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CDS spreads for Auchan have collapsed in the last week as holders are spooked by fears that a transfer of bond debt from the French grocer’s parent company ELO Group to real estate arm New Immo Holding could orphan the derivatives.

ELO Holdings launched a consent solicitation on 24 July asking bondholders to approve the transfer of the majority of its bond and Schuldschein debt (~€3bn) to New Immo Holding, while ELO would remain the issuer of €1bn of SUNs due January 2026. See image below for an overview of ELO’s proposed changes:

ELO’s issuer substitution has prompted concerns that the legacy CDS — which still references ELO— may be functionally orphaned, with no remaining deliverable debt tied to the reference entity. Five-year Auchan CDS spreads abruptly tightened almost 450bps from around 600bps last week (24 July, before the announcement) to their current 160bps area.

Auchan's 5.875% senior notes due 2028 rallied from 94 to just above 103, as of today (31 July), on the plans. The transfer would shift the bonds to a Ba1-rated issuer — one notch above ELO’s BB — and introduce real estate–specific covenants tied to a €7.2bn property portfolio.

“The evolution of bond prices reflects the benefits of this project for bondholders, with whom the group has a direct and transparent relationship. This is not the case for CDS holders, who operate in an over-the-counter market that is totally opaque to us,” a spokesperson for ELO Group told 9fin.

ELO Group is the French conglomerate that’s almost entirely owned by the Mulliez family and is the sole shareholder of French retail giant Auchan, New Immo Holdings, and holds nearly half of the shares in French bank Oney.

The group’s free cash flow has been under pressure in the last two years, thanks to increasing capex spend and higher interest costs. Some of this pressure stems from Auchan’s recent acquisitions from distressed retail group Casino, and its Spanish and Portuguese acquisitions from discount chain DIA.

Auchan Retail, which accounts for the largest share of ELO’s negative free cash flow, has a “clear plan for returning to growth” based on “six strategic priorities”, the spokesperson said. These include: improving operational efficiency, strengthening in strategic markets, adapting the hypermarket model, repositioning on prices in France, optimising the product offering, and developing a franchise business.

The company claims the transfer is “debt neutral” and designed to reflect a broader strategic realignment — creating two independent businesses focused on retail and real estate.

ELO’s new debt structure strengthens the “financial autonomy of its two business lines… tailored to their own characteristics,” the spokesperson said.

Auchan Retail has “short term” needs to finance its seasonal activity, while New Immo Holdings has “long term” needs to finance its real estate projects, the spokesperson added.

What’s the deal?

ELO’s substitution offer goes beyond changing the issuer of most of the company’s bond debt, as detailed in a 24 July investor presentation. ELO Holdings will cancel around €2.5bn of intercompany loans it has issued to New Immo Holdings as compensation for the issuer change.

The deal will also introduce new covenants to the bonds, which ELO says are comparable to the terms and conditions offered by other real estate issues and will align the debt with the real estate segment of the debt capital markets.

ELO’s proposed new covenants include a secured debt ratio of no more than 20%, an interest coverage ratio higher than or equal to 1.8, a loan-to-value ratio lower than or equal to 50%, and the suspension of the interest coverage and loan-to-value ratio covenants if New Immo Holdings is rated at Baa1 or above by Moody’s — and provided no event of default exists.

New Immo Holdings has yet to draw up a plan to reduce its greenhouse gas emissions, though it will create one this year, according to the presentation. ELO is proposing to remove the sustainability-linked features of €750m SLB notes Due 2029, which will be transferred to the real estate group under the transaction.

The meetings regarding the deal have to reach a quorum requirement with one or more persons representing not less than one fifth of the aggregate nominal outstanding amount from each series. More than two thirds of 2027 noteholders voting must approve the transaction, while at least half of the 2028 and 2029 notes must approve of the deal.

The voting deadline falls on 7 August at midnight (Paris time), after which a general meeting is slated for 11 August — ELO Group will publish the results of the meeting on the same day — with a second meeting to be held on 19 August if the required quorum is not met.

Before the end of 2025, New Immo Holdings also intends to issue €415m of new debt, either through a bond issuance or a mortgage loan on certain assets. So though framed as “debt neutral”, gross debt will rise (from €3.08bn to €4.11bn by year-end 2025) if one includes the planned issuance. The LTV improvement is largely a function of asset sales and revaluation — not real deleveraging.

Longer term questions may centre on whether this lays the groundwork for restarting dividend payments, independent financing or even a future sale/IPO of NIH. NIH will now be structured much more like a standalone real estate operating company: separate from Auchan Retail, rated independently, and with its own metrics like LTV and ICR.

NIH has committed to no payouts until 2026, but post-2026 it targets 2–3% of NAV as distributions. That only works if it can borrow independently — which should be possible, thanks to the separation from ELO and the removal of intercompany loans.

Market response

Investors are being asked to consent to the move in exchange for a 0.1% voting fee, but the rally suggests the market is already assigning value to the structural protections and cleaner credit profile.

But investors say the sharp CDS rally reflects a more mechanical concern. Auchan was once a name more broadly followed by CDS traders, having been a constituent of the iTraxx Crossover index. It dropped out of the index in March 2021, in the roll from series 34 to 35, at a time it was quoted at very tight spreads below 100bps. But it began widening again in 2022, due to deteriorating fundamentals, retail headwinds and capital structure concerns, to hit a near-800bps peak last year.

Despite the big recent drop on orphaning fears, Auchan CDS remains well above the lower part of that range. Of concern, or curiosity, is there has yet to be a question to the EMEA Credit Derivatives Determinations Committee about whether there should be a succession event, in which other debt could become deliverable. It's possibly just too early for a DC request since the debt has not yet moved — those holding protection may believe the sequence of repayment/debt exchange matters in terms of successor outcome.

But observers say there's another, historically minded reason why CDS hasn't gapped in further — even though zero might intuitively have been the expected outcome since there's no debt left to protect.

"CDS is definitely pricing in some orphaning but there still might be some 'option' value,” said one buysider. “In the distant past, one of the reasons orphaned CDS never went to zero was always the threat that a bank or hedge fund could approach the company, lend them say $100m at 5%. That would create a deliverable at the same entity as the CDS, and they would have bought all the ‘orphaned’ CDS at a much tighter spread, say 50bps.”

The result would be the bank or hedge fund then has a perfectly hedged basis package paying them 450bps (per the example), while the company has accessed cheap financing.

This is not purely theoretical. For experienced market participants, the situation has clearly revived memories of incidents many years ago, around Rentokil and Carlton/ITV. The Rentokil one began in May 2006 when investors suddenly realised their CDS protection referencing the pest controller's old entity would be worthless once debt at that level expired. That event shocked the market, especially as it came at a time when the ability to avoid succession events had caused concern about CDS — prompting ISDA to step up plans to overhaul successor language, the mechanism governing migration of CDS to new reference entities.

But subsequently, Rentokil caused CDS traders to smell even more of a rat when, in October 2008, it issued £50m of floating rate notes due 2013 to a single investor. Those notes contained a guarantee from Rentokil 1927 and had an immediate impact on CDS, which gapped out by nearly 250bps, having been at 130bps. Contracts referencing the entity had been steadily tightening since the remaining Rentokil Initial obligations were due to expire in mid-November. Market sources at the time claimed the bonds were issued at the behest of a bank proprietary trading desk, which had previously bought CDS protection.

Something similar had happened shortly before that, in July 2008, when ITV issued a bond with a non-cancellable Carlton guarantee (replacing bonds in which the guarantee had been due to disappear in 2009 leaving Carlton with no deliverables).

“It’s a win-win,” notes the buysider. "I don’t think that would happen now. But given everything going on with Ardagh and SFR, who the heck knows?”