The tempestuous week wasn’t a surprise, it is not unusual for a raft of companies to decide to leave it to the very last minute (most had 30 November Q3 reporting limits under their docs) to release their numbers. Luckily we had most of the usual suspects lined up, and their write-ups with key takeaways are on our site for many.

But that left a lot of presentations and transcripts to wade through. The plan was to triage, write a TLDR for each release, with a traffic light system to assess which ones to write straight away, those to publish later, or just give a bye for the quarter. (We will publish some of the TLDRs further down in the Workout — watch out for some more in-depth pieces next week).

If that wasn’t enough to be going along with, Adler Group announced its capital reorganisation at 8pm Friday (my German wasn’t good enough to participate in the Media call at the same time) which alongside more column inches on commingling (not a euphemism for employee behaviour) at FTX dominating my weekend reading. There was also some stale pizza, as Food Delivery Brands finally admitted its poor service for bondholders (since early 2020) cannot be tolerated.

There wasn’t much downtime to watch the drama unfolding at the World Cup (and mourn Ecuador’s exit) speed reading through dozens of investor presentations as an first screening.

So, apologies for a lack of a big picture update this week — the TLDR is that mister market now thinks only 50bps from Fed/ECB in December, the S&P 500 and Nasdaq are close to downtrend breakouts and the 200day ma, and everyone believes in this Santa rally.

The iTraxx Crossover is now less than 200bps wide of its 2022 starting point — this seasonal gift has led to banks offloading what they can before their Xmas parties start — witness Ekaterra hung debt sold at 82, Entain upping its dollar and euros add-ons, KronosNet TLA paydown, with Altice and Sebia A&E’s going smoothly, unlike Keter’s Kerfuffle (and possibly we hear also for SLV and Flakt — please call us and tell us more!)

Once the dust settles on earnings and after a mini-break eating lots of oranges (the only clue I’m giving to my whereabouts), I will share some thoughts on where I think the distressed market sits, the key takeaways from 2022 and our expectations for 2023. Feel free to get in contact with your own thoughts (privately or for publication).

And back to the present day, despite the recent wider LevFin rally, CCCs have lagged significantly suggesting that many names have idiosyncratic risks. Our latest Top of the Flops report for November highlights some of the worst performers. Plus the third-quarter earnings season has thrown up some new special situations (more on some of these later).

But first, its time to get primed on our favourite German Real Estate situation:

Adler subs-primed financing

When the Adler Group capital reorganisation release landed in my inbox last Friday at 8pm, my first reaction was a blessed distraction from the mind numbingly dull England versus USA game.

My second thought was, how much are the bondholders lending— €937.5m, are they crazy?

My third thought was, OMG that’s really expensive funding (12.5% for secured first ranking PIK, plus CVRs to 25% of the equity)!

My fourth thought, what about the Adler RE bondholders (not mentioned at all in the release) — have they been primed?

After an early start on Monday to post a first glance piece, it was another early start on Tuesday as the Q3 presentation arrived at 7am. I decided to skip the 8am equity analyst call in German (weirdly the Q&A was advertised to be in English) and wait for the 9.30am call, with Chairman Stefan Kirsten finally having some good news to convey to bondholders.

As usual Kirsten wasn’t short on hyperbole in his introduction. In November the group had its back to the wall, with no auditor, and unable to sell assets as it was seen a distressed seller with just a number of ‘indecent proposals’ submitted. The deal with its bondholders will protect Adler’s assets and cash position and allow time to maximise value for all stakeholders, he said.

CEO Thierry Beaudemoulin then took over on the call. The group was sailing in a perfect storm, he said, due to the effects of strong inflation and interest rate resets across the globe. Investors are extremely cautious in underwriting in the current market environment, moving from a state of FOMO to FOMF (fear or moving first), resulting in dry market with almost no sizeable transactions occurring in Q3, and low expectations for Q4.

So, the disposal strategy which Adler had hoped would repay upcoming maturities is shelved, with the management team clearly not open minded enough to accept indecent proposals.

Instead, they are relying on new money from a steering committee of Adler Group bondholders. To steer it into calmer waters, said Beaudemoulin as he mixed his metaphors, “the company and bondholders had found common ground.”

The financing will allow orderly disposals over an extended period, with cash forecasts suggesting just €107m of disposal proceeds by end-2024.

We were then treated to the five pillar strategy which sees Adler Group transitioning to a pure-play Berlin residential real estate company with very selective development exposure:

Amazingly, there were just three questioners on the call (we had been pre-warned that management may have to cut it short to leave for an employee town hall), and some of our initial questions were left unanswered.

So, based on the available info, what is the TLDR on the proposed deal?

The financing effectively buys the Adler Group around 2.5 years of time, but also creates a huge maturity wall in 2025. Adler Real Estate bondholders will see their 2023 and 2024 SUNs repaid (this is where most of the holders of the dissident K&E Adler RE group reside, but there’s still a question mark whether the RE 2026s will approve, it may depend on how many cross-holders are in the notes). Whether Adler can make enough disposals by 2025 or be in a better position to refinance by then is moot.

In the meantime, there are better economics on offer for existing Adler Group bondholders. The 2024 SUNs will be extended by one year, and like the Schuldschein and 2023 Group converts (not party to the agreement) they will be elevated to second ranking behind the new PIK. We are told by sources close to the deal, this is the price to gain agreement, but it does seem odd to us. All Adler Group bonds gain an extra 2.75% coupon (albeit all paying PIK until maturity).

In return, the company gains from its LTV covenants being raised to 87.5% (not exercisable until end 2025), FY 22 reporting covenants are relaxed to end 2023, as Adler RE goes to court to get an auditor — yes you read that right, they can get a judge to force a firm to audit! But we are also told the auditor in question can decide to resign straight afterwards, if they wish.

Bondholders get a Chief Restructuring Officer, a block on dividends, with security over shares in a LuxCo holding most of the Adler Group assets, the good ol’ Double LuxCo protection.

Kirsten said under questioning that the company had wall-crossed six funds representing the 45% of its bonds (that’s a hefty €156.25m of new money each), with another 11 in the Hengeler Muller advised group that were not wall-crossed. Management will now talk to this group and invite others outside the group to participate, he added.

The consent solicitation is due to be launched this week with a bondholder meeting to vote on the amended terms of the notes is expected in mid-December. The approval threshold is 75% of those present at the meeting voting in favour. If they fail to get enough votes, English Scheme or STARUG are alternative options.

For those wanting more detail on the subs-priming financing, our more in-depth write-up is here.

In a Bind

When is a binding agreement, not binding? That was the question being asked by Atalian bondholders on a terse call earlier this week with the French facilities management group.

Atalian in its Q3 release announced that buyer CD&R had extended its put option exercise period for shareholders to accept its offer to buy the France-headquartered facilities management business from 25 November to 16 December.

The killer slide from the company’s presentation is reproduced below:

This news no doubt came as a shock to Atalian bondholders, who received notice of conditional redemption on 7 November, indicating that their bonds would be redeemed on 16 December, subject to the completion of a share purchase agreement.

The bonds had surged from the mid-70s to above par after the agreement with CD&R, broken by Sky News in May and confirmed by the company in July. The sponsor’s plan was to combine Atalian with OCS International, a UK-based facilities management business.

The conference call was almost exclusively dominated by analyst questions on the option extension, with another poor quarter, and an uncertain outlook, the bonds could return to the 70s or even worse, if it didn’t go through.

Surely, the deal was binding and irrevocable? Why issue the redemption notice if there were discussions? Why say the bonds would be repaid in mid-December, if the carveout of the Russian and Moroccan operations (a condition for closing) would happen at a later date? The completion of the OCS transaction was supposed to be on 30 November (no news yet), what optionality do CD&R have?

Management said it couldn’t say more on the discussions which began on 25 November, which they were not privy to, but said these were being undertaken in good faith. Their response to several probing questions was the same, to the ire of one analyst who said that the company should have had someone on the call with knowledge of the negotiations.

Bondholders were told that the deal is contingent on additional analysis — primarily on the French business — and were told they would have to wait until 16 December for an update. Management said, however, that they remained confident that the deal would still complete.

Management said they expect if the deal goes ahead, bondholders would now be repaid in mid-February, with a new notice being issued.

The bridge facility to repay the bonds is still in place, management confirmed under questioning. The combined OCS-Atalian deal is being financed by Carlyle Credit and HPS, as reported.

One questioner asked what the plan B was if the deal falls through? After all the company is almost 8x levered and has maturities in 2024 and 2025 (€625m May 2024 SUNs; £225m May 2025 SUNs; €350m May 2025 SUNs). Management didn’t directly respond to the question, saying that they remained confident that the deal goes through.

I reprised this story with one of 9fin’s lawyers at the water cooler. Surely, CD&R will be unable to pull out from a binding and irrevocable offer? Who wrote the contract, he responded. No decent lawyer would write a binding offer that couldn’t be revoked in some way. We only have a couple of weeks to find out if CD&R decided to use the T&Cs to wriggle out of the deal.

BTW I pinged OCS International to see if their offer closed on Weds, I have yet to receive a response, and their website doesn’t have any new releases.

Stale Slices

Citing adverse prospects for 2022 and 2023 and a difficult liquidity position, Food Delivery Brands (FDS) says it intends to engage in discussions with stakeholders. The Spain-based Pizza delivery operator, formerly known has Telepizza, has hired Kirkland & Ellis, Uría Menéndez and Houlihan Lokey as advisors to evaluate its options. The pizza house says it is looking to effect changes to the business, capital structure and to the Yum! Alliance.

The move was outlined in its Q3 earnings release on Friday (25 November), with a call for investors cancelled and replaced with a 20 minute recorded presentation from management.

FDS has operations in Spain, Portugal, Mexico, Chile, Columbia and Ecuador. It has been affected by a slowdown in sales, with the duration and depth of economic downturn worse than management’s prior estimates. Its franchisees are suffering and had not yet fully recovered from the impacts of Covid-19. This has led to a slowdown in new restaurant openings (a key driver of earnings) and a larger than expected number of closures (less franchisees).

As a result, FY 22 EBITDA guidance was revised further downwards to €36m-€39m, impacted by inflationary headwinds derived from rising input costs associated with energy rental and labour expenses as well as main ingredients costs.

The focus remains on preserving liquidity, said management. But with €10.5m of bond interest due in January, liquidity will become even more constrained. Leverage is expected to rise from 7.8x at end September to around 10x in 2023, clearly an unsustainable level.

The question is whether sponsor KKR (with a 84.3% stake) will once again inject money to deleverage the business or decide to hand over the keys to bondholders.

In April 2020, holders of the €335m 6.25% SSNs due May 2026 had wanted to discuss restructuring options with the company after it had disclosed a €100m liquidity need. One large holder at the time told me that the business was as poor as its pizzas, which he said were among the worst in Spain — a claim backed up by 9fin(ners) in an office poll this week.

But rather than engaging with bondholders, FDS and its sponsor kept them at arms length, eventually securing the additional funds from its shareholders (€42m) and via a (€40m) ICO-guaranteed loan from Santander.

Now, it looks as if the bondholders (plus JV partner Yum!) will get their chance to dine at the negotiating table. Lets hope they don’t serve Telepizza carbonara pizza, definitely not yum!

The 2026 SSNs have fallen by around 10 points after the news broke of the hiring of advisors. They closed on Thursday indicated at 63.25-mid, a 22 % YTM.

Too Many Didn’t Read (them all)

As promised, here are a few selected TLDRs from the 9fin team from Q3 reports this week:

First off the line is McLaren. A further £100m shareholder commitment in November (in addition to August financing) as semiconductor shortages and Artura upgrades push deliveries in Q4. Wholesales volumes -13% during the quarter. Said that “the group is in active discussions with key shareholders regarding a broader recapitalisation of the group.” Aim to be agreed and announced in Q1 23, with Lazard engaged as advisors. No Q&A for bondholders, just a nine minute pre-recording.

Financing Lycra continues to be a stretch for its new shareholders which entered into new $25m Senior Secured Term Loan (Sofr+600 bps) on 18 October. In September, the stretch fabric producer told lenders it was looking at refi or extension (to May 2025 dollar notes) for its € May 23s, entrusting in JPMorgan to find a solution. RCF extended from November 2022 to February 2023. “Exploring all funding options to support our anticipated debt service requirements,” but no mention of refinancing progress. Hopefully will say more on conference call on Monday 5 December.

Automotive leather Pasubio is somewhat insulated from automotive downturn due to being placed in luxury auto market - 9% growth expected in FY 23 vs FY 22. Interest costs for 50% of FRNs are hedged, at cap rate of 1.75%. Won’t be able to fully offset inflation in FY 22, with about 85% of contracts containing pass-through mechanisms. New standout contract with BMW (Mexico) signed in Q3, will require minimal capex.

Talking of autos and insulation, Adler Pelzer’s acquisition plan which included the purchase of eight plants from Faurecia and a majority stake in STS Group in 2021, is beginning to show results. The company, which manufactures acoustic and thermal components posted the strongest EBITDA generation since 2019 and revenues which beat previous all time highs. Looking into 2023, the group is likely to enter the market to refinance €425m of SSNs due April 2024 and a €40m Super Senior loan which matures in June 2023. Management will be conscious that the cyclical nature of the automotive industry may prevent a smooth refinancing, especially with economic headwinds on the horizon. The current yield to worst of 18.7% on the notes and 17.5% on the mirror notes shows just how challenging this could be.

Loose lips sink ships. Hurtigruten management hopes if they raise the prices high enough and are patient long enough, customers will have no choice but to swallow the inflation. As a result they expect a strong rebound in financial performance in 2023. And while management offered two slides with 2027 targets for KPIs, they failed to quantify their targets and expectations for revenues and EBITDA, which is what we really care about. Q3 22 revenue is back to pre-pandemic level, EBITDA and the EBITDA margin are positive but half their pre-pandemic level, and the group still burned cash this quarter. Going forward they hope to be cash flow positive. Sponsor is still supportive (as if they have a choice) and refinancing talks are still ongoing.

Forgital: EBITDA strong but margins affected as strong cost pressures (mostly energy). Pass-throughs with Industrials are okay, but struggling with Aerospace due to longer contracts. Engaging in negotiations to facilitate crossovers. Made profit on Energy Hedging - undisclosed amount. Net debt saw increase due to FX effects. Cash Flow from Operations saw huge fall due to much higher inventory to mitigate supply chain risks. Expect strong FY 23 due to recovery in Aviation and aerospace volume pushouts. Our more detailed update piece is here

Cardboard and container board manufacturer Pro-Gest had a tough Q3 22 with a big volume hit because of a combination of weaker demand and production capacity constraint as they extended plant maintenance works in August. This depressed the topline and caused both EBITDA (in euro terms) and the EBITDA margin to halve YoY. FCF is likely to be modestly negative this year. It's worth listening to the earnings call (scheduled for next week) to pick up colour on if this is one-off or if based on where volumes have been quarter to date, we should see some rebound.

Victoria Plc is not being floored by inflation, with no major surprises or big news in Q3. Management confirmed FY 222 EBITDA guidance at £130m - the focus is protecting the absolute level of EBITDA, not the margin. Net leverage is flat. No refinancing until 2026. Good liquidity of £250m and expects £100m of net cash flow generation in H2 22 on the back of WC unwind. Next year the focus will be on integrating Balta and finding synergies, so it will ease off on M&A. The company will watch capex and try to deal with inflation by cutting staff, cutting costs, redesigning products. Demand for top end products is resilient, some weakness in the value-end products. Dodged the question on gas hedging (didn't disclose what % of cost they have hedged). May consider bond buybacks but not immediately, more like a mid-term option...

With friends electric Standard Profil the automotive sealant producer has a record order book exceeding €3bn boosted by BEV demand from Tesla and VW, but direct and indirect material prices continue to weigh on margins and China lockdowns are affecting its Asian sales. Semiconductor shortages and supply chain issues mean that lead times remain long. Higher LTM EBITDA, resulted in leverage falling from 6x to 5.4x.

Stuck with aged stock, home shopping channel HSE 24 said liquidity is the number one priority in Q4 and for the first half of 2023. Even if this comes from sacrificing aged stock at flash sale prices. Management confirmed that Q4 is still under “significant pressure” after depleted demand has left large volumes of inventory obsolete. The “painful, but best approach”, according to management, comes after ordering too much merchandise before falling consumer confidence, inflation, and logistical challenges occurred. It is using “extraordinary discounts” and free shipping incentives to clear stale stock and preserve liquidity. As a result margins were hit heavily with Q3 EBITDA of €18m, just 9.9% of sales versus 21.3% in Q3 21 (€42m).

Kloeckner Pentaplast may be passing through to the other side. The German packaging company had previously suffered from significant lags in passing on sharply rising input costs, but is now seeing adjusted EBITDA above prior year with Q3 EBITDA up 25% due to pricing actions and a positive mix. But FY guidance was lowered due to Q4 headwinds.

All in all, a lot for our distressed and restructuring team to get stuck into — we’re actively hiring experienced reporters and analysts — drop us a line if you want to join 9fin’s best in class team.

What we are reading (or saving to read later) this week

As you guessed by now, a big chunk of the week was taken up by reading investor reports and presentations.

You must need to rebuild investor trust if producing this slide!

Some interesting lawyer reports to digest on the plane:

A white paper from Brown Rudnick — Crypto Platforms in Crisis: Bankruptcy Considerations

From K&E on Wirecard: German District Court Rules Shareholder Damages Claims Are Effectively Subordinated in an Insolvency of the Issuer

The Wirecard trial starts next Thursday. According to the FT, there are 89 pages of charges, which will take five hours to read out, and the trial is expected to last 100 days.

I also need to catch-up on SBF’s live broadcast with Andrew Ross Sorkin — the irony — the co-creator of Billions interviewing the destroyer of billions in customer funds.

Finding the next Wirecard has just become a lot harder for journalists. A shock ruling has led to the Netherlands and Luxembourg taking down their public registers of company ownership. The Court of Justice of the European Union said “the general public’s access to information on beneficial ownership constitutes a serious interference with the fundamental rights to respect for private life and to the protection of personal data”.

Brighton’s Japanese star Kaoru Mitoma manages to keep the ball in play and indirectly secures the biggest shock of the World Cup so far as it leads to Japan beating Spain 2-1 and puts Germany out at the group stages. Cue 80m Germans arguing about overhanging balls.

And finally, a special thanks to the 9fin editorial and analyst team for all their efforts (I’ve donated some extra special South Downs Craft Beer in the 9fin Towers Fridge for Friday post work drinks).

For those who are interesting in drinking it in situ, I can strongly recommend the These Hills Beer Festival — see you on 16 June next year (its also my birthday!)