Friday Workout

Not Chicken Feed, UnTethering Crypto, Wither Defaults

By Chris Haffenden | Editor |

The effects of Brexit on businesses are somewhat masked by the covid epidemic. But on Wednesday - aptly the fifth anniversary of the referendum result - Boparan management outlined that it wasn’t chicken feed, saying that it presented structural challenges for their business. They are unlikely to be alone, other chickens could be coming home to roost. The pandemic, and the responses to it are creating seismic shifts in the UK labour market, whose implications are only now starting to become apparent. 

After last week’s excitement on dot plots, markets were better behaved this week, with Fed governors going out of their way to reassure investors that they are doves not hawks. At time of writing, equity prices and risk assets are all close to all-time highs/tights. European HY saw a blow-out issuance week, with InPost, Poland’s Amazon Lockers clone, the standout pricing a debut BB rated deal at a lowly 2.25%. 

But in Crypto, all is not well. 

Bitcoin briefly breaking through 30k on Tuesday (50% retracement from March highs) got a lot of newsflow, but behind the scenes, it is the fate of Stablecoins that will decide if Cryptocurrencies will prevail. (As an aside I’ve always been amused how an alternative to fiat currency, touted by those as a hedge against inflation and unravelling of the financial system is so directly pegged to the dollar.)

Around 50%-60% of Bitcoin trades are linked to Tether. It is referenced one-to-one with the dollar and Tether should hold equivalent reserves (100% cover) backing its tokens. But only 18% of assets are cash, 10% are corporate bonds, ‘funds’ and precious metals, and 13% are in secured loans. 

What happens if there is a run on Tether? Could it liquidate the assets to match its reserves? Last week saw a prequel, with the collapse of Titan. This excellent post likens stablecoins to being the money market funds for Crypto

Coindesk recently described Tether as “a key piece of plumbing for the roughly $2 trillion global crypto market" because traders “use it to quickly transfer dollar value between exchanges to capture arbitrage opportunities when a bank wire is unavailable or too slow." 

But 65% of tokens are reportedly held by those using Chinese exchange Huobi, who suspended bitcoin mining services and sales of mining equipment this week after a crackdown by the Chinese authorities

Could we see the Crypto equivalent of breaking the buck – where after Lehman – the $1 NAV anchor was broken for several money market funds which had to be bailed out by the Fed? 

I’m not sure, but it is probably the biggest risk alongside exploding margin debt to financial stability. 


In hindsight, Boparan pulled a masterstroke last November, pricing its stressed refinancing off a ‘pro forma run-rate adjusted EBITDA’ of £134.8m. Their LTM EBITDA to end-March was just £92.2m and could drop below £90m by its financial year end. In early April, it talked about a perfect storm, but tried to reassure investors that rising costs of feed would pass-through albeit with a three-month lag. 

On Wednesday, it posted another disappointing quarter. Since Easter, Boparan saw a significant drop in labour availability for production staff and drivers. Some of these drivers are clearly structural and therefore Boparan would need to find structural solutions, said management. 

Brexit was the number one cause, leading to a reduction in migrant workers. Under new immigration laws the majority of their workforce would be considered unskilled and prohibited from entering the UK. 

Covid also had an impact. Boparan had benefited from the closure of hospitality businesses, but as lockdowns unwind, they are now returning to their old jobs. The strong growth of online retailers such as Amazon has significantly affected availability of drivers and warehouse and production personnel. Management said these businesses which had much higher margins were able to attract labour at significantly higher rates. A high number of furloughed workers reduced the available pool of workers. 

Labour shortages have affected Boparan’s ability to pack cut chicken, which meant that it had to dispatch to customers lower margin whole birds. European operations performed better, their margins were higher, but at the expense of volumes. Its Poland operation is still unable to sell into China (avian flu concerns) and exports are unlikely to resume into the New Year, said management. 

Boparan says it is looking to increase automation to mitigate labour costs and shortages, with labour making up around 18% of total costs. The payback time is around two years, and it will take at least six-months to automate end of line packaging.  

Management explained that they had a different philosophy compared to its competitor. Boparan is much more labour intensive, but this reduces waste, which they claim overall is a wash on economics. Any loss of competitive advantage in such a low margin commodity-like poultry business from increased labour costs is likely to skewer them, said one analyst. 

It’s £475m senior secured 7.625% 2025 bonds jumped two points on the Q3 release to 95.25, but reversed all their gains after an invitation-only lunchtime conference call which buysiders said was unconvincing. (Why do public bond issuers do this - are they chickening out?)

Optically net leverage looks manageable at 4.9x, but this doesn’t take into account pensions liabilities and factoring. This adds another £218m and £134m respectively, pushing leverage nearer to 9x. Worse still, the Northern Foods pension liabilities rank pari passu to the bonds.

Boparan has stated that it would seek to exit its food and meals business (around 50% of EBITDA) in three years. The food business helps to stabilise earnings, said the distressed analyst. “But there is huge volatility in the chicken business and the margins are too thin - it shouldn’t have leverage attached to it.”

Wither defaults

A year ago, ratings agencies were all forecasting double-digit default rates, expecting a wave of defaults after covid support measures expired in the autumn. Personally, I had decided it was time to return to covering distressed and restructuring anticipating a restructuring wave bigger than the GFC. 

But a year later, the picture is very different. Trailing 12-month default rates in Europe were just 2.6% in May, according to Fitch with no defaults recorded during the month. Last May over 30% of LevFin were trading at distressed levels (over 10% yield), but now that figure is well below 10%. Net upgrades are accelerating with raised expectations that debt profiles of pandemic affected credits will return to 2019 levels by 2022. 

Distressed funds are forced into playing in stressed refinancing, with many considering top-of-the market deals such as HoldCo PIKs, desperate to find product to meet their returns.

We have in turn pivoted towards previewing/reviewing stressed refinancing deals, turning an analytical and skeptical eye to companies such as Douglas, Kloeckner and Tullow. 

But is there a danger of being sucked into believing that the wave has been completely avoided rather than just delayed? While a number of companies have been able to raise additional funds from a hot financing market, with some able to push out their maturities to avoid a payment cliff, it's abundantly clear that pricing is getting ahead of reality.  

This week we were reminded that not all pandemic affected businesses are awash with liquidity. Carlson WagonLit has defaulted on its interest payments for its second and third-lien notes. The US-based travel service company has entered into a forbearance agreement with lenders, to allow it time to present a restructuring plan. 

As the half-year point approaches, we are speaking to distressed players and restructuring advisors on their thoughts on the upcoming deal pipeline, and will review some of the key transactions and legal developments in the first half of the year. 

If you want to contribute to these reports, please email me at

In brief

The administrators of shopping centre owner Intu have won an English court’s permission to make distributions to unsecured creditors – and to extend its administration for two years in the hope that assets in Spain, India and the UK may become more advantageous. Earlier this year, valuations of its prime UK shopping centre assets were slashed by over 30%. 

Codere announced that it will contribute Codere Online to a Luxembourg NewCo which will in turn via a merger acquire a SPAC, DD3 Acquisition Corp II. Codere will maintain a 54%-73% ownership stake, depending on SPAC Investor redemptions. It values the combined company at an estimated pro forma EV of $350 million (€287m) or 2.3x Codere Online’s estimated 2022 revenues.

Four institutional investors (Baron Funds, MG Capital, LarrainVial and DD3 Capital Partners) have committed $67 million with Baron Funds committed to roll-over approximately $10 million SPAC shares, resulting in minimum transaction proceeds of $77 million. SPAC investors will have the option to redeem their existing cash contributions. The SPAC has $125 million of cash – implying total proceeds ranging from $77m to $192 million depending on redemptions, prior to any expenses. 

Carnival Corporation says that it will have 27 ships (35% capacity) operational by end November; with its whole fleet of 95 vessels ready by Spring 2022, ahead of an expected summer bonanza. It said on an earnings call this week that it would continue to seek to reduce interest costs and extend maturities, but ruled out further equity raises. The US-based cruise operator declined to say when it would be cash flow and EBITDA breakeven. It burned through $500m in Q2, and says it has sufficient liquidity to bridge to full reopening. 

Another week, another UK Restructuring Plan challenge at sanction, albeit a lot less high profile than deals such as Virgin Active. Hurricane Energy, the North Sea E&P producer, is seeking to do a deal with its bondholders to reduce its USD 230m convertible bonds due July 2022 by £50m and extend the remainder until December 2024. In return holders will receive 95% of the equity. But shareholders have rejected the plan, and have sought to delay its sanction to allow them to replace directors at an EGM on 5 July. Mr Justice Zacaroli has reserved judgment. 

NCP Car Parks sanction hearing, which was due to be held at the end June has been delayed, after REEF Technology and Bain Capital launched a late takeover bid to trump an offer by existing sponsor Park 24. Directors have agreed to consider the offer, and have asked the court to delay sanction, according to a source close to the situation. 

HMRC has agreed not to pursue troubled companies for unpaid taxes. Last year it was granted preferential creditor status, leading to concerns that it would take an aggressive approach. This coupled with the latest three month extension to rent moratoriums and a new arbitration plan for landlord/tenant disputes, is likely to push the day of reckoning for many businesses into the autumn and beyond.

What we are reading this week

In a past life, I closely followed events in South Africa and corruption at state-owned entities, most notably Eskom, the electricity utility. News24 has done a great series - the Eskom files, showing how executives were gifted dream homes, with school and dental fees paid directly.

An excellent twitter thread from Travis Kimmel looking at Stablecoins dissecting whether they could become global reserve currencies.

Another blast from my Emerging Markets past. I remember the English High Court lists in the mid 2010s being clogged up with cases related to collapsed Kazakhstani bank BTA and its former head, who it is claimed embezzled $6bn. This New York Times article delves into why the English Courts become the forum of choice for governments and oligarchs to litigate

The killer para is late on, $470m of legal fees on BTA alone, with just $45m recovered to date. 

A strange ruling has created confusion on Carnival’s plans to resume cruises from Florida. The US CDC has insisted that cruise passengers must be vaccinated before travel, but a court has granted Florida a preliminary injunction from the CDC's cruising restrictions by making them optional instead of mandatory, beginning July 18.

A must to adorn our new Newsroom (we are still actively hiring reporters) - a 2,000 piece LEGO typewriter - complete with moving keys and carriage

This article amused us at 9fin towers, and may explain the raft of enquiries from LevFin bankers in recent weeks asking us for data. Staff shortages oblige senior bankers to do juniors’ work - another compelling reason for a 9fin subscription.