Friday Workout

EMbracing tourism, Tullow Swaps Security, Landlords barred entry

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

At this time of year our attention turns further afield to more exotic and less familiar jurisdictions. Don’t worry, please read on, the workout has not turned into a travelogue! But we like to follow the latest trends. Advisors and investors bored with a meagre and traditional diet of special situations are widening their horizons and looking at potential opportunities in Emerging Markets. 

This isn’t new, as Editor of CEEMEA at my old shop, I often saw non-dedicated investors appearing in our market, who we dismissively called ‘EM tourists.’ Either HY funds stretching for yield – it didn’t end well on Croatia’s Agrokor - or distressed funds/advisors seeking suitable opportunities away from Europe. The financial and legal advisory community does have some dedicated regional specialists, but there are plenty which are agnostic to jurisdiction. Many EM restructurings will head to London or New York for implementation, allowing legal professionals to find lucrative work. 

In recent years Emerging Market corporate credit issuance has dwarfed that of high yield. The external EM corporate bond universe is estimated at around $2.5trn in hard currency (similar to European Inv Grade) and $8trn in local currency. In the past couple of years, inflows have surged to record levels, boosted by a weak dollar (bullish, many EM borrowers have a currency mismatch, lower dollar = lower servicing costs). A lot of the inflows have gone into EM high yield as shown below by BofA:

9fin is not specifically focusing on EM, but quite a few names have snuck onto our site - we don’t turn down requests from users to add companies – if we have the docs. You can find financials and news for First Quantum MineralsDTEKNostrum Oil & Gas and Eskom, for example. We will add others, such as NMC Healthcare, which many funds believe is the largest distressed opportunity for 2021. 

Often there is ambiguity with regards to jurisdiction. Do you categorise a business as EM based on where its main revenue generating assets are, where it is headquartered, where it is listed, or where the bond issuing SPV is registered? Or by the currency? Or by the investor base – HY or EM funds? 

A good example is Tullow Oil, with most of its producing assets in West Africa, with some fields in South America and East Africa, debt in dollars, but it is listed in London and headquartered in Chiswick Park. Holders are a mix of dedicated EM investors and High Yield funds. At my old company, it led to Tullow Oil being covered by a number of silos for all the reasons above. I lost count of the number of times, I tried to explain coverage rationale to various sales teams. I am keen to avoid a repeat at 9fin.

Yesterday, Tullow launched $1.8bn of new 2026 SSNs, which simplified our expectations for an amend and extend transaction to take out the 2021 converts and 2022 SUNs. We give an initial overview later in the Workout, but first we take a look at some other interesting EM names

Purer waters for NMC Health

Many of you may remember NMC Healthcare from their take-down by Muddy Waters, and the subsequent disclosure of over £3bn of additional hidden debt, most of it provided from disgraced supply chain financer Greensill. 

Advised by Lazard, the Dubai-headquartered healthcare business filed for administration in the Abu Dhabi ADGM last Autumn, with appointment of joint administrators, and a claims’ recognition process. Non-core assets would be sold (Perella Weinberg advising) with a $325m administration funding facility (AFF) backstopped by key lender Abu Dhabi Commercial Bank (ADCB) to fund through the restructuring process, to the ire of Sculptor Management, which had tried to provide alternative funds. 

Distressed investors were slow to take notice of the opportunities, with up to $6.8bn of potential claims that could trade. The whiff of fraud, a new jurisdiction and difficulties in establishing the ranking and guarantees for 36 different entities in a complex group structure, with a number of cross-guarantees for buyers to get their heads around, were all cited as reasons to avoid. 

In the meantime, the business had performed much stronger than anticipated under the restructuring plan. In early April, the restructuring plan was launched, and the key entity priority model released enabling buyers to better understand how to value their claims. 

For those new to the situation, the lender credit pack is a good place to start

In recent weeks, there was a feeding frenzy with over $370m of paper trading (over $1bn of bids, 16 funds bidding, according to one buyer) as prices of claims rose from the mid-teens into the mid-20s. The AFF paper soared from 145 to 280/300 in recent weeks, with a number of distressed desks keen to get in front. 

Roust(er) booster

Veteran EM investors often steer clear of Russian names, as the enforcement route is tricky, and the courts are often politicised. But Roust, the drinks business which includes Russian Standard vodka might be an exception, according to distressed investors which are circling the name.

Following a US restructuring process in 2017, $385m of 10% senior secured bonds due 2022 were issued in exchange for old debt with a number of brands including Russian Standard were contributed as security. The bonds are issued out of a swiss-entity making it easier to enforce, with most operating businesses in Poland. LTM EBITDA is around $115m with net debt of $722m, giving leverage of 6.2x. 

Hopes that the business would IPO in time to repay the 2022 bonds have faded (various media reports had 2019, and 2020 as IPO dates) though you never know, a few celebrity-backed SPACs would love to own their brands. Then again, the CEO Roustram Tariko is a celebrity in his own right, this fantastic Vanity Fair article will give you a flavour

Tariko also owns a bank, Russian Standard Bank (RSB), a significant creditor to Roust, and where most of the company’s cash balance sits. Owning a bank is common tactic for EM oligarchs to leak out value - a great example is Kostyantin Zhevago, the largest shareholder in Ferrexpo - who lost $184m in company cash when his Bank Finance & Credit was declared insolvent by Ukraine’s Central Bank

RSB has defaulted on its Eurobonds, but a group of holders recently failed in their attempts to enforce in the Russian courts to get hold of their 49% pledged stake. Seasoned EM investors have grown tired of Tariko’s pleading of poverty – “it’s hard to believe when you are meeting him at his suite at the [London’s five-star] Corinthia Hotel,” said one. 

Tullow Swaps Security

Just over a year ago, Tullow Oil seemed a nailed-on restructuring candidate as low prices fell below $30/bbl, with its 2022 bonds trading into low 20’s. A sale of its Ugandan asset bought time and the recovery in oil prices and appetite for risk assets saw its bonds recover back into the 80s in January. 

But with bond maturities due in July 2021 and April 2022, and $1.8bn of reserve-based lenders (with a 18-month look forward liquidity test) we outlined in January that a holistic solution was most likely. The new management team in early March put together an impressive presentation, saying that constructive discussions with creditors, would result in a refinancing by the end of the first half.

A 10-year strategic plan seeks to boost operational cash flows to c.$7bn by focusing on generating value from its West African assets on which 80% of future capex will be spent. The plan will generate $4bn of cash flow to service its debt, aiming to reduce net debt to $1bn-$1.5bn in the medium term and reduce gearing to 1-2x net debt/EBITDAX (from 3.5x) “while retaining appropriate liquidity.” Tullow envisages $2.7bn of capital investment, with over 80% into its existing West African fields which should deliver an IRR of over 80% with oil at $55 per barrel oil.

But yesterday’s announcement caught us by surprise. We had expected some form of tender, and/or partial paydown of the 2021/2022 notes from cash on balance sheet and exchange into new notes. We were not expecting $1.8bn of new senior secured 2026 notes and a $600m super-senior revolver, to repay the 21s/22s and take out the $1.5bn (outstanding amount) Reserve-based lending facility. 

Our legal QuickTake outlines some of the protections and guarantees, which could be critical in securing investor interest – even in this hot market, such a large deal for an oily credit will take some selling. In theory, the new SSNs have supplanted the RBL, but the 2025 notes will be miffed about being primed by up to another $900m (600m revolver, SSNs is 300m larger than the RBL it replaces). 

Pricing is tricky, are Kosmos Energy’s SUNs a good starting point at 8.5% yield? Or do we look at how much inside the 25s it should price? Is 250bps the right price – existing paper jumped from around 80 to 87 on the news – yielding just north of 11%. 

Let us know your thoughts. We are working on a preview of the deal for early next week. 

Other EM names on our radar are the long-running restructuring talks for Nostrum Oil & Gas, prospects and recoveries under DTEK Energy’s restructuring plan, Turkish Ferry operation Global Ports and Eskom’s long-awaited restructuring – and prospects if the contingent government liabilities are crystalised. 

Landlords barred entry

This week is an important one for commercial landlords. Followers of 9fin on LinkedInmight have had a hint earlier this week. At stake is the use of the two UK processes to impose deals on dissenting creditors, with big implications for the financial health of commercial tenants, especially retailers, and their landlords. Both cases are likely to set important legal precedents for future deals. 

The ruling for New Look CVA’s challenge failed to arrive, prior to the start of the Virgin Active sanction hearing. The UK-gym operator is seeking to use the new UK process to cram-down dissenting creditors and for the first time reduce amounts due to landlords which would normally be addressed via a Company Voluntary Arrangement. A Times article has called the process like CVAs on speed.

We expected drama at the sanction hearing in front of Justice Snowden, but not its sub-genre – farce. 

Lawyers to the landlords had previously complained about receiving information late for the convening hearing, and the latest set of evidence bundles arrived at 9am, just 1.5-hours prior to the hearing start. Mindful of the release of sensitive information during the public hearings, the redacted parts were outlined in orange highlighter, but Robin Dicker QC, had prepared from an older set of bundles. Tom Smith QC and the judge volunteered to prompt him, if he inadvertently strayed into confidential info. 

Usually Skeletons are available on request, but exasperated lawyers were unable to comply after the company cited the confidentiality issue. “The first issue of the day was the organisation of the court into private rooms at every moment that “sensitive data” is referred to. There is a real risk that this sanction hearing turns into a clown show,” said a source close to the landlords. 

Sanction hearings can be dry affairs, with a lot of time spent examining various clauses and legal precedents, but the first two days here were scheduled for witnesses and their cross-examination. The big landlords, the freshly de-vowelled Abrdn, plus KIFM, Land Securities and British Land had hired top QC Robin Dicker in their corner. After a slow start, he realised there were two different sets of bundles, he then hit his stride and wasted no time skewering the Virgin Active CEO - who admitted that a CVA would fail, given the opposition to the landlords.  

He was then grilled on why a market testing exercise hadn’t been undertaken, given the interest from four potential buyers. Conversations in February with Nuffield Health on taking on underperforming clubs were not disclosed wider. Pricing conversations with a PE house in January were not shared, nor fed into a valuation exercise by Grant Thornton. Their assumptions in turn ended in Deloitte’s entity priority model on which the payouts are based. It then transpired that the Deloitte model didn’t use their detailed base case, but the lower case, which GT said was illustrative only. 

The second day started, with more questioning over the assumptions going into the model. Virgin Active assumes little value for the equity by 2025, but PwC for landlord’s estimates this at £569m. 

Selected 9fin coverage

McLaren management faced difficult questions on their conference call earlier this week, but gave very little detail on the planned equity raise, Q1 earnings, cash flow and liquidity developments. 9fin’s Ben Hoskin listened into the call.

A recent sale/leaseback of the headquarters for £170m and leased, at a ‘fair commercial rate’ and selling a stake (£100m invested so far) in its loss-making racing division have bought time. The racing division is now out of the restricted group which will help avoid future cash leakage away from bondholders. The £205m of Heritage Car assets will remain in the restricted group for their benefit. The key going forward will be securing fresh equity and finding a way to repay a £150m loan from its Middle Eastern backers due in July, we suggested. 

Just a day later, the group said it would be using £80m from the sale/leaseback to tender for some of its 2022 notes. This may say more than words, about McLaren’s confidence on the equity raise.

Ellaktor, the Greek concessions and construction group this week sought to reassure bond investors over further leakage to its loss-making construction arm. Management said that the retrenched AKTOR construction business would break even during the fourth quarter, adding that concession renewal talks with the Greek Government for the Athens Ring Road (a key asset for the restricted group) would begin soon. 

In theory, Ellaktor’s 2024 SUNs are insulated from the construction business, which sits outside the restricted group. But in practice the concessions business is heavily dependent on the construction arm, leading to a recent downgrade to triple-hook from S&P. Noise from a legal challenge from a large shareholder seeking to block a capital raise and the downgrade has weighed on the bonds in recent weeks, which at one point slipped below 90, before recovering as the legal challenge failed.

Ellaktor has provided AKTOR with €76m of intra-group funding in 2020, with another €17.5m this year. But with little room left under restricted payments baskets, Ellaktor has proposed a €120m capital increase (around 40% of market cap) which was approved at a  shareholder meeting on 22 April, with funds expected to be disbursed in July. The €50m bridge financing should be completed “in the next few days/weeks,” said management.  

What we are reading/listening to this week

To complement our piece on New Look’s CVA challenge, we found an excellent review by PwCon the pick-up in CVAs usage since Covid and their expectations for the future

Heathrow this week lost its battle to recoup a portion of its covid losses from a large increase in its regulated asset base (RAB). This is important for its recent bonds, as the regulator allows it a certain return based on RAB, leaving less revenue in the restricted group to trickle out for debt service. 

Robin Doumar from Park Square talks about Private Credit

Another shout-out for Epsilon Theory, Ben Hunt believes we should be looking at Bitcoin like an art investment, such as an NFT, not as a currency. Once again, another thought-provoking piece.

Our reading list wouldn’t be complete without another piece on Greensill. Kudos to Robert Smith at the FT for comparing Boris’ latest funding woes to supply chain finance “the refurbishment was funded under a ‘prospective receivables’ programme, sometimes described as future receivables. Therefore, although a Tory donor was identified as a potential funder of the invoice, he is not one currently.” But the loss to the taxpayer from Greensill is less funny, it could be £5bn