly be wrong. Is Nvidia the new Tesla? 

BTW how are those predictions of self-driving cars and uses for Blockchain technology looking?

So it is possible that we are in a bore market and in for a less scary ride in coming months. Time to get off the rollercoaster we’ve been stuck on since the start of the Covid pandemic. 

One business that hopes so, is Merlin Entertainment, which this week successfully managed to refinance its €500m 7% 2025 SSNs. The old bonds were issued in April 2020, when EHY was in peak pandemic panic mode and just nine of its 130 attractions worldwide remained open. It was remembered for incredibly loose docs — such as the first use of the available amount, for having an unique Covid-claw and for being the first to be marketed on pre-Covid 2019 numbers.

I won’t go too much into credit aspects, as Josh Latham’s Financial QT covers most bases here. 

The business has performed well since reopening and is seeking to grow significantly in coming years. But I would highlight the heavy reliance on capex (23% of sales) to invest in new and existing attractions to drive this growth, which is likely to result in low cash generation for at least the next couple of years (plus some exposure to rising rates) with a high susceptibility to discretionary spending in a cost of living crisis, and two-thirds of its revenues in the UK and US. 

While leverage including leases is in the high 7s (around 6x without), asset coverage looks impressive (if you believe 15x sale multiples), but conversely goodwill makes up a chunk of total assets. There is also the question of what is the reference EBITDA number, as there is significant ability for addbacks including uncapped cost savings, synergies, plus expected EBITDA from new attractions which can be fully booked before completion. 

But, for me the most spellbinding aspect of the deal, the magic so to speak, was in the pricing.

Initial whispers were unofficially at 7.75%, but some of the smarter money on FinTwit and independent research houses had suggested somewhere in the low-to-mid 8s. 

But how did they conjure up this fair value price point?

Existing SSNs were trading to their call, so their 5.5% yield wasn’t that representative. Nor were the euro-denominated SUNs, yielding in the mid-7s, inside where comparable B3/B- names are trading, and tight for where the sector (admittedly mostly in the US) trade on a spread basis. 

The only other tradable senior secured paper is the 2026 TLB. The euro tranche (paying E+ 300 bps) is indicated with a 96-handle, a 330ish discount margin, and with three-month Euribor at 3.4% that gives 6.7%. Including a 50 bps new issue premium, and accounting for the longer duration, gets you to 7.25-7.5%. But new single B leveraged loans print at E+475-500 bps, and as an A&E would need a 125 bps margin bump (from 300 bps), pushing into the high 7s/low 8s. 

The above thoughts were my on-desk musings earlier this week, as I briefed some of the primary reporters before they made their calls. 

In the end, the deal priced tighter and quicker than we expected. This prompted some to opine that this showed the current strength of the EHY market and the solid demand picture. 

But the bonds traded down on the break, from par re-offer to 99.20-99.60, before recovering to 99.60 bid. Some accounts complained of 2-3x higher allocations than expected. As our deal review states, many buysiders familiar with the name pulled their orders as the IPTs tightened. 

It will be interesting to see whether the existing TLBs or SUNs cheapen up in the coming weeks, and/or if accounts decide to switch rides and find greater thrills from the new SSNs. 

9fin’s new arrival Dan Alderson has spent a lot of time looking at the deliberations of the CDS Determinations Committee in recent weeks. The 11-member Committee (made up of banks and hedge funds) has been stuck in a room deliberating a lot of late, after a fallow period of several months where few requests were made. 

We’ve spoken before about their difficulties in accessing information in the Workout, after the Committee met numerous times to determine two requests relating to Cinema Group Vue’s restructuring, which was finally (part) resolved by the use of 9fin data. 

The latest requests seemed to be more of a gamble relating to Credit Suisse and its subordinated bonds. First the Committee quashed an attempt by buysiders to trigger a government intervention credit event after the AT1s were written down as part of a deal which saw the troubled Swiss bank being bought out by UBS. 

And last Thursday, just a day later, there was a general interest question about a Credit Suisse bankruptcy credit event.

As Bloomberg’s Matt Levine excellently summarised at the time:

“Did Credit Suisse go bankrupt? No; it agreed to be acquired by UBS in a voluntary-ish merger at the strong encouragement of Swiss banking regulators. 

Did it go bankrupt-ish? Ehh, kind of? Its debt was not impaired, but its additional tier 1 capital securities, which were intended to be written down to zero if Credit Suisse got too close to needing a government bailout, were written down to zero. 

This did not affect the Credit Suisse bonds that are subject to CDS, but the game here is, you buy the CDS on the unimpaired bonds, and then you argue that something impairment-ish happened in the general neighborhood of those bonds. 

We have talked before about arguments that the AT1s were “not subordinated” to the bonds, and that therefore the write-down of the AT1s should be treated as a write-down of the bonds (which were not written down); this argument did not work. Now there is an argument that the write-down of the AT1s should be treated as a bankruptcy and thus trigger CDS on the bonds (which were not written down). Will this work? I mean, probably not, but it’s worth asking the question.”

There was some excitement when it was revealed that the national regulator had considered bankruptcy — a statement cited as one of the supporting documents for the DC request had said — “Specifically, the Federal Council has established bankruptcy privilege rights for this additional liquidity assistance. This gives the SNB the necessary assurance to make available to Credit Suisse substantial additional liquidity.”

But this request was also quashed, and in relatively short order too.

Next up for Committee members could be French retailer and iTraxx constituent Groupe Casino.

On Monday, HoldCo Rallye (Casino’s largest shareholder) said that it, and its own HoldCo’s Euris and Finatis “had requested and obtained from the President of the Commercial Court of Paris the opening of ad hoc mandate proceedings to their benefit.” The proceedings were for an initial period of three months “in order, in particular, to solicit from the relevant creditors, relief or waivers of events of default that may arise if Casino decided to initiate conciliation proceedings”.

The same day, Casino suspended its shares and bonds. 

It was widely leaked in the FT and several local media organisations last Friday that Casino would enter into the voluntary negotiations overseen by a court appointee, reportedly to be lawyer Marc Sénéchal. After three days of uncertainty, the France-based retailer today announced it is in a conciliation process, confirming his appointment together with Aurélia Perdereau.

According to a press article profile on Sénéchal last October, “He is one of those characters who, in the shadows, brings together brothers who are enemies of French capitalism to negotiate ceasefires. Before everyone’s interests, sometimes egos, cause irreversible economic and social damage to their businesses or those they covet.”

I’m sure that some of the hedge funds in Casino’s unsecured debt may be shuddering after reading this. With 53,000 employees and many more working for local suppliers, some fear any court-supervised restructuring will become highly politicised, as some have claimed for Orpea. 

But we are still some way from a full blown restructuring. Conciliation is a court-supervised process under the French pre-insolvency code that is consensual, amicable and flexible. It is overseen by a court-appointed conciliator (i.e. an impartial mediator) whose role is to help reach an agreement between the company and its stakeholders to resolve financial difficulties.

So would an entry into conciliation be a credit event? The company appeared to think so when earlier this month, a request was made to certain bondholders to waive a potential event of default from entering into the process (others were EMTNs with little documentary protection). The extended deadline for consent expired this week, with no announcement made.

As Dan wrote, five year CDS referencing Casino widened only 1.25 points on Wednesday to 77.25 points up-front (PUF), its most stressed level ever, leaving little payout to any protection buyers with IHS Markit assigning a real recovery rate of just 16.4%. Zero-month jump-to-default protection is now 22.5 PUF and six-month protection at 72 PUF.

Conciliation is often surrounded in secrecy. There was a time when the court appointees would enforce strict confidentiality, even on whether the process had been entered into or not. One gnarled but terrified distressed fund manager once told me that he and other committee members were threatened with jail by an administrator if they leaked anything. 

This confidential aspect could make the job of the Determinations Committee even harder, if Casino and the courts decide to keep everything behind closed doors. 

But there are occasions, however, when a default is advantageous to trigger, as an auction settlement would result in new holders, whose voting (on a potential restructuring plan) would not be clouded or motivated by having CDS positions. This happened with Technicolor in 2009. 

It is worth noting there has not been a default in the Crossover requiring auction settlement since Europcar in January 2021, which some readers may remember having a perverse outcome leading many observers to question the effectiveness of the credit default swaps market. 

Another company that has been on a rollercoaster ride is Wepa. A year ago, the German tissue producer had a disastrous quarter, with EBITDA margins falling to a mere 0.7%. Leverage spiked to over 9x by the end of the first half. With fears of gas supply cuts, and suffering from high input prices, management spoke about its rollercoaster year. But a year on, sizeable pass throughs have resulted in a bumper first quarter, with leverage down to 2.4x and margins back in the mid-teens. 

But not all are paper related businesses are on the up. Lecta, the specialty and coated wood-free paper business had a Q1 shocker, hurt by customer de-stocking, exacerbated by hedging energy costs at the wrong time and for too high volumes, writes 9fin’s Arturo Alaimo. Management confirmed that it had hired Lazard to discuss options for its 2025 bonds, which could include another restructuring (last in 2020) with more capex needed to transition to speciality papers. 

Adler Group has just completed its restructuring, and is better placed to navigate the stormy waters in German real estate, with more leeway to make disposals in the next couple of years and avoid firesales. Reduced development capex and the PIK’ing of bond interest should reverse cash burn, but management on its Q1 23 earnings call on 25 May declined to give guidance for FY 23, citing significant market uncertainty. The cash balance fell to €235m at end-March (prior to new money from bondholders) from €387m, but this included a number of one-off costs. Four development projects with a gross asset value (GAV) of €423m have received offers or letters of intent. Management declined to comment on how these bids compared to book value. 

Olympic Entertainment is set to return to positive cash flow, writes 9fin’s Denitsa Stoyanova. This will delight bondholders after their bonds were extended by 2.5-years to December 2025 in a creditor-friendly A&E deal. In FY 22 the company swung back into profit as land-based operations fully reopened. Solid growth from the prized online assets — which in April 2022 bondholders finally managed to wrangle back into the restricted group — also contributed. This removed near-term refinancing pressure and allowed the company to focus on business recovery and strategy. This could include M&A opportunities funded from internally generated cash flow.

A lot of my week has been spent reading and editing excellent write-ups from our analysts for the latest batch of earnings reports (our digest is here). I have also been trying out our excellent new transcripts tool, invaluable in catching-up on recent tape bombs for Catalent and Altice SFR.

Sometimes there is news which clearly signals a top for a particular market, such as Softbank’s intention to become a lender in Private Credit. My colleagues Josie Shillito and David Brooke can point the way to several struggling deals which could benefit from the unicorn investor’s funds!

Hat tip to Matt Levine for pointing this one out, an academic study from Jared A. Ellias from Harvard Law Schooll and Elisabeth de Fontenay from Duke University on how judges treat equity and debt cases very differently:

“Judges perform very different analyses when investors ask for protection. When the petitioning party is a shareholder, the court will deploy broad equitable doctrines with an eye towards reaching a fair result. On the other hand, creditors usually find a much less sympathetic ear, as courts typically march through technical analyses such as examining whether the offending party violated a contract term, with far less concern for whether the outcome is fair.”

Sam Kerr’s, A Curious Case of a Phantom IPO — for a purported company called Swiss Investment Solution — is a cracking piece of journalism. 

Unbelievably, it is the 25th anniversary of the ECB — ”We will do whatever it Cakes.”

That might be the only cut we see from Madame Lagarde and the ECB this year!

Sadly, two of my heroes passed away during the past week. 

There is a light that never goes out — Andy Rourke, the bass player from The Smiths, who died at the age of 59. His contribution to the band and its unique sound was so under appreciated. 

Only in art will the lion lie down with the lamb, and the rose grow without thorn. While I didn’t share his politics, Martin Amis’s writing blew me away in the mid 80s, when I first read Money. He was arguably the first rock star novelist. I would highly recommend listening to his long-time friend’s Ian McEwan’s interview on BBC Radio 4’s Today Programme. As Martin said:

"All writing is a campaign against cliché. Not just cliches of the pen, but clichés of the mind and clichés of the heart.”

Finally, yet more ups from Brighton and Hove Albion. After securing an Europa League place last weekend after beating Southampton, three days later, we faced Manchester City, Premier League champions. 

Clearly, Pep didn’t read the memo, that we should both play our reserves, putting out an almost full strength side, including Haaland, Foden, Mahrez, Gundogan, De Bruyne, and Silva. We had six players 21-years of age and below, including our two centre backs!

But remarkably, not only did we draw 1-1 with a goal of the season contender, we had 20 shots, the second highest total that Pep has faced, and we more than held our own in the best game I’ve seen in years. In a remarkable pre-match interview, Pep said that Roberto De Zerbi is one of the most influential managers he has seen in 20-years. Heady times. 

A nice touch from Southern Trains at Falmer Station on Weds, backing onto the Amex stadium.

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