Winding Up — Very mindful, very Demire

Will Macadam

6 September 2024•8 min read

Winding Up is 9fin's weekly newsletter, incorporating summaries and commentary from our European distressed coverage for the past week. Find out more about what we do for distressed here.

Another week, another group of creditors sign a co-op agreement to stymie the efforts of an issuer hoping to pull off some kind liability management exercise. Oriflame has the honour of causing Europe’s sixth co-operation agreement to come into effect, as creditors baulked at its decision to designate four of its subsidiaries as unrestricted for the purposes of raising new debt.

We don’t have much information about Oriflame’s newly designated subsidiaries other than that gleaned from regulatory filings (the quality of which varies) and the function of each business. Two of the designated subsidiaries are responsible for producing Oriflame’s cosmetics and also manufacture products for third parties while the other entities, the IT business that manages Oriflame’s e-commerce platform and Oriflame’s Swiss business, are less viable as independent businesses.

Oriflame’s creditors follow in the footsteps of other creditors in Altice France, Ardagh, iQera, Kloeckner Pentaplast, and Intrum who have all also signed co-op agreements this year for the same reasons.

We’ve amply covered the purpose of co-op agreements before so we’ll try to avoid unnecessary repetition. Anyone still out of the loop should read our educational on the topic here.

Cynicism comes easily, perhaps too easily, in the world of distressed investing. Certainly there’s been plenty of cynicism about the rise of co-operation agreements in the European market, which we’ve covered before.

But there’s another view which we haven’t considered before: what other choice do creditors have? It can perhaps be viewed as a form of the prisoners' dilemma infused with a bit of 'heads I win, tails you lose'.

We live in strange times. Debt capital markets are awash with money, the broadly syndicated loan market has issued more than €103bn loans in the first half of this year while private credit funds have raised $60.9bn globally (reaching an average side of $1.7bn) in the same time period — albeit that was in spite of a pretty shabby first quarter.

Covenant protections, at least in the broadly syndicated market, have yet to recover (if they ever will) from the practices of more than a decade of cheap money. Cov-lite structures feature in about 93% of broadly syndicated loans issued last year, according to data from Apollo. The private credit market tends to favour maintenance covenants on smaller value deals around or less than $250m, but they are not as common on larger cap deals, according Fidelity’s analysis.

The point being that even struggling borrowers have access to a plethora of sources of capital and they’re more than happy to rejig their own corporate structure to unlock access to that funding.

Beyond Oriflame’s groundwork for an LME, this year we’ve seen Irish packaging business Ardagh team up with Apollo in a priming deal to refinance $700m of senior secured notes maturing in 2025 and Altice France designate subsidiaries (such as the valuable XpFibre) for possible priming transaction while also withholding the proceeds of sales of unrestricted assets until creditors agree to a distressed exchange.

One investor who spoke to 9fin about the recent crop of LMEs said it was as if the documentation underlying bonds and loans was “worthless”. While signing a co-op agreement doesn’t change a company’s bond or loan documentation, or dissuade management from opting to pursue a liability management exercise, that’s not really the point.

The point of signing a co-op agreement is that it gives lenders, if timed well, a first mover advantage. Lenders can make the process of executing an LME all the more painful and annoying for the company, its management and its advisors.

That’s not to say co-ops won’t prove effective. Maybe some of the co-op agreements that have been signed will stop (or materially alter) certain LMEs.

The bigger victory for lenders is probably to create an environment in which borrowers are more afraid to employ aggressive LME tactics, for fear of the headaches it will cause them. Time will tell.

Anyway, onto…

This week’s news

Atos — Credit default swap contracts referencing the French IT group will be settled on 25 September, in Europe’s first credit event auction since October. Atos revised its financial projections for 2024-2027 to reflect its H1 24 earnings but it has no impact on its restructuring plan, which will be voted on by creditors on 27 September, set for court approval on 15 October and implemented from November until January next year.

Boparan — The UK-based poultry and food company announced that it had agreed to sell its European poultry business to the Boparan Private Office for more than €200m. A timely transaction considering the business’s refinancing of its 2025 maturities, expected to come before the end of this year. Read more from 9fin’s Arturo Alaimo here.

Cerba — The French lab service provider returned to positive topline growth in Q2 24 (ending 30 June) after six consecutive quarters of losses. This is thanks to volume growth in core activities, allowing it to partially offset a 3.8% French tariff cut and Covid testing phase-out. Read more from here.

Demire — The German commercial property landlord announced that more than 90% of its bondholders voted to extend its €600m SSNs Due October 2024 to the end of 2027. Enough lenders have voted in favour of the deal to allow the company to implement the terms of its A&E.

HSE24 — The German teleshopping retailer finalised the sale of its Russian business for €5m in net proceeds, boosting HSE24’s cash balance up to €64m for Q2 24 (ending 30 June). As a result the group ended the quarter slightly less levered at 6.3x, down from 6.7x in Q1. Read more from here.

Isabel Marant — The French luxury fashion brand has guided even lower orders for its spring / summer 2025 season than the previously provided -5% to 5% range. Its Q2 24 results this week weren’t much of a surprise with weak performance expected, but the announced 5.0x net leverage covenant on the new RCF has raised some questions around its availability.

Kloeckner Pentaplast — Management clarified on an investor call late last week that the German packaging producer hopes to wrap up a “regular way refinancing” by the end of the financial year and has hired advisors for negotiations with lenders. The group also unveiled its Q2 results, which saw an uptick in volumes for its PHD segment offset by declines in its food packaging segment, and a more organic adjusted EBITDA figure featuring only €4m worth of adjustments. Read more here.

Medical Properties Trust — MPT made a surprise deal to take over the running of dozens of Steward’s hospitals until they can be sold, leaving investors in its bonds questioning how it effects the REIT’s cash flows this year. Steward’s bankruptcy judge temporarily withheld $17m slated to go to Apollo from sale proceeds of the non debtor owned real estate after Steward’s FILO lenders argued objections to the allocation this week in court. A bid for Steward’s hospital in Texas set a stalking horse price this week for only $4.5m.

Oriflame — An ad hoc group of creditors representing more than 75% of the Swedish beauty products manufacturer’s bonds have signed a co-operation agreement, which became effective on 4 September, in an effort to combat a recently announced liability management exercise. Late last week, Oriflame designated four of its subsidiaries as unrestricted and said it was in “active discussion to raise financing against the assets”.

Talk Talk — The UK telco announced more details on its restructuring proposal this week. The current agreement includes €235m of new money (in the form of a €170m bridge financing and a €65m cash management facility), the contribution of new assets to the restricted group, tighter docs and a higher coupon in exchange for a debt maturity extension. 9fin got the terms out before the company presented them to the market on Tuesday (4 September).

Thames Water — The troubled water company is in the process of booking up time in the High Court of England and Wales in connection with a possible restructuring, as a contingency for circumstances in which it fails to reach consensus on a market-led solution, sources close told 9fin. Thames has also launched an equity raise process this month to try and raise liquidity given its current shareholders are not willing to give it any more funding, as reported. If the company fails to find a new equity investor then the group’s largest creditor group is willing to come up with a creditor-led solution, sources close told 9fin.

Lateral Moves

A&O Shearman announced on Monday, 2 September, that Paolo Manganelli would join as a partner in the firm’s Milan office. Manganelli joins the firm after more than seven years as a partner at Ashurt in Milan, where he led the office’s restructuring and special situations practice.