Friday Workout

Maintaining perfection - are you a sentimentalist or cynic?

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

The first 9fin Friday Workout of 2021 takes a stab at some broad themes for the upcoming year. But first we look back to the end of 2020 – to assess our starting point – and tidy up the plethora of announcements and developments made since our last Workout on 18 December. 

We ended the year with HY bonds in positive territory, with plentiful liquidity to refinance stressed credits as most stressed/distressed bonds trade above 95. Borrowers are touting their ability to ride out the storm with significant liquidity buffers and with vaccines rollout they hope activity will return in the second quarter, with most businesses aiming to hit 2019 profitability by end 2021/early 2022. 

The European default rate ended the year below 5% - nowhere near the double-digits levels being forecast as the crisis broke. Expectations for 2021 are wide, from 3-4% from some research houses to 8% from S&P Global. This is partly due to uncertainty about the cliff edge from withdrawal of support programmes, partly due to uncertainty on the timing and strength of the recovery and in my view something which is often overlooked – the ability and willingness to access finance to avoid defaults. 

Maintaining perfection

With existing HY debt seemingly priced close to perfection – it is hard to see even in a perfect world more than 4-5% returns for 2021 – asset managers need to be adept at avoiding blow-ups while they earn their carry. Can it make sense to clip coupons on the latest Carnival bonds at 5.5% yield? 

For PMs aiming to avoid tape bombs and distressed investors and advisors looking for deal pipelines, finding early warning signs of stress and looking for potential triggers will be increasingly important. 

The surprisingly slow start for European LevFin primary this week allowed us at 9fin Towers to think more about these signals and what metrics we could use to help build your watchlists. 

Conversations with asset managers and advisors confirm tracking working capital movements and dynamics are key in 2021. We see big swings as accruals are paid and businesses are ramped-up, therefore, some liquidity buffers may be smaller than you think. Conversely, how companies use excess cash - M&A, ramp-up capex or repay debt - is another determinant. 

Covenant holidays and resets are another key datapoint. Most were secured last summer to give enough headroom room into the second half of 2021, when the recovery was meant to be in full swing. But are these still relevant, do they need to be extended further given revised rebound expectations and will lenders be as willing to grant further relief? 

As Fitch points out – it is only by year-end 2022 that leverage headroom for global corporates will normalise.

The appetite of governments to support businesses by providing tax and rent relief and support payments to employees will be tested in upcoming months. Continued availability of state loans and if these could be extended to distressed businesses is high up the list.

For example, Abengoa and Duro Felguera – see our Spanish Workout for more details. 

Sentimentalism or cynicism to prevail in 2021?

At current levels and appetite for risk assets - does it pay to be a cynic in 2021?

Oscar Wilde once penned that a cynic “knows the price of everything and value of nothing.” 

Less well known is Lord Darlington’s response: “and a sentimentalist is a man who sees absurd value in everything and doesn’t know the market price of a single-thing,” 

In the short-term, sentiment is winning - we are at the mercy of stimulus optimism and rampant risk-on optimism for risk assets, only partly countered by renewed concerns about the second wave and vaccination rollout. However, for some sectors, tough lockdowns may change perceptions for retailers, hospitality and travel businesses and merit a repricing. 

For cynics looking for signs of returning inflation, I would point out recent moves in oil and breakout in the Bloomberg commodity index as early signs, together with strong Yuan – also seen as inflationary and reversing a deflationary trend. 

This week, 10-year Treasuries broke through the 1% barrier after Democrats won the Senate with consequent likely increases in spending and borrowing. This may test the Fed’s ability to purchase bonds to keep rates low and affect DCF valuations on growth stocks.

Several announcements for our watchlist names appeared during the last two weeks of 2020. 

The cynic in me would say this due to advisors keen to book fees for the calendar year and boost their league table positions. But given the high level of activity, I would say that was far less prevalent than prior years.  

After teasing bondholders in their Q3 earnings call of its ability to raise more debt without their consent, Hurtigruten announced on 28 December it had secured €60m of letter of credit capacity. The troubled Norwegian Ferry and Cruise operator says that this would free up to €60m in restricted cash. As at the end of the third quarter, Hurtigruten had €77m of free cash and €47m of restricted cash, relating to travel guarantee schemes. It burnt through €83m that quarter, adding that its monthly cash burn rate was €12-15m. 

Amigo teased bondholders about the use of a scheme of arrangement to deal with ringfenced claims in its third quarter earnings call, without giving details. At the time we speculated that they could separate the businesses into a GoodCo/BadCo and use the scheme in a similar way to how schemes had been used for the wind-down of insurance claims. 

On 21 December Amigo said that redress claims (from issues arising from unaffordable lending) will be dealt with via a scheme of arrangement. It will stop making payments of redress claims and will calculate claims lodged within six-months of the scheme becoming effective. There is a right of set-off against outstanding loan balances. 

Amigo estimates an initial cash payment of £15m towards the redress pool plus a cash contribution to the scheme based on 5% of profit for the next financial years (to 31 March 2024). Without the scheme the guarantor lender says the level of redress claims would jeopardise the groups future – despite having “adequate liquidity in the medium term.”

It adds that it would seek to launch the scheme as soon as practicably possible. 

There was more English court action in December, with arguably the Dutch subsea services operator DeepOcean set to be the most interesting. It could have been the first UK restructuring plan to use cross-class cramdown with the added appeal of Havila Chartering AS threatening to challenge the treatment of its claims at the 13 January sanction hearing. 

Havila is a scheme creditor to DeepOcean 1 – one of the three group entities under the UK plan. The Triton-owned business is seeking to use the procedure to wind-up its loss-making cable laying and trenching business using the plan to exit non-profitable charters. 

But earlier this week, Havila announced a settlement with DeepOcean, dampening ours and process watchers hopes that the challenge would set precedents for the new process. 

The International portion of Hertz’s restructuring is moving forward with Hertz Holding Netherlands Senior Unsecured Noteholders to vote in favour of the scheme of arrangement on 15 January. Noteholders will exchange their SUNs into new first and second lien notes gaining security and can subscribe for a new €250m new money piece via new Senior Secured HoldCo notes to give expected par recoveries.

But amounts exchanged are dependent on a novel idea – bifurcation – where US guarantee claims against Chapter 11 debtors would be sold via auction. Cash proceeds (expected around 40% of notes) will be applied to reduce exchange amounts. The Hertz Corporation is a parent guarantor who with its Canadian subsidiaries filed for US Chapter 11 on 22 May 2020

Scheme creditors to Norwegian oil services provider PGS will vote on 20 January on a proposed Amend and Extend transaction. The single-class scheme already has 95.35% of creditors signed up to a lock-up agreement. The only other remaining creditor holding 30% of the RCF has not responded meaning that unanimous agreement could not be reached, leading to the scheme launch. 

Under the proposal its $350m RCF ($135m due Sept 20, $215m Sept 23) will be converted into a new TLB carrying the same terms as the existing TLB. In addition, the company will issue a NOK 116.2m three-year convertible bond – mostly backstopped by certain TLB lenders. 

Spanish deals in brief

Prisa completed its amend and extend transaction on 31 December. The A&E refinancing approved by 100% of lenders sees debt maturities extended until March 2025, with €400m of debt repaid from proceeds from the €465m sale of its Santillana Spanish business. 

Telepizza has secured €72m of incoming funds comprising a €42m shareholder injection and €40m Santander and ICO loan (with €20m upfront including the rolling in of a €10m term loan issued last spring)

Naviera Armas agreed key terms with an ad hoc group of bondholders who are providing a €100m bridge (€35m already disbursed) and converting €240m of their debt into equity and to extend their remaining bonds into 2026. The Family owners will inject €40m and will maintain control via 51% of the voting shares and retain a 35% economic interest. 

For more details on the names above and the attempts to get rescue Abengoa and Duro Felguera via Spanish government assistance – please see our Spanish Workout

New Dutch and German processes 

On 1 January the Dutch Scheme and the German Restructuring Plan came into force. Both have the potential to compete with the English Scheme and the UK Restructuring Plan amid concerns over their recognition following Brexit (9fin will be publishing on this next week). 

WHOA - the Dutch confirmation of private plans, more commonly known as the Dutch Scheme has a number of advantages over its English counterpart. It is cheaper, faster, with lower voting thresholds. It can also confer some tactical advantages (especially for junior creditors) according to our primer

On 17 December the Bundestag passed the Further Development of the Restructuring and Insolvency Law. Most of the draft law survived, but the shift of directors’ duties to creditors if imminent illiquidity occurs and the ability to terminate certain contracts such as leases was removed. Our updated primer can be found here.

Bears believe that Germany-based beauty products retailer Douglas could be one of the first companies to use the new process. Douglas released its year-end (to September) results on 18 December. But for 2020, it has decided to delay their release until January, causing some concern for nervous bondholders following news it had hired Lazard and Goldman to explore restructuring and refinancing options. Holders are braced for a poor Xmas trading period after Germany entered into a hard lockdown in early December – over 50% of yearly EBITDA comes then.

9fin recently produced a deep-dive analysis on Douglas - one of a series of reports released on a trial basis – your feedback and suggestions are welcomed. 

This week in brief

Pacific Drillingannounced on 1 January that it had exited Chapter 11, reducing the debt burden of the Luxembourg-based ultra-deepwater oil drilling services firm by $1bn. More background is available here

Grenke has said that its leasing division new business in 2020 was 71.2% of 2019 levels, with contribution margins improving. But it may disappoint hybrid bondholders, saying it would not be calling the bonds on the first call date on 21 March 2021. 

Europcar this week released a detailed independent report – in conjunction with its restructuring and associated capital raise. On 7 January, creditors committees approved the Sauvegarde Acceleree plan with a shareholders meeting to be held on 20 January. 

Carnival has amended the terms on its $3bn-equivalent multicurrency RCF. It has changed the ratio of debt to capitalisation, added a $1bn minimum liquidity covenant (Feb 21 to Nov 22) and 2.0x minimum interest cover (from Feb 23, rises to 3x in Feb 24) with a number of negative covenants and 0% Euribor and Libor floors added. The cruise operator will give an investor update next Monday. 

What we were reading this week

Why ‘BRRR!’ Doesn’t Mean What You Think It Means

Louis Gave: Inflation Will Come Back With a Vengeance

Moving from cash preservation to cash excellence for the next normal

Waiting for the last dance

A 25-Year-Old Bet Comes Due: Has Tech Destroyed Society?

Predicting bank distress in the UK with machine learning