While I was in Seville topping up my Vitamin C — sadly not so much Vitamin D, but still much warmer than in Ol’Blighty — Frigoglass provided some festive fare for 9fin’s restructuring team shivering back in London. Frigo is Spanish for fridge, which I recalled while scraping the ice off my car in Stansted on Wednesday evening. I spent most of Thursday reading up on the restructuring and working out if my glass is half empty or half full on the proposed plan.

While I was away, the primary market thaw continued. Intrum managing to get a refinancing away at 10%, a mere 100 bps cheap to its outstanding curve at launch, despite its recent problems in Italian NPLs (would recommend Owen Sanderson’s Excess Spread this week for more). 888 took a gamble to refinance, as did Telco Illiad, plus Parques Reunidos and Safic-Alcan in loans.

Back to distressed, Frigo wasn’t the only surprise for me to defrost on my return.

According to our colleagues at Bloomberg, Aggregate Holdings might repay its subsidiary’s VIC Properties converts via a SPAC merger with motivated dealmaker Burford Acquisition. Our obscured view out of less-than-super car manufacturer McLaren was de-mist(ifi)ed) as we found out its Bahrani investors drove a hard bargain for injecting another £100m, taking a number of its Heritage Cars in part exchange.

And that was not all. Despite not being at the World Cup, Italian football continued to grab headlines, with the Old Lady losing its entire board and gaining a Uefa investigation, and the Nerazzurri limping away from block(chain) tackle from a crypto sponsor.

Also on my list in the workout this week is Technicolor Creative Solutions, which has animated lenders and equity investors alike with its latest announcement, the release was certainly not box office, and may match Schur Flexibles by going into restructuring before its first interest payment is made.

More on the above later in the workout, but first a look at macro and a breakout in spots markets which may have less attention than US stocks and crypto, but could upset the consensus view for a relatively benign 2023 and a return to positive bond returns.

False Breakout

As a trader, I had a healthy scepticism of charts. But just like religion and investing, the more blind believers and diviners you have, the more likely it is a self-fulfilling prophesy.

But there are plenty of false prophets and many false new dawns (and pivots).

It certainly pays to study the trendlines, stochastics and open positions carefully, even if you are as I am, more macro-focused, and not a true believer and a chartist.

In my early days as a trader I could tell when the stop losses would kick in, and would tactically position my orders a few ticks away from the chart levels to take advantage. In the Australian Government market I was briefly (im)famous amongst the futures traders on the Sydney floor after buying the low point or selling the high point of the day, for eight trading sessions in a row.

Unfortunately, my futures P&L wasn’t huge, it was just playing around with the hedge for the lowly correlated Aussie Eurobonds I traded in my day job. I coined it as Garbatrage, hedging garbage with garbage. (Not as good as my friend at Chemical Bank who traded Illiquids — with Toxic Waste Unit on his Bloomberg greeting — that name worked on so many levels).

As the S&P 500 chart below shows, there have been at least three (and probably now four) false breakouts on spot futures over the past 12-months. Time to reconsult my Elliott Wave textbooks on what’s next. The breaking of the rising wedge doesn’t look good either, btw.

As we head towards 2023, markets are forecasting a very different outcome to now. For example the US 10yr bond yield has broken the key 3.5% level (after hitting 3.41% yesterday, it is 3.44% at time of writing), a mere 90bps tighter than where it was in late October.

While terminal rate expectations remain the same at 5%, we have a big inversion between the terminal rate and long-dated bonds. This, says Deutsche, is due to the bond market is coming around to the idea of a harder and harder landing. Futures are suggesting over 100 bps of rate cuts by the end of 2023, amid sharp drops in energy prices curbing inflationary pressures.

But the recent rally in bonds and stocks means that the financial conditions index is 225bps tighter than just two months ago, notes Goldman. So, the risk (at current prices) is two-fold. If the recession doesn’t arrive as 90% of the market thinks, and/or inflation is stickier, all other things being equal, the Fed will need to hike well beyond 5% to reach its goal.

Conversely, if there is a deep recession, there is an increased likelihood of sharp earnings falls (margins and profits are still near historic highs), which doesn’t play out well for stocks or high yield, which after recent rallies are not fully pricing in the risk.

Or alternatively, you can hope that Goldilocks arrives on time and markets will neither be too hot or too cold. This bear is waiting for the thin gruel to cool.

The recessionary scenario is also playing out in commodity prices, strange given China’s reopening hopes.

Oil be back below 2022 opening levels, for example.

This might be a relief for input prices for plastic packaging businesses such as Kloeckner Pentaplast and Schur Flexibles and for some chemicals producers, but how many may have locked themselves into hedging at much higher prices? We may find out in Q1 or Q2 2023. It doesn’t bode well for Tullow Oil, whose March 2025 SUNs are now in the low 60s.

Breaking the Buck

Another key potential reversal is the dollar which spent most of 2022 on a tear. After breaking out to the upside from a trading range seen since 2017, it has come back sharply in recent weeks, and is back to a key support (its former breakout level).

There is strong negative correlation between the dollar and EM, as most borrow in $, which could prove some relief for EM distress. But for many HY companies, the FX tailwinds seen for most of 2022 could reverse. Once again, the proportion of hedging and the prices paid may be key.

And it could be the season to be fearful for us residing in Europe.

Deutsche is forecasting 10yr Bunds at 2.60% at the end of 2023 (current 1.85%) against 10yr Treasuries at 3.65% (current 3.57%). This is based on core European inflation in 2023 (and potentially longer), more fiscal spending potential in Europe, higher net-net supply in Europe, the start of European QT, and greater impact in Europe from China’s reopening.

Raising a Frigoglass of cheer

Tis the season to be jolly, or should that be folly?

With Frigoglass, restructurings are more frequent than a decent vintage year for Rioja (before you ask, 2017 compared to 2016 — btw the best vintage for 20 years).

As 9fin suspected, the €30m of bridge financing from an ad hoc group of bondholders (representing 56.9%) announced in early October was just to provide funds to allow time for a wider restructuring.

It is now clear why the company was tight lipped on the call about shareholder support (in several media articles, sources said they were allegedly keen to co-invest) as there isn’t any — the shareholders whose relationships were previously seen as key for the business (especially the Nigerian operations) — are simply walking away.

In short, the restructuring plan involves reinstating €165m of the €260m of SSNs, with the remaining €95m converted into 95% of the equity. There will be €65m of new SSNs backstopped by the committee, but is open to all. These new notes (cash and PIYC) rank pari passu, but are senior in an enforcement scenario with rights to 5% of equity. The pro forma cap table is below.

The new money notes will provide much needed liquidity, with just €17.8m of cash sitting outside of Nigeria in August. The PIK element on the new notes will be toggled if liquidity forecasts for outside Nigeria for year ahead are less than €20m. Looking at the group business plan for 2023 and FY 22 forecasts, there is limited headroom for full cash pay if performance doesn’t go to plan.

Most of the funds will go towards repaying the €35m super senior bridge, which pays 13% and is due on 11 January 2023 (extendable until end February), especially if an additional €20m (uncommitted) is made available and adding in fees (the chart below suggests €11m).

The proposed equity splits are intriguing. Why so little to the new money providers?

Normally, an ad hoc committee is keen to grab better economics, especially given the very tight liquidity position. We are surprised they didn’t push for more.

For the debt/equity swap, what is the correct EV multiple and equity valuation?

Given where the bonds are trading (the mid 30s), its clear that writing off €95m of debt won’t give €95m of equity value on day one. If we take a 50% haircut to implied equity value, that gets us to an EV of 5.7x.

And why so little debt write-off, if distressed funds were keen to drive the value via equity?

The group is projecting EBITDA to rise to above 2019 levels by 2025, from €42m in FY 22 to €70m in FY 25 driven by glass division sales. This suggests that if all goes to plan, then leverage should have a two-handle (or lower) by then, giving a decent recovery for bondholders if the business can be sold with a five-handle or greater.

Monday’s announcement is light on detail on implementation.

As 9fin’s Bianca Boorer writes in her summary of the deal, according to the 2025 OM, the group needs at least 90% of the aggregate principal amount of the outstanding notes to consent to the proposed changes in order to implement the restructuring.

This appears a high bar, so we wouldn’t rule out implementation via an English Scheme, similar to what happened under its 2017 deal. For now all the company has said is that it is asking bondholders to lock-up to the deal.

VIC considers SPAC tack new la(rge) IPO

One of the strangest stories this week was for Aggregate Holdings, or more precisely its Portuguese subsidiary, VIC Properties.

To recap, the troubled real estate group has been selling trophy assets at Aggregate Holding level such as Quartier Heidestrasse (QH) to meet upcoming maturities. The €250m 2022 VIC Properties converts were the most pressing maturity, with the original 28 May 2022 redemption date extended to 28 September/28 December 2022 after negotiations with holders. The redemption amount had increased to a staggering €372.4m by 31 December 2022. The redemption date was further extended to 28 February 2023 in September.

On a 28 October investor call, management said they are running a dual track process of refinancing and sales “to maintain optionality” for the convertible bond payment, with a “number of options” available to refinance the convertibles.

Bloomberg’s Gillian Tan reported this week,that Aggregate is in talks to merge VIC Properties with BurTech Acquisition, a blank cheque SPAC for a potential equity value in excess of $300m.

BurTech is led by CEO Shahal Khan, with the vehicle raising $287.5m in a IPO last year. With SPACs typically having to invest their funds within 12 months, or return cash to investors, this suggests that the timeline for such a deal could be very tight.

It is unclear whether Oaktree still retains an interest in purchasing VIC. As 9fin disclosed previously, Oaktree had been actively purchasing the converts at a discount earlier this year.

As a footnote, the price being discussed seems very low. According to Aggregate’s latest presentation, VIC Properties has total assets of €1.88bn and total liabilities of €732m, giving a €1.15bn segment NAV. Then again, most of the three build and sell projects are yet to be built, and its unclear how much capex and consequent funding is needed to achieve these figures.

Techicolor Dream Float turns to Nightmare

In early March, I detailed Technicolor’s plans to split itself in two, by listing and spinning off 65% of its Technicolor Creative Studios (TCS) business, with 35% being retained. The proceeds, plus a €300m mandatory convertible and €100m in cash from the sale of its Trademark Licensing operations will significantly deleverage the France-based media and entertainment technology company.

Under the plan, existing debt was to be refinanced with fresh debt sitting at the two new entities - TCS and Technicolor Ex-TCS. For those lenders that took control after writing off €660m of debt in the late 2020 restructuring, it represented a very successful turnaround story.

In August, 9fin’s Lara Gibson revealed that the former banking syndicate rolled, after advisor Rothschild opted not to widely market the deal, persuading former lenders to reinvest instead. They provided ~€620m equivalent of four-year TLB at E+600 bps and a 95 OID. The facility is composed of two tranches, a €564 million tranche and a $60m dollar tranche. The new financing should push TCS’ leverage to around 3.7x, based on forecasted 2022 EBITDA, she revealed.

TCS provides animation and CGI services for the film, animation and gaming industries and is forecast to generate €180-190m of EBITDA in 2022 and €210-220m in 2023.

At the time, buysiders told 9fin that they were relatively optimistic about TCS’ recent performance with one noting that TCS is the jewel of the former Technicolor operations.

But in November, management dropped a bombshell revising 2022 adjusted EBITDA down from €120-130m to just €50-70m, which could put TCS in breach of a leverage covenant at its first test (30 June 2023). TCS has a financial covenant of a maximum 5.75x net leverage for its €624m-equivalent TLB, meaning it has to generate annual adjusted EBITDA of over €100m (assuming liquidity remains constant).

TCS’s main three business sectors are down into “MPC”, which specialises in VFX, animation and visualisation for movies, “The Mill”, focusing on transforming advertising campaigns, and Mikros Animation, which works on animation films.

On the webcast management blamed sluggish results on “The Mill” and “MPC” on lack of available talent and “challenging key departures” which hindered projects. They emphasised to investors the immediate focus on recruitment across all sectors and added that a drop in results at “The Mill” was also partially due to clients tightening advertising markets.

Free cash flow took a hammering, falling to negative €59m (negative €12m in Q3 21), mostly due to working capital deterioration (from negative €17 million to negative €45m), blamed on lower advanced payments from a reduced order book. We suspect reduced demand for comic book blockbusters is the main cause, its customer book is certainly less marvel-ous than before.

To drive a turnaround, Caroline Parot, former CEO of Europcar, has been hired as senior advisor. The new strategy has the strange working title of “Re*Imagined program”, and will seek to retain and attract top talent.

Christian Roberton, the TCS CEO, said on a webcast last Thursday evening: “I want to be able to communicate to everyone here that we are still very much a leading provider of courageous visual services.”

But that bravery didn’t extend to engaging with loan and equity holders, as the webcast didn’t have a Q&A. The loans dived from the low 90s after the profit warning and are indicated in the low 50s. The shares have fared even worse, closing on Thursday at 25 euro cents, down 86.8% since the float, for a market cap of just €136.1m (they floated at a valuation of €1.03bn).

Electrifying Performance

McLaren is learning the hard way (as have other auto makers) that transitioning to electrification is harder and costlier than expected. Similar to TCS, the car maker avoided engaging with investors when it delivered its latest set of bad news, releasing a slide presentation and a nine minute audio file.

A key part of the UK sports car manufacturer’s strategy was the launch of the Artura, its hybrid supercar.

Its release was delayed several times (it should have been delivered in 2020) and development costs have spiralled. This is especially concerning given that the platform and the cutting edge technology are to be used in future fully electric vehicles. In the meantime, 50% of its order book is for the Artura, so any further delays will severely impact liquidity.

In its Q3 earnings release, McLaren said that it had pushed Artura deliveries into Q4, in order to implement "technical upgrades to ensure Artura customers enjoy optimum long-term performance."

The delays had led to a further injection of £100m from the lead shareholder Mumtalakat, the Bahraini Sovereign Wealth Fund, which Sky News’ Mark Kleinman revealed this week had acquired part of McLaren’s heritage car collection in part exchange for the funds.

It is worth noting that under the McLaren refinancing in Q3 2021, heritage car assets worth up to $117m were transferred to a newly incorporated company, McLaren Newco Limited.

McLaren had said in its Q3 release that management were in "in active talks with all shareholders regarding a recapitalization of the group,” which it hoped would conclude in Q1 23.

Mark Kleinman wrote that at least £250m needed to fund its long-term business plan. He suggested that while Lazard is in talks over the recapitalisation, its restructuring team are also involved in providing advice.

The key question is whether the shareholders will continue to support the business without some sacrifice from bondholders. Last July, new investors PIF (the Saudi sovereign wealth fund) and Ares provided £400m via preference shares and equity warrants, and £150m from existing shareholders, including Mumtalakat Holding, through convertible preference shares.

Then again, as we’ve seen over the years, there is no shortage of vanity investors who are keen to buy into this segment despite ongoing losses (Moody’s expects negative EBITDA of £190m in 2022 and £80m in 2023. It forecasted £150m was needed to cover forecast cash burn).

With that in mind, the $620m 7.5% 2026 SSNs are indicated at a far from racy 15% yield.

The Not so Beautiful Game

In hindsight, 9fin’s Nathan Mitchell’s excellent deal prediction piece Derby Debt’Italia was extremely timely, focusing on the high yield debt for Juventus and Inter Milan.

The Old Lady when it debuted in the HY market in 2019, had won Serie A for nine consecutive seasons. But as Nathan outlines, in the (unsuccessful) hunt for European glory and the desire to stay competitive, Juventus’ expenses, mainly player wages, spiralled out of control. Combined with Covid’s impact, this pushed the Bianconeri (the Black and Whites) into a net loss of €254m in the 2021/22 season, the largest ever for a Serie A football club.

Historically EBITDA has fluctuated around €100m-€150m, but with both rising costs and falling income, FY 22 EBITDA turned negative to -€46.5m with net debt sitting at €153m. In comparison, four months after its 2019 issuance, FY 19 net debt was €463.5m, 3.2x €145.9m EBITDA.

As a result equity injections of €300m in 2020 and €400m at the beginning of this year were used to pay down debts, fund transfers, and drive revenue growth. The Agnelli family, who currently own 63.8% of shares through holding company Exor, have owned the club since 1923 and also have large holdings in household names like Ferrari and Christian Louboutin.

Given the poor financial position we expressed surprise that the €175m 3.375% February 2024 SUNs were trading with a 97-handle, presumably due to implied shareholder support, and over €400m of unused bank lines.

In late November, the whole board resigned on masse. This followed an announcement a week earlier that Consob had found inaccuracies and deficiencies in its reporting of its 2020, 2021 and 2022 accounts, with financial losses being understated. It was then revealed that Uefa has opened an investigation into club licensing and financial fair play. If that wasn’t bad enough, La Liga released a statement asking for “immediate sports sanctions” to be imposed.

On the pitch, performance has been better, with Juve winning their last five, to rise from eight to third and stay in the race for lucrative Champions League spots. But the League remains tight.

Inter Milan have also recovered from a poor start to the season to be within a point of Juve and close to fourth, the last spot for Champions League qualification.

Unlike Juve it has a more bondholder friendly MediaCo structure — its bonds are insulated from many football-related risks, such as wages, as the club borrows against its media and sponsorship revenue and puts bondholders senior to claims on this income over players and management, and other non-media operations of the group.

But the Nerazzurri are facing a slump in sponsorship revenue, notes S&P in a recent report. The ratings agency has put the B ratings on watch negative, after “nonpayments from DigitalBits, which could reduce MediaCo's debt-servicing ability.” DigitalBits, their non-paying sponsor, is “an open-source Brand Blockchain provider” (me neither) and depends on cashflows from the cryptocurrency market.

S&P said DigitalBits has missed €1.6m in bonus payments for the 2021/2022 season and €16m for this season, which it says represents the first two instalments “of the main €24m base contract payments due in July and October.”

DigitalBits logos have disappeared from Juve’s website, billboards, and jerseys for the youth and women's teams.

“Without an adequate sponsorship partner to replace DigitalBits, these lost cashflows could lead to a more than 50% decline in sponsorship revenue from 2024 than our previous base-case assumptions,” notes S&P.

The €415m SSNs are unmoved on the news, we presume that investors remain confident of the robustness of the MediaCo structure and the club’s ability to secure an alternative sponsor.

What we are reading/watching this week

The list is a little light, as I was mostly reading guidebooks and Google Maps.

Elon Musk refuses to stay out of the news, with San Francisco investigating Twitter after receiving a complaint that it is converting rooms in its headquarters into sleeping quarters.

Meanwhile, Elon’s banks are considering lending him more against his Tesla stake to help repay some of the Twitter debt. At this point we suspect that the banks would prefer this collateral to owning Twitter.

What could possibly go wrong? The Reddit Crowd are now looking to move up the capital structure and buy the debt of their Meme Stocks.

And plenty of time watching the World Cup. Congrats to Morocco for their win against the Spanish. Tonight’s QF sees the repeat of the 1978 final between the Dutch and Argentina, after the Netherlands beat the USA last weekend.

Some of you may have seen the famous footage of Diego Maradona warming up, but goalkeeper John Burridge’s is even better.

And best wishes to Pele, who has done everything your favourite player does, first.

One of the stars of the World Cup returns to Brighton after losing in a shoot out to Croatia. Japan had beaten Germany and Spain earlier in the tournament.