I was also struck down by the commentator’s curse. Hours after saying in our Review of 2022 in the Legal-Ease section that there was a lack of interesting or substantive case law this year, Veon’s Scheme hearing brought some very interesting legal arguments.

So, no time this week to dig into JGBs, or whether macro data was a consumer confidence trick.

But there is still time for some temporal thoughts.

Temporal Seniority

In our Distressed/Restructuring preview of 2023 (if you are not a client you can request a copy here), we said that temporal seniority would be a key area of debate. Is it inappropriate to put shorter maturities in the same class as the longer dated?

“There are a number of situations with complex debt stacks where pari passu creditor dynamics are not going to be simple. In many cases companies are being run for cash, and are able to repay short term maturities (often through funds from asset sales), but this will be to the detriment of future value and refinanceability for longer-dated tenors.”

I wasn’t expecting this issue to crop up so soon, less than 24 hours after publication to be exact.

Veon’s English Scheme convening hearing kicked off on Tuesday, and it was soon clear it was worth spending the time to go through the skeletons and type up the hearing notes that evening.

I won’t go into the extensive detail of the case itself, as our report is here, and for those who prefer audio, Bianca Boorer, who covered the case, is interviewed by our US Editor Will Caiger-Smith on our Cloud9fin podcast.

In summary, two of the Dutch-headquartered telecoms company’s 2023 bondholders challenged the single class composition and Veon’s motivations for the Scheme.

The holders argue that the February 2023 notes would be paid in full (rather than be extended by eight months) just 2.5 weeks after its proposed sanction date. Therefore, the February 2023s would be strongly motivated to vote against, whereas the April 2023s may not.

Given the presence of a put option on 2 May 2023 where up to $600m of the combined notes could be repaid (upon certain conditions) — the April notes could be repaid just days later scheduled, rather than 2.5 months later for the February notes.

In addition, the inability of Russian-domiciled holders (which comprise around 60% of the 2023 notes) to vote due to sanctions may be another blot on the Scheme. The company contends however, there is existing case law governing Schemes where some holders have been sanctions-disqualified persons (SDPs), most notably in Nostrum Oil & Gas.

In a neat workaround to pay Russian holders that hold their notes in Russia's National Settlement Depository (NSD), which is sanctioned, the company is seeking to pay local holders from the proceeds of the sale of Vimpelcom, its Russian subsidiary. This is being sold to its managers, and is due to complete by June.

Therefore, to enable the sale Veon wants to extend the notes under the Scheme by eight months and impose a standstill on the rights of the 2023 holders to repayment. The company has argued that one of the primary reasons for the Scheme is to avoid a potential double payment to the Russian holders, but this falls away once Vimpelcom is sold.

Another bone of contention is that the Scheme seeks to harmonise the modification provisions under the docs. The February notes require unanimity for reserved matters, whereas for the April notes the threshold is a 75% majority. The Scheme will align and lower the thresholds to two-thirds for reserved matters and 50% for non-reserved.

This will mean that the February 2023s are to be deprived of their veto right, Daniel Bayfield KC, counsel for the bondholders, argued in court.

Tony Zacaroli (in my view the smartest of the current crop of High Court judges) had to decide whether to fracture the class, or to allow a single-class scheme as proposed.

Delivering an oral judgement the next morning, he approved the single-class Scheme but asked for the removal of veto rights to be excised from the order.

Zacaroli said he didn’t believe that the differences presented by the bondholders were material enough. He added that the hypothetical example given by Bayfield, was “too extreme”.

The essential question was whether there was any material impact on the likelihood of bondholders being paid in full. Given the company’s cash balance and intent to repay both the notes, there is “insufficient risk of not being repaid”. The different maturity dates also does not prevent the noteholders from consulting with each other (a key determinant of a single-class Scheme classification)

His written reasoning in likely to emerge in the coming days in his full judgement. We suspect this will be closely watched by restructuring professionals (and ourselves) as we can envisage a number of situations where temporal seniority and class composition will play out in court.

Addled Adler

This could happen to Adler Group in early 2023.

This week, it was confirmed that as we expected, Adler Group 2029 holders have blocked a series of amendments via a series of consent solicitations to facilitate the new funding plan. The Ad Hoc Group in the 2029s believe the plan favours shorter-dated holders, most notably the 2024 notes whose status was elevated to second ranking (the other SUNs are third) to help the company reach agreement on the overall proposal to allow €937.5m of funding from a select noteholder group to repay Adler Group subsidiary Adler Real Estate’s 2023 and 2024 maturities.

In a press release the AHG said it now represents over €500m in face value of Adler Group notes and represents holdings close to 20% of all of the Issuer’s senior unsecured fixed rate notes (excluding those due 2023 and 2024).

They are keen to enter into discussions over an alternative proposal “that provides fair treatment to all of the Issuer’s senior unsecured fixed rate notes, taking into account their pari passu legal status, and which the AHG believes is a substantial improvement for the Company and a vast range of its stakeholders.”

Its clear that the rebel alliance, represented by FTI Consulting and Akin Gump, is seeking to get to over 25% across the whole debt spectrum, in order to block a vote if all the SUNs (from short to long maturities) are lumped together in a process.

But the company then released details of the consent results which suggests they could secure agreement if they are indeed treated as a single-class.

Adler Group says it is set to go down an alternative implementation route, most likely the English Scheme, but it could be a German Starug, which is a less travelled and tested route.

Under Starug, the voting threshold is 75% by value in each class (secured and unsecured are separated), but as Weil Gotshal outlines “this percentage is calculated by reference to the total value of the class, not just the value of those voting”. Similar to a UK RP a dissenting class can be crammed-down as long as it is no-worse off and it “receives appropriate economic value in accordance with a modified absolute priority rule.”

Sub Standard

This week, we moved Ideal Standard into our Expected category in our Restructuring Tracker. As 9fin’s Josh Latham reports, liquidity is draining away, with just €33m left at end-September.

With credit lines flushed, the Belgian bathroom products manufacturer may need a capital injection to get through 2023. Excessive cash burn, partly relating to its Trichiana manufacturing site closure, have sent the group’s 2026 SSNs into free fall — currently trading at 43.38-mid.

Similar to previous quarters, management on Monday’s earnings call (18 December) didn’t field any questions from bondholders. Instead pre-arranged questions, which did little to add extra information about business performance, were answered by management on the call.

The transcript is available to subscribers on request.

Ideal faces headwinds with significant rises in prices of raw materials such as copper, brass and steel. Due to market position, S&P believes the group may have relatively weaker pricing power compared to its peers, which including Roca and Geberit AG.

According to management, pricing has seen “high single-digit” percentage growth throughout the year, with the latest round of price increases announced in July. Price hikes have compensated for the drop in volumes, with sales growth of 4% recorded in Q3 22 versus prior year, aided by a 8.2% YoY sales growth in the UK segment — the group’s largest market.

Elevated energy and raw material costs have materially impacted Ideal Standard’s margins. Pro Forma LTM Adjusted EBITDA margin dropped to 11.8%, from 16% in FY 21.

As Josh outlines below, Pro Forma Adjusted EBITDA is inflated due to productivity and restructuring related add-backs. Restructuring costs mainly relate to the sale of the Trichiana (Italy) manufacturing site and the running costs of closed plants. Bond covenants feature uncapped EBITDA add-backs, which management are blatantly taking full advantage of.

If we remove restructuring add-backs, Adjusted EBITDA falls to ~€27m for LTM period, whilst net leverage jumps to a whopping 11.7x.

So, performance from Ideal Standard has been substandard since issue, and its long-suffering owners might be contemplating whether they want to provide further support to unblock the toilets business cap structure, which has billions of preferred equity certificates.

We shall be looking closer into basket capacity to provide emergency liquidity lines and if there is room under the docs to come up with something more creative. Watch this space.

Seeking a French Exit

Orpea, as we expected, revealed some hefty revaluations on its real estate portfolio, receivables and other intangible assets on Thursday (22 December). In our piece on 25 November — Orpea — searching for equity and asset value, we questioned the level of asset coverage and the implied value of the new equity.

Our view was that the €8.5bn of Real Estate asset value as reported at Q2 22 would be revalued down to around €6.5bn, which would equate to a 101% LTV at time of closing of the restructuring next summer. We projected that this would drop to around 74% by FY 25 if the care home group’s management hit their ambitious targets. Our analysis is illustrated below:

Orpea has said that the annual review by appraisers has resulted in a new real estate valuation of €6.0-6.1bn, consisting of a €2bn downward revision in property values, plus a change in approach (removing equipment and furniture from valuation) resulted in another €800m hit, partly offset with a €500m benefit from perimeter changes. The value of intangible assets has also fallen sharply to €2.6bn - €2.7bn from €4.7bn as at 31 December 2021.

Those looking for a progress update on the the equity fundraising (the restructuring plan envisages €1.2bn-€1.5bn of new money) would have been sorely disappointed. The 15 November outline was repeated verbatim. We would have thought that they would have wanted to create some momentum and reveal the level of commitments offered thus far, for example.

In addition, there is no further information on the progress on the negotiations with creditors and exactly how the deal will be structured. For example, whether they have senior secured lenders onboard—  their support could be critical to get the restructuring away — as absent agreement from unsecured creditors, they will need them to do the heavy lifting via Sauvegarde to cram down the unsecured debt.

As we have previously outlined, getting agreement from unsecured creditors is further complicated by the presence of a large Schuldschein component, who think their special German law status means that they cannot be compromised.

According to the release the next meeting in the conciliation process between the company and its creditors was yesterday (22 December).

9fin’s Denitsa Stoyanova is working on an update on the equity and asset value based on the company revisions. We are also about to release details of an Orpea webinar scheduled for early January — watch this space for both.

Setting the record straight

Eight days after Muddy Waters’ short-seller report into Vivion Investments, the company has issued a 31 slide rebuttal — Setting the Record Straight: Response to Short-Seller Report

As reported, the short-seller alleges artificial asset value inflation and cash leakage through the repayment of what it says are questionable shareholder loans.

“In order to borrow even more debt from third parties, Vivion inflates the values of its real estate portfolios through fair value gains. Our research leads us to believe that these gains are generally unjustifiable, and appear to be built on transactions with related parties and significantly exaggerated occupancy rates,” alleged Muddy Waters in its report.

Muddy Watters alleges that Vivion Investments’ controlling shareholders, principal among them Amir Dayan, have potentially extracted €360m from the business through the repayment of shareholder loans, despite evidence suggesting a significant portion of these loans were never actually funded by the shareholders.

Earlier this week 9fin’s David Orbay-Graves provided some insight into the shareholder stake changes (if you are not a client you can request a copy here), and how Amir Dayan, the principal shareholder reduced his personal stake in the company to below 50% through various dilutive transactions starting late 2021. The combined Dayan family stake now stands at roughly 64%. Our reading is that this doesn’t pose the risk of a change of control event.

We are reviewing in detail the rebuttal and the allegations in the Muddy Water’s report, but we do have some initial observations.

While providing a fair amount of information, not all the issues from the Muddy Waters report are answered, most notably regarding the Furst transaction. There are still some question marks around the shareholder loans and assets contributed in 2018 (which we will put to the company) and we are surprised that Vivion didn’t provide more valuation evidence and decide to engage a third-party independent advisor to audit the allegations.

For now, the market remains healthily sceptical, with the bonds up only 1-1.5-points following the release, still over 10 points lower since the rebuttal was published. With a CMBS loan to refinance in H1 2023 and bonds to refinance in late 2024, it will need to restore confidence quickly, with auditors to review FY 22 accounts soon.

In brief

Pronovias lenders led by Bain Credit and MV Credit are injecting €100m into the troubled Spanish bridal wear business, reports Cinco Dias. They are writing off €125m, a 68% haircut, in return for taking over the business.

Elior will offer another 24% of its equity in return for Derichebourg’s multiservices business valued at €450m EV a 9.1x multiple, raising its stake to 48.4%. The deal will boost EBITDA by at least €30m. The French catering facilities business however, will struggle to deleverage in the short-term, with lenders relaxing the September 2023 covenants from 4.5x to 6x.

In a timely move, just hours before Moody’s put its B3 rating on watch negative we released our Stressed QuickTake for Tele Columbus (you can request a copy of this report here).

A non-announcement, announcement from Matalan. It is assessing a number of bids, with the first lien ad hoc group (70%) willing to support a recapitalisation if necessary. It says it wants to complete the sales process by end-January.

Reflecting the weakness we are hearing about in the wider market, there was a number of ratings downgrades to triple-hook this week, with a few now sitting on the brink. Some of the more interesting ones are Parkdean Resorts (2024 maturities, 9x levered), Arxada, Wittur, Adler Pelzer and Constellation Automotive.

What we are reading this week

Little time to read other content rather than 9fin-generated pieces this week. But there is a raft of reports and articles pinned and on our reader lists for the extended break.

Lots of cringeworthy year-end promos on LinkedIn, Apollo’s Seasons Eatings is among the best (or should that be the wurst?) Thanks to Oliver Cardoso for this one.

We had the latest Twitter Poll to keep us amused as Elon was voted out as CEO, but doubts were raised if he would indeed go (h/t Sasha Padbidri)

So who lasted the longest in 2022?

For those still keen to exercise their grey matter on matters financial:

Echoing some of my thoughts from throughout the year on the Workout, Oaktree’s Howard Marks in his latest memo, says that there is a sea change currently taking place in Financial Markets, only the fourth he has seen during his lengthy career which spans 53 years.

Oaktree have also posted their 2022 book recommendations too.

On my commute home last night on the Lizzy Line, I skip read Petition’s (Sub)Stacked: Top Writers Review ‘22 and Predict ‘23. As well as their own thoughts, we have several SubStackers (not ourselves unfortunately, we migrated from the platform some time ago) views. Some great ones in here, and a number of other blogs to subscribe to in 2023.

9fin’s Restructuring Review of 22 is available to read and Preview of 23 is available on request.

And finally, as we celebrated Brighton’s 4-0 win against Manchester United in early May, little did we know we would be having a selfie with a World Cup winner.

Felicidades, Alexsis Mac Allister

The Friday Workout will return in the New Year.

On behalf of the 9fin editorial team we hope you enjoy your break and best wishes for 2023.