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Post the Easter break, the improved tone for risk assets continues. They remain in risk-on mode (despite the latest surge in oil prices) reinforced by lower-than-expected headline US CPI and PPI prints earlier in the week. While not a flood, we’ve seen a decent flow of LevFin primary deals, which should surge further next week as EHY spreads compress to levels attractive for borrowers, retracing most of their SVB/CS losses.

While there continues to be the odd doom and gloom piece about the risks to commercial real estate from the rates shock, the exposure of banks to CRE lending, and some poor retail sales numbers for names such as Tesco and Asda, the impact on sentiment has been minimal. 

As headline inflation numbers come down, and with leading indicators predicting a slowdown and potential recessionin Q3, market expectations for interest rates in late 2023 and early 2024 are showing a big divergence from those of policy makers. As the chart below shows.

One of the biggest reasons for this divergence is policymakers' focus on core inflation. If we don’t lose the core strength, rates will remain elevated for longer, even if economic activity slows.

In the old days, when I was trading US dollar corporate Eurobonds in the early 90s, the intention of the core measure was to strip out the effects of volatile components, such as food, energy and mortgage costs. 

As a young trader, with a newly bought 450-year old cottage in East Sussex — my estate agent brother once joked I misread instructions from my partner to go and buy a large granary — my mortgage costs had doubled in less than six months (I bought weeks before Black Wednesday). 

With almost all my salary going on food, energy and housing costs that winter, I mused on what is left, surely the headline number was much more representative of overall inflation?

Over the past few months, some of the main headwinds for CPI have abated, most notably energy prices, but as the ECB and Eurostat note in their latest bulletin some sectors, particularly food and services, remain stubbornly high.

The benefit of negative energy price effects is likely to abate in the coming months, and if you look at underlying inflation, most components are continuing to rise (see below)

Some blame has been placed on producers using the inflation premise to supercharge profits and margins, leading to allegations of greedflation. We have certainly seen EHY borrowers such as Upfield Flora, Tereos and Boparan raise prices aggressively to boost margins at the expense of volumes, but retailers have struggled to fully pass this through. This was thrown into sharp relief in a report in Les Echos, which said that French super and hypermarket volumes fell by 9% so far in 2023, the worst fall on record, and news yesterday that Tesco’s profits halved in 2022.

This doesn’t bode well for Groupe Casino, which, according to a recent Kantar survey, is the worst supermarket performer in the fresh food sector in France amid rumours that some suppliers are concerned about its financial position. As we await ultimate owner Nouri’s next move, we are putting together materials for a webinar in late April. Watch this space for more details.

As well as turning our attention back to Groupe Casino, the 9fin distressed/restructuring team was catching up with events from late last week, after the Adler Sanction hearing finished. Even before we arrived at our desks on Monday, we were aware of an imminent Takko restructuring release, and were looking to follow-up on Covis Pharma from the prior week. 

Both were light on detail, so there is still plenty to play for. 

But first, a quick update on the Adler decision before moving onto other consequentials.

Justice Leech on Wednesday was true to his word at the end of third day of the AGPS BondCo Sanction hearing. There would be no verbal ruling, he would only say whether he had sanctioned the UK restructuring plan or not, with written reasoning to follow. 

In making an order to sanction the plan for the English substitute issuer for Adler Group, he was pressed to give a timeline for his written judgment — which he said should come asap — with the opposing AHG of 2029 noteholders keen to launch an urgent appeal against the decision. 

Leech said he would make a determination on permission to appeal at the hand down hearing, (expected early next week), with the company looking for an order truncating the amount of time that the AHG had to appeal and the AHG likely to resist this. 

As reported, the timeline for the hearing (just three days after his decision) was very compressed. There was a hard deadline of 12 April, to allow Adler Group (the co-guarantor) the nine business days necessary to release funds to repay the Adler Real Estate 2023 notes due on 29 April. 

The ruling was eagerly awaited by the restructuring community. In addition to the immediate impacts for the German real estate group, there are much wider implications for longer-dated securities given that pari passu treatment of creditors within an insolvency process was varied. There were also questions relating to jurisdiction, issuer substitution, the purported acceleration of the 2029 notes, and the discretion of the English Courts to approve restructuring plans.

For more, here is 9fin’s reporting on day one, day two and day three of the Sanction hearing. 

Any appeal will need to be related to a point of law, hence the keenness of the AHG to get their hands on Leech’s ruling as soon as possible to understand his reasoning. 

My gut feel is their challenge is likely to be based on the lack of pari passu treatment — the plan projects a par recovery (which I think is debatable) — but is essentially a managed liquidation, meaning that longer-dated notes bear the brunt of insolvency risk. Whereas in an insolvency (the comparator) they would get paid pro rata. There is also a fairness issue: do the mechanisms to subsequently enforce work and apply equally to all SUNs?

I wouldn’t be surprised that Justice Richard Snowden — a favourite to take the case prior to his elevation to the Court of Appeal — and involved in a number of rulings setting the relevant case law, ends up hearing the appeal, if accepted. 

Every now and again comes a new HY deal that gives me the strong feeling that I will be covering the same name’s restructuring within 12 months. I thought this privately on Carvana and Avaya, but with Covis Pharma I told anyone who would listen that it was coming my way. It was zero surprise when we first heard that advisors had been appointed last November. 

In the Friday Workout last January, I spoke about the Covis variant, which was a new low in loose docs and definitions. There was also the lack of guarantor coverage (lenders unable to benefit from product pipeline) and some remarkable EBITDA add backs — reported LTM EBITDA at launch more than tripled to $262.2m on a pro forma adjusted basis.

As I said at the time, I was scratching my head at how they could adjust $62.2m for the loss of market share for its Feraheme drug (its former blockbuster, which had suffered from loss of its patent and stronger-than-expected generics competition). 

Adjusted EBITDA was just $185m in FY 22 and was projected by Moody’s to be below $150m in 2023, less than the $180m or so of debt service costs. With the RCF fully utilised, and with factoring facility providers pulling back, it was inevitable the deal would be restructured. 

On 31 March, the speciality pharma business announced an agreement with its lenders (95% of 1L, 100% 2L) to reduce debt by $450m to $860m with a partial debt-for-equity swap of the 1L and full repayment of the $312m (at issue) 2L at a deep discount to par. 

A new $64m super senior facility (rates unknown) due February 2027 provided by existing 1L lenders

$700m of reinstated first lien (from $900m) also maturing in February 2027

Reinstated 1L RCF (you can guess the maturity!) 

Other details for the restructuring were sketchy. 

Apollo would maintain the majority of the equity, with a significant minority going to 1L lenders. It is unclear who has bought the second lien and who is providing the super senior. 

The sponsors retained the majority of equity, which is unusual given the sacrifice made by lenders. As S&P says in a recent report, a $200m debt exchange into a substantial equity minority isn’t adequate compensation for the 1L. This leads us to suspect that the sponsor was the likely buyer of the second lien, and may have significant positions in the debt stack. 

This is purely speculation, and we are digging deeper into the situation as I write this. 

Another restructuring announcement light on detail was German discount retailer Takko, whose non-cash transaction registered in our inboxes on Tuesday morning. Not one to make it easy for outsiders to access its bond reports, with barred codes for conference calls, those involved in the deal tell us that the company and the sponsor are sensitive about full details leaking.

However, we can confirm that the returns policy for bondholders are very similar to the terms that you can scan from 9fin’s David Orbay-Graves’ piece on 2 March, which revealed that creditors were about to take the keys to the shop.

Under the terms of the deal, bondholders (90% held by AlbaCore, Napier Park and Silver Point) will take control of the business from current sponsor Apax Partners, with the maturity dates of reinstated debt pushed out to 2026. Apax is set to retain equity in the region of 5-10%, thanks to the equitisation of their term loan position, as well as a sweetener for agreeing a consensual deal.

Investors holding Takko’s €510m senior secured notes, as well as those holding a pari passu term loan (€40m outstanding as of October 2022), will receive roughly €300m in reinstated OpCo debt due 2026, and mainly paying PIK interest and €100m of HoldCo debt also due in 2026.

The €80m, 7% super-senior term loan, due May 2023, will be fully reinstated with amended terms, the sources told 9fin. Takko’s €185m Letter of Credit (LoC) facility, due May 2023, will also be largely reinstated with some tweaks to the terms.

Takko, which operates in 17 countries, anticipates EBITDA of €130m in FY23, and will have liquidity of €70m post-restructuring, according to the sources. Leverage under the deal at OpCo level is projected to reduce from 4.3x to around 2.4x, at 3.2x if you include the HoldCo debt. 

On the road from the city of skepticism, I had to pass through the valley of ambiguity — Adam Smith

Regular readers are aware that creditor-on-creditor violence is a particular interest of mine, warning in the past that it is coming to a jurisdiction near you. As I outlined in my two-part feature in early February, some of the prior instances in the US were being litigated via the courts and would be closely watched by lawyers over there and over here.

One of the most advanced legal cases was for Serta Simmons, whose lenders were subject to an uptiering transaction in 2020 (for more on priming transactions, our Educational is here). Under the transaction Serta’s majority lenders exchanged their existing first lien term loans for new super-senior term loans, with minority lenders effectively left with subordinated debt.

The aggrieved lenders (which included big names such as Apollo and Angelo Gordon) claimed a breach of the implied covenant of good faith and fair dealing (under NY law) by having their sacred rights stripped away. Under the docs key provisions, does the subordination of the liens equal a full release of collateral? Can an “open-market purchase” be done via an exchange with selected lenders or does it have to be communicated to and be available to all?

In March 2022, Judge Katherine Folk Faillia in the SDNY denied Serta’s motion to dismiss, saying that the term “open-market purchase” was ambiguous, allowing their breach of contract and implied covenant claims to proceed to discovery. 

But in January 2023, Serta filed for insolvency in the Southern District of Texas. The company at the same time as petitioning for Chapter 11 filed an adversary proceeding against the NY litigants seeking a declaration from the bankruptcy judge, that the transaction was permitted under the credit agreement.

On 28 March, Judge David Jones gave a short oral judgment, stating that there were was no ambiguity on the meaning of open-market purchase and it was “very clear” that the transaction fitted within the definition. But he did not go on to define what constituted an open market purchase nor what transactions could qualify. 

He said the excluded lenders were sophisticated investors who should have known from reading the loan docs that this could happen: 

“I sit with these matters every single day… Sophisticated parties know what words they want to choose… this is very easy for me.”

He also refused to give summary judgment on claims for breach of implied covenant of good faith and fair dealing, or if certain excluded lenders were disqualified from holding debt, which means those claims remain live for now. 

This leaves a lot up in the air, and has the potential to complicate the Chapter 11 process. The Apollo, Angelo Gordon group have already requested an order for an immediate appeal, which could go to the Fifth Circuit or could go for review at the District Court first. 

The decision has the potential to spice up future uptiers, as lawyers had thought that the Serta Simmons and the Boardriders litigation would lead to future uptiers being offered to all. We could now see more covert deals appearing following Jones’ decision.

I will be looking into this is in more detail with our legal team soon, watch this space for updates. 

There has been significant negative price action in Groupe Casino bonds in recent months, as bondholders fear ultimate majority owner Jean-Charles Naouri may have come up with a cunning plan to unlock value through a proposed merger with Teract, run by a former protege. As 9fin’s Denitsa Stoyanova wrote a month ago, this “will likely involve further heavy financial engineering and the ripping-up of Casino's complex existing organisational and corporate structures.”

Many column inches have been turned over to speculation about the proposed transaction. But there has been less focus on the parent company, Rallye, whose recent FY 22 report contains an interesting update, which many (including us) might have missed. 

However, first for uninitiated on Casino, arguably the most complex and difficult situation in EHY, we need to look at the complex group structure, the interrelationships, and how we got here.

To recap, 48% of Groupe Casino share capital is free float and 52% is in the hands of its parent company, Rallye SA, which in turn is controlled by the family of Jean-Charles Naouri.

Rallye creditors were subject to a highly controversial Sauvegarde in 2019, which dented the confidence of foreign investors in French insolvency (later reinforced in Comexposium). 

In early May 2019, following a sustained attack on the group from short-sellers, Rallye triggered a margin call under its secured financing agreements. It was forced to pledge increasing levels of collateral, mainly in the form of Casino shares, until it pledged all their shares by 21 May 2019.

Four days later, Rallye had to file in a Paris court. Controversially, its Sauvegarde plan was approved in February 2020 despite opposition from certain creditors who claimed they were frozen out of the process. As it was a HoldCo, there was no need to hold creditor committees. The company was allowed by the court to impose a 10-year term out on its unsecured debt. 

But it was not all good news, around €1.5bn of secured debt was pushed out to 2023, creating a serious maturity wall, with Groupe Casino frantically seeking to make disposals to de-lever and push up funds to its parent. However, this came with some serious restrictions (more below).

Due to the Covid pandemic, Rallye in October 2021 was able to get the court to defer the payments by another two years. The amended Sauvegarde Plan now allows the €1.5bn secured creditors to be repaid in Feb-25 while the €1.7bn unsecured creditors are to be repaid over a 12-year period (10% per year). Per the below schedule, 75% of the unsecured debt will be back-loaded in the last three years of the Safeguard Plan namely between Feb-30 to Feb-32.

Of Rallye’s €3,029m of total debt as of 30 June 2022, 42% was unsecured, 16% secured by shares of subsidiaries other than Casino and 42% (or €1,247m) secured by Casino shares. Worryingly, Casino's market cap is currently €693.9m (13 April close), which provides only around 55% coverage for the Rallye secured debt.

The only way of paying interest and principal at Rallye is from dividends from Casino, but this has been restricted since November 2019, and are only allowed if the ratio of gross debt/EBITDA (France Retail + E-commerce, including leases) is < 3.5x. The company has been unable to meet this covenant in recent years as the ratio has consistently deteriorated from 5.03x in FY 20 to 5.50x (FY 21), 6.47x (FY 22) to hit 7.12x in H1 22 (the latest reported number).

With its unsecured bonds trading at deeply discounted prices, Rallye launched several tender offers for the unsecured bonds to take advantage. But interest in the auctions has been weak resulting in only a 4% cut in its gross debt from €3,155m on 23 May 2019 to €3,029m in H1 22.

In its 2022 annual results release on 22 March (the bolding is their emphasis), Rallye said:

“it draws the attention of investors to the fact that the safeguard plans depend primarily on the ability of Casino to distribute sufficient dividends, the principle and amount of which will depend on Casino’s financial position, the implementation of its strategic plan and, in particular, its disposal plan. Rallye therefore considers that the risk factor related to the implementation of the safeguard plans has increased. Rallye will liaise with its creditors in order to examine the possibilities and possible ways of adjusting its safeguard plan.

Fearing another term out and possible impairment, Rallye unsecured bonds are now in the low single digits, trading at little more than option value, despite their importance within the group structure. With Nouri seeking value recovery via his new JV, their pessimism might be justified.

A few long running restructuring situations are struggling to get over the finish line: 

Frigoglass has announced a further extension to its lock-up agreement, pushing out the implementation date of the transaction to 28 April. 

As 9fin’s Bianca Boorer outlines, Corestate said this week it will consider an “alternative restructuring concept”, which involves the potential provision of further liquidity sooner than originally planned. The German real estate company said it is discussing whether to increase the bridge financing of €25m structured by the AHC in December 2022. Aside from the AHC, the group is also in talks with other investors, including from Corestate’s shareholder base.

Investing in Petrofac bonds has been a rollercoaster ride in recent years. Remember, it had to raise funds via bonds and equity in 2021 after a $105m bribery fine was imposed. As David Orbay-Graves writes, the price of the 2026 SSNs fell to the mid-50s when Petrofac warned of FY 22 losses in its December trading update. But the bonds rocketed 20 points, to 75 cents, in late March after the company announced it had won, alongside Hitachi, contracts worth some €13bn from the Dutch state-owned electricity company TenneT to develop offshore wind in the North Sea. But this week, Petrofac said it expects to make a FY 22 EBIT loss of $150-$170m, compared to earlier guidance of $100m loss. A review of Petrofac’s contracts revealed increased costs, and the company decided on a more conservative approach to revenue recognition.

Canpack, the polish can producer, avoided a potential covenant breach in Q4 22, replacing its previous RCF with a new ABL facility to sidestep its leverage headroom limit, writes 9fin’s Ameeq Singh. The new ABL facility excludes the previously enforced net leverage maintenance covenant. The cash position declined sharply to $318.3m in FY 22 vs $794.4m in FY 21 (-60% YoY). EBITDA erosion in FY 22 saw net leverage rise to 3.95x vs 2.1x in Q4 FY 21.

A group of minority Cineworld shareholders have made a last-ditch plea to the judge overseeing Chapter 11, writes David Orbay-Graves. It feels like a long shot, but we will follow progress. 

One of the themes of the 9fin and Mayer Brown leaders in private credit roundtable last month (the distressed report should land next week) was the rise of mezzanine financing. 

As interest coverage ratios and senior leverage have fallen dramatically there is room for mezz, especially PIKs to replace the gap left behind from diminished senior leverage, my panelists suggested. A recent report from Pitchbook agrees.

It’s been a tough year or so for the sell-side. eFinancialCareers asks if investment bankers have a productivity problem, luckily, Fixed Income is streets ahead of equities and IBD.

It’s been an interesting few weeks for Fraser Perring and Viceroy Research. First, Medical Properties Trust launched a lawsuit against the short seller, and this week, we had the surreal scene of Labour MP Liam Byrne accusing Perring of links with Russia and Vladimir Putin. The issue was serious and should be debated in Parliament!

Elon Musk has apparently merged Twitter with X Corp this week according to a court filing in New York. Ever the sceptic, I wonder if this allows him to do anything sneaky under the lending docs? 

In the meantime, the platform continues to get more frustrating, and while we consider paying for blue ticks, Musk’s decision to suppress Substack Tweets has proved to be a Streisand effect — highlighting the attractions of Substack’s Notes feed. Here is an example

But every now and again there is a delicious Tweet giving reasons to stay on the platform:

It took most of the Easter Weekend to recover from yet another VAR debacle which went against Brighton. This led to our third apology of this season from Howard Webb the head of the referees body for a wrong decision (a penalty which wasn’t checked, we also had two goals disallowed which most pundits think should have stood). 

To make it worse it was a six-pointer against Spurs in fifth, and could now scupper our chances of Champions League and a £20m plus payday. It could also mean losing some of our star players at the end of season. 

If you think these decisions even out during the season, this might change your mind.

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