Market Wrap

HIP to be scared; Issa no deal; Take it (out) to the Max

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

Over the past few months, memories have come flooding back as a shower of issuers whose restructurings and chequered performance I covered during and post GFC have tapped EHY primary. The roster of names so far this year includes Punch, Pizza Express, Parts Europe, Kloeckner Pentaplast, Tullow Oil, APCOA, Ontex, Saga, David Lloyd, Rodenstock, Consolis and our sparkling new deal for this week, Ideal Standard.

I’ve been criticised for being too negative on businesses that went down the toilet and were then restructured. Admittedly a lot of time has elapsed since for many of these names and most of their problems may have been flushed away.

Several companies are under new ownership and have undergone substantial changes to their financial plumbing and numerous operational restructurings to unblock efficiencies.

Many fund analysts covering these credits will not know of former histories and even some of their bosses may not remember nor have been a party to negotiations in a past cycle.

So, is having past knowledge of a EHY company a good or bad thing?

Is it better to know about all the baggage or be blind to historical problems?

Does it aid investment decisions or does this just lead to the application of negative bias?

Deals with a hairy past are often priced wider. I remember one German stressed refinancing which we said "might be the hairiest deal ever” prompting the CFO to stop talking to me for almost a year. At a restructuring event in Frankfurt, he finally told me why - he thought we were poking fun at his moustache - which was indeed spectacular.

So could a Hairy Issue Premium (HIP) be advantageous to new buyers? You might even say it is HIP to be scared.

I used to be a renegade

I used to fool around

But I couldn't take the punishment

And had to settle down…

Hot Flushes

Bankers to Ideal Standard are saying that following substantial changes to the business, it was time to reintroduce the credit back to the HY market. After a grimy past, it is now squeaky clean and presented to investors as the latest piece of Sanityware.

The Belgian-based bathroom fixtures company bears no relation to the business that Bain bought in 2007 for $1.7bn financed with $1.55bn of hung loans led by BofA and Credit Suisse.

The banks subsequently offloaded some of their exposure in the 80s in the summer of 2008 as leverage approached 7x. It was not helped by the European Commission responsible for competition policy in 2010 uncovering a long-running cartel between Europe’s major bathroom equipment manufacturers.

Around this time, EQT, sponsor to its peer and major competitor Sanitec, was fighting to retain its investment. It was further down the U-bend in reducing costs and moving production to cheaper countries, but it was still forced to restructure its debt in 2009, via an equity injection of €115m to reduce debt to €300m. It was subsequently IPO’d in 2014.

Performance at Ideal Standard continued to go down the pan, prompting lenders to issue an acceleration notice in February 2010. But sponsor Bain used €321m of new money to buy back €820m of loans from lenders at 55-56c and then as new majority lender waived the breach. Minority lender SVP had earlier taken it to court alleging round-tripping of €75m sitting elsewhere within the group to cure covenant breaches in September 2009, with the money returning the next day, but it lost its legal challenge.

In 2011, Ideal raised €250m via a new seven-year SSN to part refinance senior debt, at a purported 3.6x net opco leverage (pro-forma EBITDA of €69m versus actual €13.8m – you thought this was a new phenomenon?) with another €15m of EBITDA from closing its French plants to come.

I will leave you to do the maths to work out how much of a bath Bain took on the deal, it will certainly not make it into their fund marketing materials. It wasn’t the worst deal of that vintage, the sink-ing of Bavaria Yachtbau was arguably worse, but I digress.

Back to Ideal, a misnomer of a name for Bain.

By the spring of 2014, Ideal Standard’s EBITDA was sub €10m, with the bonds trading at 70, with the company offering a swap into new PIK/toggle bonds or preferred equity certificates and/or a mixture of the two, without haircuts. Interest rates offered were in the mid-20s (the majority of the interest was PIK).

Anchorage by this stage owned 60% of the debt and was offering to provide €50m of new money. Most holders took the equity-linked PECs option which would allow funds to take control if performance didn’t improve.

By 2018, the terms and conditions of the gargantuan €2.275bn of preferred equity certificates and shareholders loans were amended under a swap deal, leading ratings agencies to finally treat them as equity. Anchorage ended up with 80% of the business with CVC Credit owning the remainder.

So, after reading all the above, are you better off with historical knowledge or just looking afresh?

Taking the bondholder presentation at face value, the business looks in okay shape. The new €350m 2026 SSNs are marketed off €91.6m of pro-forma EBITDA for a lowly 3.6x net leverage. Add backs for a 2021 vintage stressed refinancing are relatively light, LTM March EBITDA is €67.5m. Admittedly, there are some joint ventures which are fully consolidated, plus significant pension liabilities but earnings growth and cost savings in the past few years have been very impressive.

Most production has shifted to low-cost countries such as Bulgaria and Egypt, but there are plans for more savings with margins forecast to improve from 8% into low double-digits. Ideal faces headwinds with significant rises in prices of raw materials such as Copper, Brass and Steel, but it claims strong historical success in passing through costs. Its addressable market is unlikely to grow much, however.

The deal funds a dividend payment of €272m to repay PECs (still another €1bn plus to go) and refinances a €65m Bulgarian syndicated loan. But as our Legals QT explains the docs are relatively conservative, which should provide some semblance of protection.

So, is 6.5% pricing enough of a HIP, to square with investors?

Issa no deal

Last week we jokingly used as a headline for our LevFin wrap, suggesting that anything can be refinanced and is able to avoid a hard restructuring. It can be difficult to cast our minds back to last October and November when emergency loans were provided to household names like Cineworld in mid-single digits as they struggled for survival as the second lockdown hit hard.

Regular readers may be bored by now of my fascination with CVA challenges and my willingness to spend hours listening to submissions from landlords. But every now and again, a trawl through the Rolls Building Court lists can throw up a case with wider interest and listening in can prove enlightening.

Ronald Young’s solo landlord challenge to Caffe Nero’s CVA went to trial this week, despite the company failing to strike out on the grounds that it was a proxy for EG Group’s attempts to take control of the UK-based coffee shop chain. EG paid Young £100,000 to pursue his challenge despite an offer to pay his arrears in full. (It is doubtful that Mr Young is paying the expenses of Robin Dicker, the country’s most prominent corporate law QC to pursue his case.)

Last October, faced with possible insolvency in December when the rent moratorium expired, Caffe Nero launched a CVA to compromise its unsecured creditors including landlords. But just a day before the Monday voting deadline, EG launched an unsolicited offer via its lawyers Kirkland & Ellis. It would pay an enterprise value of £350m to £400m on a cash free and debt free basis and pay landlord arrears in full (compared to 30%). But by this time a majority of creditors had already voted.

With a waiver agreement with lenders to fall away in mid-December and conditional on CVA implementation, Caffe Nero rejected the offer believing that it was undeliverable and highly conditional, especially as it was unlikely to discharge the £350m of debt plus other liabilities.

However, Moshin Issa of EG Group is adamant that he could have completed a deal within 10-business days, remarkably telling the court: “I can complete any deal in seven-days, it is still possible, I can wire £400m [today] to the court to hold.”

He went on to say that he had a mandate to make the offer, and this didn’t require shareholder approval. “I have autonomy to do that deal… the board has a lot of trust and autonomy put onto me – that’s why we have done so many acquisitions in speed.”

However, Tom Smith QC for the company pointed out that there was no evidence submitted in his witness statements of this ‘unwritten standing mandate.’ He added that on that Sunday, Imraan Patel - the EG Group general counsel and company secretary, sent an email seeking offline board approval.

Issa said: “it was in light of governance, just a formality dotting the i’s and crossing the t’s.” The request was to just approve the offer and not its terms, it was confirmed in court.

Under further questioning about his role and interaction with the EG board and shareholders, he said:

“The shareholders say just do it - you don’t need to come back to us.” He added: “This is not like a normal business, I shake their hand, look into the whites of their eyes, I will get the deal done. I have no [spending] cap, they allow me to do any deal that makes sense, to find legitimate opportunities, we would just go out and do it.”

Tom Smith pointed out that there was a lot of press attention about corporate governance at EG at the time, most notably the resignation of Deloitte as auditors in mid-October.

Issa didn’t directly answer the question on why the auditors had resigned, but he stated that having KPMG, another big-four accounting firm as replacement, showed that there were “no big issues.”

The above are not the only incredible statements to come out of the trial.

Moshin Issa called an email advice from his future CFO on the EV being underwater “Rubbish.” He also contradicted evidence from the email offer from Kirkland and Ellis on 18 December as EG’s offer being conditional on finalising financing, which he said was inserted by the lawyers in error.

But EG Group’s Moshin Issa was not the only one to contradict their own side's evidence.

Dr Ford, the Caffe Nero CEO denies looking at the EG offer which was emailed at 8.48pm on the Sunday Evening, saying he went digitally dark after 9pm as per an agreement with his family. But was later forced to confirm he sent an email response at 9.58pm to Richard Hodgson, a restructuring partner at Linklaters who had emailed him at 7.05pm shortly after lawyers for EG had indicated that a proposal would be submitted.

Caffe Nero lawyers sought court permission to amend evidence to correct ‘minor errors’ to remove Dr Ford and Benedict Price, the CFO, from the attendee list of a lender meeting the same day, and that minutes prepared by company lawyers of two board meetings were discovered ‘very recently’ to be inaccurate and should have been on 30 November, not Sunday 29 November.

There are differences with lenders who the company claimed had quickly reiterated their support for the CVA (via lead bank Santander and Partners Group for the Mezz) and the board's rejection of the EG offer. But it later emerged when they asked for this in writing the banks were unhappy at not being told the full details (there was a chance of being repaid in full). The company countered that it was advised it couldn’t share the emailed documents due to the strict conditions attached.

We also had Mark Kleinman from Sky calling the company at 8am on 30 November for a comment on the offer, which the CEO believes was a deliberate move by EG to influence the vote and disrupt. The company alleges it was a tactic to ensure that the CVA would fail and allow EG to buy on the cheap out of administration.

Hopefully the above has given you a thirst for more 9fin court coverage. The case continues - I’ve always wanted to say that!

Sponsors take it (out) to the Max

As documentation gets looser, and pandemic affected companies are able to find yield hungry investors to tap their bonds for more, there is a downside for existing investors.

Maxeda showed this perfectly on Wednesday by announcing that it would be making a €90m payment to its shareholders, less than two-months after tapping its bonds by €50m for liquidity purposes. To be fair it didn’t say at the time specifically who the liquidity was for!

Most holders were unaware of the news of the cash distribution via a share repurchase until the next morning (9fin had it at 12.01pm on Weds) paid via cash on the balance sheet.

The distribution was not entirely unexpected, however, with Fitch suggesting in May that the company “may distribute excess cash as dividends over the next few quarters, depending on its performance”. The ratings agency was probably unaware that 9fin suggested in January that Maxeda sponsors could do an opportunistic dividend recap.

It may rankle investors coming off a very poor first quarter, and while May and June were very strong from the reopening of its DIY stores, bondholders are likely to be miffed that around half of the €182m of end-June liquidity has disappeared from the store.

So, how did it pull it off?

9fin’s Caitlin Carey outlined yesterday the starter basket and general RP basket’s get you to €79m (easy to find btw using our Covenant Capacity functionality) but using room under smaller baskets and some CNI builder it could have feasibly made the distribution.

This would max out all their available RP. But it can be reclassified if, at a later point in time, Maxeda’s Consolidated Total Net Leverage Ratio falls below 2.25x, then the distribution can be reclassified under the leverage-based RP carve out -- which would “empty out” the baskets leaving these available for future use. If you thought that was bad enough, there is a super grower from September 2021 which could permanently upsize all the fixed amounts on the baskets.

We calculate that net leverage was 2.3x in the quarter to 2 May, so the above is very possible.

There is another route, a controversial two-step unrestricted subsidiary structure approach, using flexible language around Unrestricted Subsidiary value transfers in Maxeda’s covenants. In our report we go into detail about how this might work too.

We have asked the company to confirm the approach it has used – we will keep you posted.

Stonegate said in a recent conference call that it would need a waiver to issue another tap, this time for another £165m of its 8.25% senior secured 2026 notes. Earlier this year the UK-based pubs chain said it was close to maxing out on senior secured debt capacity.

In its consent solicitation request for which it would pay a skinny 10bps fee for further issuance headroom (up to £225m in total) it said that it had already had indications of support from 61.1% of holders. The consents require a simple majority across both the FRNs and Fixed Rate Notes -- separate majorities are not required for each tranche.

In addition, Stonegate intends to exchange its remaining TLB borrowings (€196m) for an equivalent amount of Additional FRNs on or before the New Notes’ issue date.

The proposed amendments also include (1) a provision permitting any contribution debt (debt on a 1:1 basis with any equity injections) to be secured pari passu on the Collateral and (2) provisions restricting the ability to access certain RP and PI baskets until the Consolidated Senior Secured Leverage Ratio < 5.5x.

As we point out in our analysis of the consent request:

“Although marketing EBITDA is presented for a pre-COVID period, the covenants do not have any language that would allow this metric to be used for covenant calculation purposes. Rather, covenant EBITDA “shall be measured for the period of the most recent four consecutive fiscal quarters” for which internal financial statements are available. Stonegate’s LTM Adjusted EBITDA is around £18m (£130m FY ended Sept-20 - £92m for 28 wks ended Apr-20 + £(10)m for 28 wks ended Apr-21). Granted that this calculation does not include pro forma synergies adjustments, but it’s clear that the leverage ratios would be much higher if calculated off current LTM EBITDA.”

Stonegate wants to spend around £180m towards reviving its expansion programme, mothballed during the pandemic. The plan is to convert more pubs to its managed concept.

One bondholder complained about another round of bond issuance in the last earnings call:

“The company is very highly indebted, it has gone to the bond markets to shore up liquidity,” said the investor. You are now wanting to come back to the high yield market, to layer more debt or potentially priming us via a sale and leaseback. “It is astonishing to hear management mentioning this. From a creditor and bondholder perspective this should be funded by equity. I am not alone in that observation. The shareholders should be funding this.”

Management responded that they would be guided by market forces and “if this view is shared [by other bondholders] this will limit our options.”

This was always the issue, said one fund manager who has avoided the name. “It has a very high LTV and it's rising, you either burn FCF or sell assets. TDR needs to put in equity or break the securitisation.”

The consent request has probably overshadowed news that Stonegate had launched lawsuits against a trio of insurers for a total of £845m in the High Court. It is seeking payout of business interruption insurance (being facetious I might suggest the HY bond taps were a form of interruption insurance). The case hasn’t hit the court lists yet, but it might be worth checking the bond docs to see what TDR could do with the spoils if they win a settlement.

Blessed to be Stressed

I am running out of time and space to talk about other higher yielding stressed refinancing deals to emerge this week.

McLaren £550m HoldCo injection via preference and convertible pref shares, has led to its long-awaited refi, with $620m (£449m) of new Senior Secured Notes due 2026 to take out its 2022 notes. It used its launch control of 8-handle whispers to turbocharge its order book. The deal eventually priced at 7.5% and immediately accelerated at full throttle to trade up to 102-102.5. The deal was close to our McRefi prediction, we had 4-4.5x leverage (versus 4.7x) and a HoldCo PIK rather than preference shares.

This week we published Blessed to be Stressed, which builds on our work on predicting and reviewing stressed refinancing candidates. It includes Lowen Play, Haya Real Estate, Raffinerie Heide and Matalan. We have used 9fin’s screening tools and added companies mentioning refinancing in their earnings calls to fashion our list of most likely names.

Our stressed watchlist report is organic, with names to be added and amended over time.

One of the most interesting stressed refinancing deals of this year was Tullow Oil, which ditched its relationship banks and its reserve-based lending facility for a more expensive jumbo HY bond deal. Tullow Oil emerges from the RBL, Oil Reservoir Dogs asset valuation.

Peer Enquest went down the opposite route, gaining bank financing to take out its bondholders which had been problematic for years.

But fellow North Sea operator Ithaca Energy this week decided to go for a mix of both. Their $625m senior notes due 2026 are guided right on top of Tullow’s existing notes at 8.75-9% having lower leverage but much weaker security. Arguably 2020 revenues were boosted by profits on hedges and as our ESG QuickTake outlines the mid-life assets E&P company appears to be hoping that it will be business as usual for North Sea Operators. Admittedly, the bulk of payments to deal with its $1.1bn of decommissioning costs are beyond 2026.

In brief

More court coverage from 9fin Towers, with Comexposium ordered by Justice Zacaroli to provide the parameters of French law they are relying upon by 10am today. Two lenders, Attestor and SVP, have launched a Part 8 claim regarding their rights to information under the SFA with an English jurisdiction clause for disputes. The company claims that following its entry into Sauvegarde last September, lender rights fall away. The arguments are to be heard at a three-day trial in the week commencing 16 August after as reported, the company failed in its jurisdiction challenge last week.

Heathrow issued a consent request this week from its SSN holders to extend its ICR covenant waiver to apply for FY21. Headroom is tight, with just £66m of cash deficiency to the base case likely to trip. Our legal analysis of the ICR requests and other amendments is here

After its recent defeat in the courts, Steinhoff has announced details of an improved settlement. We will endeavour to take a closer look at the details next week.

The founder of NMC Healthcare BR Shetty has launched a $8bn legal claim in the US courts, accusing the former CEO, EY and two banks of operating a ponzi scheme, stealing $5bn from his empire. In a separate legal action, NMC administrators Alvarez & Marsal will launch legal action to recover the lost funds. But in a potential blow to the creditors, one of the largest lenders Dubai Islamic Bank has not agreed to the restructuring and is attempting to freeze assets of former directors including BR Shetty.

There was mixed news for two recently completed restructurings:

Harbour Energy announced that first gas from the Tolmount field would be delayed to year-end due to technical issues with equipment.

Conversely, French tubes manufacturer Vallourec raised its forecasts for 2021, projecting €475m-525m of EBITDA and negative €240m to - €160m of FCF. The improvement is down to a higher contribution from its Brazilian Iron Ore Mine, and better internal efficiencies.

What we’ve been reading this week

Almost a year after irking bondholders with a controversial transfer of assets out of the restricted group for Olympic Entertainment, rookie Private Equity sponsor Novapina has another scandal on its hands. The second of the PE Fund's three investments NSO Group is getting a lot of media attention for all the wrong reasons.

The Israeli firm is accused of selling its Pegasus Project spyware to track journalists and was cited in a report from Amnesty International that its software has been used to track a number of prominent politicians and even world leaders. Closer to LevFin home, behind the paywall Reorg has reported about covenant issues at NSO with attempts to raise hundreds of millions of new debt amid lenders organising.

If you thought it couldn’t happen here in the UK, then the Guardian’s article earlier this week is disturbing. The new proposed secrecy law by the home office could recast journalism as spying with similar penalties.

Financial restructuring journalists are always looking for the next big whale, and they don’t get much bigger than China’s Evergrande. Low-ball estimates are that the property developer has $107bn of debt and its bonds fell as much as 20-points at one point this week on stories that bank lenders are being told by the Chinese government not to lend against unfinished properties, with holders of 2023 notes being forced to accept 53% discounts to pledge their bonds as collateral. This Forbes piece is a good starting point- but if you want to be really scared and wonder if this is China’s 2008 moment – this thread is for you

In a week where Janet Yellen said that the inflation spike could last a year (is that still transitory?), this excellent IHSMarkit report shows how capacity and supply chain constraints can be a good lead indicator for inflation.

And while I was covering EG Group’s court embarrassments, I would have loved to have dropped in on Microsoft Teams into Mozambique’s case management conference against Credit Suisse and Privinvest over $2bn of hidden debt, much of which ended up in bank accounts of former CS employees and corrupt government officials. The Tuna fishing fleet scandal is one of the most interesting and bizarre cases of fraud I've come across. I may even decide to take some time off in 2023 to listen into the case when it comes to a full trial. For those who can’t wait, I suspect Laura Gardner Cuesta at Debtwire is writing about this.

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