Olympic Entertainment 

Following Novalpina’s take-private in 2018, revenues and EBITDA at Olympic Entertainment plateaued, before falling in the final quarter of FY19 and then plunging in 2020 as lockdowns took hold. The sponsor then spooked bondholders further by moving all of the group’s online and Lithuanian land-based operations outside of the restricted group, with an independent valuation determining a lowly fair value of €18.4m. Kirkland & Ellis, lawyers for the bondholders, reportedly wrote to the company’s board requesting the assets be restored, saying the transfer was “designed to benefit the sponsors” and the valuation didn’t have “any proper market testing process”. 

The bonds fell ~5pts from around 84 to 79 on the back of the transfer, but have since recovered into the mid 90s, and go current in May.

More recently, Novalpina is being liquidated due to infighting between the General Partners, with management responsibilities transferred to Berkeley Research Group in Aug-21. Uncertainty still remains around what this means for the Change of Control provision contained in the bonds. Our analysis suggested that one workaround could have been to exploit the breadth of the “Management Investors” definition so that CoC isn’t triggered. This is speculative though, and it appears negotiations could still be ongoing – in Dec-21 S&P were also still in the dark.

The most recent earnings call (16-Dec-21) produced more questions, with one lender using their Q&A time as a call on other bondholders to reach out to himself or lawyers Kirkland and Ellis to round out the process of putting together a creditor group. We have reached out to advisors but with no luck obtaining any new information.

Ent(ert)aining offers?

Finally, reports suggested that UK-based Entain were mulling a $1bn bid for the Baltic gaming operator. The Bloomberg article says that the price tag “includes an upfront payment to acquire Olympic’s online business and operations in Lithuania and Croatia, as well as an additional earnout to be paid in early 2023 depending on performance”. Management was very dismissive on the Q3 earnings call, saying “from a business perspective, we’ve never spoken to Entain, and they’ve never spoken to us.”

The article wasn’t short on detail though, suggesting there could be some substance to the story. It continues, “Entain is also seeking an option to buy Olympic’s remaining operations in other countries in early 2023, [offering] to inject liquidity into that part of the business before it buys those assets, in return for concessions from bondholders including an extension of the debt maturity.” 

So we assume the $1bn is for the entire business, given bondholders are unlikely to feel that the Croatian operations are worth the difference between the online and Lithuanain operations removed from the restricted group for €18.4m in 2020, and the $1bn touted here. 

Initial thoughts at 9fin were that $1bn looked incredibly punchy, even in the 2021 M&A stratosphere, valuing the company at just under 24x 2019 EBITDA (i.e. on a Covid look-through basis). This is a far cry from the 4.8x Novalpina paid to public shareholders in 2018 that also included the online and Lithuanian assets. Even based on FY19 EBITDA (which gives net leverage of 5.3x) the suggestion is the equity is underwater here.

Entain have been on an acquisition spree in recent years, recently acquiring Enlabs AB last year to expand into the Baltics meaning some regional synergies could be the rationale for an Olympic bid, but given the ailing performance of the business the premium in a $1bn valuation looks enormous. The multiple on Enlabs was around 27.9x by our calculations so maybe Entain are happy to pony up at massive valuations, but we note Enlabs is heavily online focused and has recovered well from the pandemic.

The liquidity injection mentioned is interesting, because we think it would be difficult for Olympic to get a like-for-like refinancing done; an A&E or an equity injection looks odds-on if they are to refinance at suitable rates (discussed later). The current 8% coupon equates to €16m of cash interest annually, some 23% of FY20 revenues (or 11% of FY19). With yields now quoted with a ~12-handle, something surely has to give in a refinancing, particularly if one pocket of value in the online operations remain out of reach for bondholders. 

In our view, the Entain acquisition might make business sense, but the reported valuation appears high. Berkeley Research Group is a consultancy, reportedly tasked with winding up the Novalpina fund by selling the three portfolio companies for the highest possible price. It seems unlikely they will have an interest in holding a company that is far outside of their typical universe where, as mentioned, they operate as a consultancy, not a private equity shop.

Following the aforementioned stagnant performance since the 2018 LBO, the company has struggled through the pandemic; gaming revenues were down 2.3% in Q321 versus prior year, with Adjusted EBITDA down 11.3% as Latvian restrictions drag on the company, so it certainly isn’t rampant growth that makes the company an attractive acquisition candidate. 

Olympic does, however, hold a niche position as a gaming operator in the Baltics with scale, with a lot of competition being “mom-and-pop” shops struggling to weather pandemic storms, meaning consolidation opportunities are present. The lack of severity evidenced by the Omicron mutation is another positive, so Olympic’s competitive position and proximity may make the acquisition a compelling one for an acquirer looking for exposure in the region.

We believe a suitable acquisition looks a serious possibility given the motivations of various stakeholders, but failing that, we look at how a straight refinancing transaction may materialise.

Home Straight

The recent fate of peers has been mixed, with Lowen Play, Intralot, and Codere, all announcing restructurings in 2021, so a workout is certainly not off the cards. Furthermore the company has a fully-drawn €25m RCF (drawn in Q120, not long before a €23.5m shareholder distribution on 27 March 2020) maturing in December 2022. Q121-Q321 tests were waived last year meaning the Q421 test is in play again, with S&P calculations suggesting a waiver is required to avoid a covenant breach (another likely topic of conversation between the company and the bondholder group).

Cirsa, however, managed to get their own stressed refinancing away in Sep-21, on a heavily adjusted FY19 EBITDA giving marketed leverage at 4.7x (excluding €450m PIK Toggle). 

Looking at the debt quantum Olympic could shoulder on their FY19 EBITDA of €37.4m, refinancing the drawn RCF and the Notes at net leverage on their previous deal of 3.2x would require an unrealistic equity contribution. This is even more likely given Berkeley’s motivations.

One option could potentially be to raise money against the assets that have been removed from the group, and use the proceeds to bring down leverage in the restricted group. 

Alternatively, the company may sell bondholders the idea of seeing out the pandemic and consolidating the Baltics gaming space to drive future growth, opting instead for an Amend & Extend to allow EBITDA to recover before launching the refinancing. In this scenario, however, there may still be a new money need in the short term. Q321 was the first quarter since the pandemic began where all countries were open for the full quarter, and Olympic generated ~€5m of cash – two quarters of this is just enough to cover the €8m semi-annual interest payments. 

We note that a covenant waiver secured in December 2020 that waived or altered the first three quarterly tests of 2021 was supplemented by a €10m equity injection, but again, this is likely to be much less appealing given the current state of the sponsor.  All eyes will be on the company’s FY21 earnings call, a date for which is yet to be announced.

Takko 

There has been a sharp turnaround in the German discount retailer's fortunes in the two quarters to October 2021, which raised prospects of a successful refinancing. But renewed headwinds and a failed marketing attempt in November to attract investor interest, could require positive affirmation from rating agencies removing its triple-hook status to get a deal away. Takko has said that it would look at addressing its capital stack on a ‘holistic’ basis. 

As recently as early March 2021, the Germany-based discount retailer was fast running out of cash, with talks over a €75m state-guaranteed loan from KfW breaking down, and interest payments temporarily suspended. In mid-March, Takko received €53.6m of new money — a €23.5m super senior term facility maturing on 31 May 2022 and a new €30m term loan maturing 15 August 2023, mostly provided by sponsor Apax either directly or reportedly via debt funds in which it invests. 

In conjunction with the new financing, minimum LTM EBITDA tests were inserted — €70m for April 2022, rising to €110m as of July 2022. However, the €20m minimum liquidity covenant put in place in the summer of 2020 and expiring in January 2022 is unlikely to be tested.

Liquidity was just £52m last May, but by end Q3 (to end October) this leapt to an impressive £242.5m, boosted by increases in payables days negotiated with suppliers during lockdown. This had fallen to £204m by 23 December with management saying that payables should normalise from the fourth quarter, without giving forward guidance. 

Trade payables increased by €52m to €173.2m to end October 2021, from €121.2m at end January 2021, while trade receivables grew by just €10.5m to €12.7m. 

Management during the Q3 conference call (11 January 2022) were unable to detail what the €32m of ‘other items’ year-to-date was in the cash flow statement, saying they would revert to the questioner. 

With several facilities and bonds to deal with in the next two years, including facilities due in the next six months, analysts have pressed Takko on whether it would first use its impressive cash balance to repay shorter-dated and more expensive debt and then tackle the remainder via a capital markets transaction. 

Management responded that they would look from an “overall point of view – looking at the capital structure and the business needs” adding that they “needed to consider all possibilities.” With the bond maturing in November 2023 – “there is still time to observe the market and to prepare ourselves for a refinancing.” They said there is current uncertainty regarding Covid restrictions and “we don’t feel that the markets are right.” 

There was no mention of a market sounding carried out by Deutsche Bank in November, which we are reliably informed was recently revealed by our colleagues at Debtwire. Investors were reportedly put off by renewed Covid restrictions and past interest payment delays. 

Since emerging from lockdown, business performance has been strong. Revenues and pre-IFRS EBITDA during the third quarter (to end October) outpaced not just 2020 but also pre-pandemic levels in 2019, coming at €58.9m (€46.6m in 2019) and €109.2m on a LTM basis, well above the €85m previously guided for FY21. Free cash flow was an impressive €77.5m.

But in the fourth quarter, the group was impacted by renewed Covid restrictions in Germany and Austria with management saying that it was very difficult to give forecasts for the weeks and months to come. Encouragingly sales were up very significantly in states where restrictions had since been lifted such as Bavaria and Lower Saxony, they noted. 

Rising input costs, including freight rates, labour costs and cotton are likely to provide headwinds. As a discounter, Takko may struggle to fully pass on cost rises, as it has a price guarantee to customers for what it calls staple products. 

LTM Leverage (IFRS 16) has dropped from 4.9x at end January 2021 to around 4x at end-October, which would suggest that a refinancing window is now open. Multiples in the sector however are low, with Hema sold at 5.8x with a 50% LTV in 2020.  

It’s UK peer Matalan is 4.8x levered, and it’s SSNs yield around 8.5%, suggesting that Takko might have to pay as much as 8% to get a deal away. It’s existing €285m 5.375% 2023 notes have performed strongly of late and are now bid at 7%, down from double-digit yields last spring. Ratings agencies remain cautious, keeping their CCC ratings, but there could be hope of a single-B rating if the improved performance can be maintained. 

Apax has tried to IPO the business in the past, and might be motivated to do so again, but it will need to address its near-term maturities first to attract investor interest.

Takko is running out of time to address its May 2022 maturities. One questioner on the 11 January call commented that the auditors would be very nervous about giving a going concern report in their upcoming annual report if these were not addressed.

“We are pretty sure that we will have addressed [them] by then,” said management who added that they are in discussions with banks. 

We would suggest that the company may be working on a dual or even triple track approach. 

It could address the May 2022 maturities first - but will super senior lenders be willing to roll if 2023 notes are not refinanced? One option is a springing maturity, to say June 2023, if the notes are not refinanced within a certain timeframe. If it cannot reach agreement with the banks, it could still use its cash balance, but this would deplete liquidity. 

If unable to launch a spring refinancing, we wouldn’t be surprised to see an A&E or soft restructuring, likely being prepared in the background as a plan B.

This is part one of our (Not So) Blessed to be Stressed report. Part two will focus on Corestate Capital, Lycra as well as revisiting Raffinerie Heide and Matalan to update for recent developments. To receive a copy please complete your details here.