Market Wrap

Friday Workout Un Schur; Core-restates; VIC leaves Aggregate in bond mortar mire

Chris Haffenden's avatar
  1. Chris Haffenden
14 min read

Some are obsessed about their four and twenty, but how Schur are they on their ability to obtain financing and do the numbers stack-up?

Private equity is becoming increasingly active in sectors and businesses where traditional cash flow models don’t apply. LevFin investors must increasingly get to grips with alternative metrics - and get comfortable with stretched valuations. In the US, we saw NetflixTwitter and Tesla tap the HY bond market well before they became profitable.

But most are now tech titans on an upward rating trajectory and are finally generating enough cash to service debt. This has emboldened several younger companies to follow the same path, but their business models may be less secure and let’s not forget to factor in survivorship bias. The fall to earth can be swift, witness Netflix stock, now 68% down from its November highs.

Cash flow for debt servicing may be no longer king.

The annual recurring revenue metric has been adopted stateside by HY investors, with software as a service and other subscription model businesses coming to market. My colleague Owen Sanderson, 9fin’s structured finance guru says that ARR CLOs are now a thing in the US. As usual in finance, the concept gets stretched by bankers (often to breaking point) with deals now being done for grocery delivery companies, whose business models are creaking to say the least.

The main selling point for these deals to HY investors is often the very low LTV, as a result of their stratospheric equity valuations. But cushions can disappear fast, for example at Grubhub.

Their bonds have followed suit with their stonks:

As we outline in our Delivery Hero preview the more natural financing vehicle to plug cash burn and finance expansion was via the equity capital markets. But after seeing its stock fall markedly (the market cap is still however almost 2x annual revenues) and their converts drop significantly below their conversion price, they had to turn to the LevFin market.

9fin’s Will Caiger Smith asked in October, Skillz, thrillz and spillz - could meme credits become a thing? It was subtitled, When investors know better, but behave as if they don’t. We noted that while investors could get their heads around RobloxSkillz another gaming tech company was a harder sell, and it ending up pricing with a 10.25% coupon at 95.

The bonds are quoted now below 80 and were downgraded to triple-hook just three months after launch on sharply reduced guidance for 2022, with just 4% revenue growth (+67% in 2021).

In light of all the above, Elon Musk’s tilt at Twitter has created a lot of interest at 9fin Towers and some scepticism as to whether he could find backers to finance the $42.0bn acquisition.

But yesterday, it was once again ‘funding secured’, but this time it was officially posted with the SEC with a list of bank commitments, not via a vague tweet.

There is $25.5bn of financing, including a $12.5bn margin loan (with a 20% LTV) so Elon will have to pledge around 85% of his Tesla holdings, Bloomberg calculates. He is in line for a $23bn bonus which would cover $21bn equity cheque, however.

What this says about Elon’s views on the relative valuations of Twitter and Tesla is moot.

The existing bonds (which would be taken out) and the shares (admittedly there is a pesky poison pill to overcome) barely moved on the announcement. Clients can read our analysis on the funding and the mechanics of the transaction here. If you are not a client, please request a copy here.

Un-Schur outcome

Schur Flexibles lenders this week finally got a look at the financing need for the Austria-based flexible packaging company. It told lenders late last week existing shareholders B&C and Lindsay Goldberg (80/20 split) were not fund the new money and would hand over the keys to lenders.

This is somewhat of a surprise, after all they had provided €41m of shareholder loans and €80m of back-to-back guarantees to stabilise the business after accounting irregularities were discovered in January and the former management were fired.

On Tuesday am, lenders were informed that current liquidity would run out on 3 June, with €60m of interim financing required by this date. This would be taken out by a €75m super senior facility at closing - the long stop date is December.

Despite a sharp drop in restated EBITDA, no debt is to be written off under the plan. However, it will be bifurcated, with 36c of reinstated Opco cash-pay debt, and 64c of Holdco PIK.

Restated FY 21 EBITDA came in at just €39m, well short of the €116m of marketing EBITDA at the time of the September 2021 LBO financing. This is projected to rise to €75m in 2023 and €85m in 2025. By end 2023, leverage would be 4.6x through the Opco (2.3x through priority debt and super senior) and 10.1x through the Holdco.

It is still unclear how these numbers will be achieved. Margins are forecast to increase from 6% to 10% which is closer to the industry average, but there was little detail in the financing update. Lenders will be pouring through KPMG’s independent business review and may need further reassurance that there are no further hidden surprises.

There is little time to reach agreement, with a heads of terms targeted for 6 May and the interim facility to fund on 3 June. There is the thorny issue of securing agreement from other financial stakeholders, most notably the supplier credit facility lenders who are being asked to roll into the Opco/Holdco debt. If they don’t - there could be another €70m of financing to secure.

There is a lot more detail on the plan, terms, and the timeline in our piece from Tuesday afternoon. Non-subscribers can request a copy here.

The loans dropped by almost ten points into the mid-to-high 50’s on the news. Our distressed analysts are looking through the various scenarios and will run their slide rules over the plan.


Regular Workout readers will know of our scepticism on Corestate’s ability to deleverage and pull off a refinancing of its April 2023 bonds, scheduled for this summer. It had previously targeted a reduction in net debt to below 3x, but leverage was stubbornly above this level at around 5x at year-end.

The pricing of its bonds reflected scepticism amongst the HY community too, trading well into double-digit yields, after several failed promises. EBITDA is forecast to grow to €90m-€100m in 2022 and if net debt fell to €350-360m, it would result in net leverage of 3.5x to 4x.

In early March, the new management team had to detail to investors why the FY 21 audited accounts had been delayed. Initially, the focus appeared to be on Corestate Bank (formerly Aggregate Financial Services) purchased in early 2020, whose management team left suddenly, with the CEO telling investors that he couldn't comment on their departure for legal reasons.

The results of the audit were expected by 31 March, but on 30 March, E&Y said that it was undergoing an impairment test of the goodwill-bearing cash generating units in HFS, the real estate fund business.

Yesterday, Corestate revealed the findings and published its annual report. It said:

Taking conservative account of the prospective development of fund volumes, goodwill at Helvetic Financial Services (HFS) was impaired by a total of € 175m to € 345m. In addition, risk provisions totaling € 46m were recognized as an expense, in particular for current balance sheet items with critical maturities. This subsequently led to deviations from the preliminary 2021 results published at the beginning of March: adjusted EBITDA now amounts to € 43.8m.

This means EBITDA is almost halved, with net leverage rising to 12x as at FY 21 (according to 9fin calculations), and is probably the death knell for any refinancing attempt.

The bad news might not stop there. My ex-colleague Luca Casiraghi spotted this from the report:

This might be a reference to the Liver building sale in Liverpool, which the FT revealed whose ownership may have links to a sanctioned Russian Oligarch. My concern from the statement above is that it refers to investments in the plural and could further delay de-leveraging.

The April 2023 bonds rose slightly on the news to 60-62, but still well below the high 70’s in late March. Amid reports advisors are pitching holders, we are moving Corestate to an ‘expected’ deal. Our initial thoughts are some form of distressed A&E with a cash sweep from asset sales.

VIC leaves Aggregate in bonds mortar mire

Another German real estate shooting star appears to be falling to earth. For some time we have seen an increasingly desperate Aggregate Holdings seek to raise cash via a series of transactions, most notably a margin loan and share option agreement with Vonovia, which recently led to the loss of its pledged Adler Group stake after a margin call.

As 9fin’s Emmet McNally has detailed in a series of reports, which dove from above into Aggregate’s financial situation, while it tries to reassure bondholders about liquidity, if the 2025 convertible bondholders at its Portuguese VIC Properties subsidiary decided to exercise their put option they would be unable to find the money to repay in May.

On 14 April, Aggregate confirmed that the convert holders in excess of €195m of the €250m of the convertible notes had delivered optional put notices, with remaining holders having until 28 April to deliver notices. Any notes not put will be redeemed at 105 plus accrued interest.

Last December company management said two main options were being explored: “The refinancing of the VIC convertible bond has been initiated with the focus on refinancing the bond at the VIC level where LTV based on appraised value of the assets was 47.2% at end Q3, in parallel with a review of potential asset sales which would provide an alternative financing route.”

But as Emmet said at the time, the €285m due (including redemption premium) on the €250m converts would be re-leveraging if replaced by more debt. There is also the issue of whether Aggregate could issue any debt at a subsidiary if consolidated net LTV exceeded 65%, which is possible given the company’s previous guidance that LTV could rise to 60-65%.

In their recent statement Aggregate said that it is “currently in advanced stages of assessing certain refinancing options which, subject to meeting certain required conditions, are currently expected to ultimately result in an Optional Redemption of the Bonds pursuant to Condition 8(b)(iv) (Redemption at the Option of the Issuer) though there is no assurance that the refinancing transaction will be successfully concluded..

Our cautious stance on Aggregate bonds has proved justified, the scores on the doors, are from the low 70’s at the time of its investor update in mid-December, to 47-mid. We shall not crow from below, but it will be very interesting to see if VIC leaves Aggregate bonds in the mortar mire.

Adler Audit Angst

A teaser on the long-awaited special audit from KPMG (investigating Viceroy Research’s allegations) landed in our inbox late last night. Adler Group this morning is highlighting the positives from the report, saying that KPMG Forensic “has found no evidence that there were systematic fraudulent and looting transactions with allegedly related parties.”

However, it admitted that KPMG had identified deficiencies in the process and the handling of those transactions, most notably the Gerresheim transaction. “KPMG Forensic's view it is doubtful whether the valuation of EUR 375 million on which the transaction is based represents a fair value of the same amount in accordance with IFRS 13.” Adler adds however, that it disagrees with KPMG on this interpretation..

KPMG also differed on the valuation of their development portfolio. It looked at two-thirds of the portfolio, their estimated market value was €1.934bn (FY20) which is €411.8m or 17.6% below the market value determined by valuer Externer Bewerter. Under questioning today, new Adler Chairman, Stefan Kirsten, said the difference was not down to methodology, but in assumptions.

While according to Adler, KPMG has cleared its LTV accounting practices “to avoid violations of the relevant bond terms”, it adds that the calculation methodology “do not fully comply with the textual requirements of the respective bond terms.”

KPMG adds, “considering the accounting corrections deemed necessary by KPMG Forensic of the fair value of the Gerresheim transaction the LtV threshold of 60% was once exceeded by Adler Real Estate AG, but not by the Company, as at the reporting date 30 September 2019.”

The company counters that the incurrence covenant was exceeded by a tiny amount that quarter, but there was no breach - as no debt was issued at Adler RE level during that period. They were back in compliance the following quarter.

The 128 page report has arrived this morning. In it KPMG complains about difficulties in accessing information, with Adler citing “work product privilege” or “attorney client privilege” in their email review. As such 800,000 documents were blocked, with 3.1m investigated. KPMG said due to lack of information provided they were “unable to verify allegations regarding persons closely connected with Extern7”(which appears to be Cedvet Caner).

We will be reviewing the KPMG report and reporting on this mornings investor call in more depth. The company is locked in intensive discussions with its auditors to finalise the FY accounts, which must be published on 30 April.

SIGNA versus noise

SIGNA Development bonds have been badly affected by the noise from its German and Austrian Real Estate High Yield peers, some of which we’ve covered above.

On previous conference calls and bondholder roadshows management were at pains to distance themselves from Adler, Corestate and Aggregate, preferring Via Celere and Aedas as comps.

We have pointed to accounting at the aggressive end of the spectrum, as it uses percentage of completion methods, and questioned whether using HY to finance development projects was the right risk/reward for investors. But we concede reported group performance appears strong.

Yesterday’s conference call accompanying their latest results, emphasised the exceeding of targets and projections at the time of their bond issue in July 2021 with sales and cash generation ahead. There was no signs Russia/Ukraine, rising inflation and higher rates were impacting valuations and rents, if anything it was the opposite, with the market remaining strong.

SIGNA wants to use NAV as a proxy for its share price (as it is private) - we note Adler’s share price referenced in the chart below is significantly below its Net Asset Value (€7.7 versus €45).

Management have consistently said the bonds are significantly undervalued, and signalled their intent by buying back a small amount in the low 90s in January. But they have since traded lower, and even after a recent rebound are yielding around 8.5%. This is higher than the cost of its subordinated capital which currently averages 8%. With €100m due in 2023, they are in advanced stages of pushing out these maturities, management said yesterday.

SIGNA is still looking to the markets to fund its expansion, with a £200m capital increase set for Q2 and it says that it considering a return to the bond markets. While issuing bonds at 5.5% last July is in hindsight a no brainer, it is less clear now which funding route is the best.

Oriflame throws out Russian subs

Oriflame, the direct selling Swedish/Swiss beauty business had a quarta horribilis. After the Russian invasion it stopped operations in Ukraine and blocked exports from its Russian operations, and suspended investments and online sales to end customers in Russia.

The conflict has had a material impact on its revenues and operating profit, with sales falling by 15.7% and losing 12% of its members during Q1. EBITDA fell by 51% YoY with net secured leverage rising by one turn to 3.9x (company metrics, 9fin has 4.6x total net leverage). Cash and cash equivalents were €103.8m down from €219.6m a year earlier. As a result, directors postponed a planned €30.5m dividend.

On an investor call yesterday, it said that it has production capacity to move operations from Russia, primarily at its Polish plants, with limited additional capex spend. There would be a timing impact and ‘some effect’ on the supply chain, however.

The Ukrainian business would be reclassified as Europe from CIS, but more controversially it is moving the Russian subsidiaries outside the restricted group, leading to a number of questions from analysts. Management said the rationale for the move was “given the big uncertainty around Russia - more flexibility and security for the whole group.”

The 2021 annual report gives additional detail, outlining the freshly unrestricted subsidiaries accounted for 16.3% of Oriflame group’s sales and 11.2% of total assets

Inventory levels remained too high, despite a deliberate running down in the first quarter which affected margins. To reflect a lower level of sales, there is a still a material amount to sell, around 10-15% of total inventory, they said.

Continued challenges in leadership development were blamed for the drop in membership numbers, as were lockdowns in Asia, previously seen as a key growth driver. The situation should improve in the second half, said management who added that getting training structures back in motion shouldn’t need significant incremental spend.

Oriflame’s senior secured FRNs dropped by around 0.8-points on the release, and are currently 78.83-mid. They were trading with a 93-handle in February, and hit 67.5 in early March.

Does the removal of Russian subs help the bonds from an ESG perspective? Thoughts?

Nordic Aviation plan of reorganisation approved

On 19 April, Judge Kevin Huennekens confirmed Nordic Aviation Capital’s (NAC) plan of reorganisation. There was a sole objection from Norddeutsche Landesbank who argued its $30.35 unsecured claim was mislabeled, but the judge disagreed.

NAC should emerge from Chapter 11 by end May.

The plan cuts the Ireland-based aircraft lessors’ debt burden by around $4.1bn, with $337m in new equity financing and $200m of new revolving credit.

For information, clients can see our Restructuring QuickTake. If you are not a client but would like to request a copy, please complete your details here.

What we are reading/listening to this week

As Steve Clapham notes in his recent Behind the Balance Sheet post, we have been mostly looking at balance sheets over the past few years with macro analysis of limited value - but now we are entering a new era.

40-years of falling rates, 30-years of real falls in energy prices, 20-years of globalisation, they may all be coming to and end and could reverse in the next decade or two.

I particularly like Diego Parrilla’s “The Frog in boiling Water” which “analyses inflation and the implications of a paradigm shift for inflation expectations across global markets.”

Zoltan Pozsar on Bloomberg’s oddlots podcast is a thought provoking listen - “the plumbing of the financial system is coming under strain like never before.” His latest research on Russian Oil and the effects on VLCC shipping is scary reading.

This week is five-years since the Seagulls were promoted to the Premier League after a 32-year absence from the top flight. After recently beating Spurs and Arsenal, we are safe in mid-table.

For away games if I cannot get away end tickets I often source tickets in the home stands. Quite often I spot the odd other Brighton fan. But in the Camp Nou last week, Eintracht Frankfurt managed to smuggle 30,000 fans in, despite only being offered 5,000 tickets. They had a famous win to get into the semi finals of the Europa League.

My old interviewee Paul Taaffe (former Tele Columbus CFO and Eintracht Frankfurt board member), I suspect your head is still sore a week later!

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