Friday Workout

Post Trauma Distress order; Deleveraged buyouts, Racing for the 2022 refi prize

By Chris Haffenden | Editor | chris@9fin.com

In conversation with a prominent restructuring lawyer this week, we bemoaned the current distressed and restructuring landscape as being very different to the one we envisaged eight months ago. When the Covid crisis first hit, prices dived into the 50s and 60s, a deluge of restructuring deals was expected in the third and fourth quarter, eclipsing the carnage from the Global Financial Crisis. 

Many restructuring advisors claim to be busier than they’ve been in years, but some would tell you that 2020 is the one that got away, said the lawyer. He referred to recent fundraisings for Carnival, Cineworld, Vue and Hammerson as examples of troubled businesses that could still gain access to the market despite seeing revenues fall 70-90%. 

Post Trauma Distress Order

A distressed analyst nailed it in a text message back and forth at the weekend as we looked at the investment case for Carnival (I struggle to find one valuing the equity at $1bn let alone $25bn): “The amount of cash they’ll burn is huge, but they have market access. They’re the exemplar of the type of company that should have gone bust this year but have survived with more and more leverage.”

If businesses such as Carnival are able to stay afloat on a sea of liquidity with ever-increasing leverage, how do distressed investors and restructuring advisors find distressed candidates in late 2020? 

Traditionally price and leverage were the first things that you plugged into your scoping exercise (much easier to do on 9fin’s platform btw) to get your long list. But it is hard to find potential restructuring deals when everything is trading above 95, noted the distressed analyst. 

The 90s is the new distressed – quipped one distressed PM. He’s not wrong, when I looked at McLaren – set to run out of cash in early 2021 - its bonds were at 96, not 66!  I can only assume that HY investors believe that another vanity investor sits across the grid like at Aston Martin.

So, what other inputs do we need to factor into our scoping model? 

Traditionally, distressed investors looked at debt capacity, interest cover, Debt/EV, upcoming maturities, liquidity runway, equity cushions, asset coverage. In addition more subjective factors, such as trades into more activist fund hands, appointment of advisors, accounting red flags etc. 

What do you use? We would love your input on what distressed data points to track and prioritise. 

This will greatly assist our new product development, and hone the enhancements in our PD pipeline.

IMax Cinemas

But all this is well and good, but without triggers, there is no catalyst for change and motivation for us to initiate a trade, said the distressed PM. 

One of the most lucrative distressed strategies for 2020 has sailed across the water from the US - charging interest rates up to the max for rescue finance. New Look was a great example, this week it was the turn of Cineworld lenders which provided a new $450m Term Loan with margins what 9fin calculated to be in the mid-teens plus potentially lucrative warrants to 10% of the equity. 

Amazingly, their market cap was still £632m as at last Friday, despite the precarious financial position. As 9fin revealed, Cineworld was days from running out of cash and had prepped a filing for Chapter 11. 

The bull case for Cinemas is that with the vaccines, most will be open by late spring and punters will return in droves to alleviate cooped up boredom. Coupled with studios keen to release postponed blockbuster releases, attendances will spike, and it will be their best summer ever. 

The bear case is that the industry was already in structural decline. Netflix, Amazon and now Apple are producing the best critically acclaimed content. We are now happy to stay at home and the Studios are rolling out releases faster, and the Cinema experience is not the differentiator as it was with improvements in streaming and tech. The spike in activity will last a quarter or two at best. 

Deleveraged buyouts

Notwithstanding your views on the above, it is clear that many businesses will end up with debt-heavy capital structures post-Covid that they will either have to grow into, or workout at a later date. Some businesses such as Cinemas and Gyms may recover more quickly, whereas others such as airlines, aircraft leasing and travel-related business may take years, if at all to hit 2019 levels. 

If we want to look at the likely effects, we should look at businesses saddled with too much debt for long periods, using companies such as AA and Saga as case studies. 

This week, AA finally concluded a deal taking the business private (yet again) but rather use financial engineering to drive returns via debt, the new sponsors have agreed to reduce debt levels by injecting fresh funds, adding that underinvestment caused by high debt had held the business back. 

Andrew Dennis from Aberdeen Standard Investments coined a new moniker – the deleveraged buyout – I don’t think AA will be the last. 

Arguably Premier Oil is another, and with long suffering IDH on the block this might make three, which we at 9fin could then call a trend. 

2022s racing for refi prize

With stressed bond prices heading back into the 90s and an extremely healthy HY primary market, the pit stop window for refinancing 2022 maturities remains open for some of the racier names. We’ve already seen Aston Martin, Lowell and Boparan avoid drive-through penalties, our list of vehicles lining up on the refinancing grid is growing. 

Arguably, many would benefit from a cash injection coupled with an amend and extend rather than a straight refinancing which doesn’t reduce leverage. But with primary so hot, many might try to jump the lights. Despite some difficult names on the track in recent weeks, we’ve yet to see a false start.

Listening into Q3 earnings calls over the past fortnight, we are struck by how many companies think that their businesses can be repaired in time and qualify during 2021 in pole position for refinancing their 2022s. But for many the gap might be too tight to squeeze through – remember once the debt becomes below one year, it can cause issues for directors and going concern opinions. 

McLaren is doing well in the Constructors Championship and may even get on the podium but will need another equity investor to keep it on track. It needs to find fresh rubber to replace a worn out set of financing – a £291m equity cheque and £150m provided by its Bahraini backers, warning that “liquidity is sufficient through to 2021.” 

Some such as 4finance had opportunistically bought back debt when it crashed earlier this year. Its bonds have recovered into the 80s, despite the subprime and near-prime lender only firing on a few cylinders. Regulatory actions and covid-related downturn in lending have pushed leverage up to 10x, but it says operational improvements will mean 2022 maturities will be addressed “in ample time.”

Haya Real Estate is another borrower that has opportunistically bought back bonds. This week it announced it had accepted tenders for €35.1m of their 2022 SSNs and €16m of their 2022 FRNs at 85 and 84.875 respectively in the recent Dutch Auction. They were trading in the high 70s, before the announcement. As reported, the Spanish Real Estate manager and servicer is seeking to build a cash balance to de-lever closer to its bond maturities. 

Ferroglobe said this week that it remains in discussions with third-party investors and bondholders over a new term loan to bridge its recovery plan and implement an extension of its 2022 notes. It has room under its docs to raise up to $125m, but its majority equity owner GVM faces problems of its own, and will not be able to inject equity, and may lose its stake pledged to a past due loan potentially causing a change of control on the notes. 

Tullow Oil management are hoping that their new strategic plan and focus on existing operating assets in West Africa will provide “sufficient medium to long-term cash flows to address debt maturities and to provide a credit runway to address debt reduction.” As reported, the new plan will be a key component of RBL redetermination talks in January. There is an 18-month look forward test for liquidity which encompasses the 2022 bonds. It also needs waivers on gearing covenants.

IDH also has significant 2022 bond maturities. Leverage has spiked into double-digits after its private dental practices were affected by Covid restrictions. It has initiated a sale process for some or all of its ownership interests. Sponsors Carlyle and Palamon have owned this asset for some time, is it time for another deleveraged buyout?

CGG is also hopeful that it can refinance its 2022 notes saying it will make preparations in March next year after the call premium expires. But 9fin thinks that the difficult environment facing its E&P customers could prove to be challenging. Its bonds remain just above par with 7-handle yields. 

Amigo 2.0

Amigo loans management is borrowing from Keir Starmer’s playbook. The subprime lender is under new management – the new CEO and CFO were keen to emphasise their turnaround experience and their plans using Lean Management and Six Sigma philosophies. Their focus was on the resumption of lending and the transformation into Amigo 2.0

Teasingly, Amigo said a Scheme of Arrangement was under consideration to deal with complaints for which provisions had risen sharply to £159.1m. But it failed to give details, apart from saying it could use an SPV to “quantify the level of claims, place a ring around and address them.”

Europcar

Not all deals are able to take advantage of the Post Trauma Distress Order. Europcar announced headline terms of a deal with its creditors this week, which sees the Senior Unsecured Notes fully equitized and noteholders receiving 95% of the equity. 

Existing shareholders can boost their holdings via a rights issue, which is based on a market capitalisation of €600m. 

Next steps are consents for the deal from bondholders to ensure no event of default from entering Sauvegarde accélérée and acceding to lock-ups for the deal where holders subscribe to new money and warrants. The Sauvegarde is expected to start around 10 December.

9fin is working on a more detailed analysis on the transaction, its evolution and value drivers.  

Just one more thing

For those buying into the asset-backing story for Carnival should look closely at its latest accounts. 

During the year to end-August it sold eight ships and is looking to sell 18 in total in 2020. Most of the older vessels will be sold for scrap – they managed to realise just $230m of proceeds – but posted $3.8bn of losses on ship sales and impairments to end August.

If this translates across the fleet, the already elevated LTV could be sky high. Proforma end-August they had $33.7bn of debt compared to $43bn of assets. In addition, it is likely that $9bn of Export Finance will grab $9bn of first lien priority security interest after covenant breaches. 

But in the new Post Trauma Distress Order, does this matter? The latest bonds are bid at 104.