Winding Up — Despite all the rage, it just killed yen carry trades

Will Macadam

9 August 2024•9 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.

Working in the distressed world turns us into a strange breed of pessimists. We look for the worst to happen because it means we will have a company to advise, debt to trade, new money to provide, or a story to write — generally we’re hoping to gain from someone else’s misfortune. Bad news for the market is good news for us.

That is why there may or may not have been a certain upbeat note of pessimism around the 9fin offices after that poor US job print last Friday. But now that we’re all a week richer, it’s safe to conclude that rumours of the financial system’s collapse were greatly exaggerated.

So, what did we see this week?

More distress in the European high yield market? Not particularly. Meltdown in primary? A slowdown, perhaps. The pain was mainly felt by parties to yen carry trades, and fleetingly in equities.

And someone will say what is lost can never be saved, but all the major stock market indices regained their composure this week. The Nikkei 225 takes the crown as the worst affected. But even including a 12.4% drop on Monday — followed by a partial rally the next day — and still not having fully recovered at the time of writing, the Nikkei is up 5.22% year to date. Some crash.

Nikkei 225, source: Google

But we don’t care about owning companies, we’re a more sophisticated sort; we care about their debt. And on that score the iTraxx Crossover did tick upwards to 350bps the start of the week, having hovered close to 300bps pre-panic, but as of time of writing it’s tightened by 30bps to around 320bps — wider than just before the sell off, but in the middle of this year’s trading range. So the market appears to be quite benign despite some initial jitters.

iTraxx/CBOE Europe Crossover one-month volatility index

The iTraxx/CBOE Europe Crossover one-month volatility index (as seen above) paints a slightly spicier picture. It crested levels last seen late in 2023 before crashing back down again to levels we’ve seen in other peaks this year.

What we’ve seen, in the words of 9fin’s Dan Alderson, bears the hallmarks of retail investors losing their cool, coupled with high leverage and automated trading. It all paints a compelling picture for investing in credit over other asset classes.

“Companies will think twice before going to market in this environment, but who’s issuing in August anyway?” one high yield analyst told 9fin’s Alessandro Albano.

But macro isn’t the only game in town for news hounds. UK water regulator Ofwat put some meat on the bones of its threat to place Thames Water into a “turnaround oversight regime” — powers it technically doesn’t have yet as the legislation it pertains to has yet to be passed into law.

Ofwat announced on Wednesday (7 August) that it would appoint an independent monitor to report on the company’s equity raise process and efforts to overhaul its business plan for the 2025-2030 regulatory period to address criticisms made by the regulator in its draft determinations. For the time being it appears that Ofwat is willing to let Thames workout its difficulties on its own terms — or at least the leash it’s put the business on is long enough for some independent action.

That being said, Thames is in breach of its license with Ofwat (and the Water Industry Act) after it was downgraded to junk status by Moody’s and S&P over the last two weeks. It's arguable that this breach presents grounds for Ofwat, or the government, to apply to place the regulated entity in a special administration regime (a SAR).

In broad terms, a SAR application can be made on the basis of poor performance (read: material license breaches) and/or insolvency. But it's not clear cut. And either way, it would probably be rather precipitous to make an application at this juncture.

Ofwat and the government are surely more keen on a market-led solution to this sorry tale. And timing-wise, Ofwat is more likely to make that decision towards the end of this year, or in the early months of 2025, depending on the outcome of Thames’ equity raise process, its efforts to improve its business plan, and negotiations with bondholders.

Oh, and Ofwat proposed slapping the group with a £104m fine in relation to its failure to limit the discharge of effluent to exceptional circumstances only, according to an announcement published on Tuesday. It also suggested fines of £47m and £17m for Yorkshire Water and Northumbrian Water respectively. Given Thames’ precarious financial position it remains to be seen whether Ofwat will levy the fine in full.

Anyway, onto…

This week’s news

Adler Group — The distressed German property company published a redemption notice last Friday for its €400m 1.5L notes due 31 July 2025. The final redemption amount for each note is €107,224.09.

AMC Entertainment — S&P upgraded the world’s largest cinema operator to CCC+ (from selective default) following the completion of its A&E transaction. It included an innovative asset drop-down and debt exchange that helped 2026 maturities, namely a $2.0bn term loan to 2029 and $414m exchangeable notes to 2030.

Atos — The EMEA Credit Derivatives Determinations Committee is looking to finalise the terms for a credit event auction and as a result is seeking clarity on the terms of the lock-up terms agreement between Atos SE and its creditors. This is after Atos triggered a bankruptcy credit event when it launched safeguarding proceedings. For details, see 9fin’s article here.

BayWa — The German food chain and clean energy company’s hybrid bonds dropped 60 points in mid-July after a deal to sell its solar trading business fell apart. The bonds have rebounded some and are now trading in the 50s as the company hired restructuring advisors and reports of a €600m mix of debt and equity capital investment along with a cash infusion from its cooperative owners surfaced last week. But nothing has been decided yet as German regulators have a final say in the country’s biggest agriculture supplier, which loaded up on €5bn of debt in an acquisition spree and can’t afford the high interest rates now. The company’s co-op ownership structure means each member gets a voice on how the business is run which slows down decision making. BayWa declined to comment.

Branicks — The German real estate group announced on Thursday that it had sold a package of eight companies with nine properties in Baden-Württemberg, Hesse, and Hamburg from its commercial portfolio to VIB Vermögen as part of share deals. The deal gives the company a cash inflow of €94m, boosting efforts to consolidate its financial position, according to a statement.

Cineworld — As promised last week, 9fin went through the detail of the cinema operator’s proposed UK Restructuring Plan and what it means for the company’s creditors. Spoiler alert: it’s good news for secured lenders and some landlords, middling to bad news for other landlords and UK councils. Read more here.

Engineering Group — The stressed Italian IT services provider held its Q2 earnings call on Wednesday — find 9fin’s earnings review here. Engineering Group is exploring refinancing options for upcoming maturities, which will address the 2026 notes and possibly the 2028s, according to management.

Lowell — The UK-based debt purchaser and its lenders have appointed advisors as refinancing conversations gather steam. Lowell turned to advisors from Kirkland & Ellis, in addition to advisors at Goldman Sachs who were appointed in June. An ad hoc group of lenders picked advisors from Perella Weinberg Partners and Willkie Farr & Gallagher.

Pfleiderer — The German manufacturer of wood products received 99% consent from bondholders for its stressed amend and extend deal launched in July, with sponsor SVP injecting €75m equity to fund growth projects. However, the transaction doesn’t address the company’s poor cash flow generation and offers inadequate compensation to lenders, so on 5 August S&P further downgraded its €750m bonds to CC (from CCC).

R-Logitech — This week the port terminal operator received 98.53% of consent from the 2027 bondholders for its restructuring plan announced on 16 July. This follows successfully obtaining 95% consent from the 2024 bondholders on 24 July, and thus avoiding insolvency.

Selecta — The vending machine operator posted its Q2 24 results on Thursday — find 9fin’s earnings review here. Selecta seems to be running low on options to refinance a €1.2bn debt pile due in 2026. The group is struggling with declining sales, down 3.9% YoY to €295m for the quarter.

Steward Health Care — Apollo effectively foreclosed on a $900m mortgage loan to MPT and Macquarie which owns eight hospitals in Massachusetts via a joint venture with no consideration given to MPT. MPW took a $550m impairment charge which was announced on its Q2 earnings call this week as a result. Steward’s bankruptcy judge approved a $30m emergency loan by the state of Massachusetts to keep the local hospitals running till a new buyer is finalised. But Steward can’t use funds to pay rents and will need more fresh cash in September to keep the lights on its other hospitals, which pay rent to MPT.

Talk Talk — Talks to sell the telecom provider’s wholesale business unit to Macquaire have reached a standstill, according to a report published in the Times. The deal is off the table for the “for the foreseeable future”, forcing the business into conversations with lenders to avert a default, according to a report from Telecompaper.

Thames Water (OpCo/HoldCo) — This week Ofwat proposed a £104m fine for sewage failings and more special measures to Thames Water as well as appointing an independent monitor to supervise the troubled WaterCo. This is in order to improve its performance and restore its IG rating status. The company will receive its final PR24 price determination in December and will likely run out of liquidity by May 2025. This week 9fin looked into detail at its restructuring options here.

Tullow — The oil and gas company held its H1 24 results call on Wednesday — find 9fin’s earnings review here. Tullow’s revenues were buoyed by an increase in realised oil prices, while EBITDA margins climbed to 92% thanks to reduced opex and decommissioning expense. But despite this the group reported a negative free cash flow of $126m.

Vivion — Today (9 August), the UK RE company redeemed a €168.9m 3% 2024 stub SUNs mainly with proceeds of the new £123m (€146m) five-year loan secured against its nine Hilton hotels.