Friday Workout

Limits of Sanity; No Smiles from Miles for Amigo; Prime numbers

By Chris Haffenden | Editor |

With High Yield Primary taking a half term break, there was finally found some time to ruminate, cogitate, and speculate if we may have finally reached a market top for risk assets. 

I’ve long believed that Efficient Market Hypothesis has no place in the understanding of markets. They are often irrational – cue Keynes’ famous quote – but it’s no Random Walk, either, correlated in a myriad of ways. Chartism is a self-fulfilling prophecy with many false prophets (and false breakouts) with many traders including yours truly making a fortune filling stop-loss orders and taking the other side of the trade. 

One of the reasons why I found it easy to transition to journalism (I parked myself for a max six months in July 2004 awaiting distressed opportunities!) is that as a trader I was always looking for the narrative to understand and then profit from what was happening. My advantage when covering special situations was the ability to work out the potential value of the distressed trade, the risks and understand the game theory. I often knew who had the gun, who had the knife, and whether either of them knew if the other was prepared to use their weapon or not. 

But how do you do this in extremis, when all the actors appear to be verging on the insane?

I’ve just got around to reading Morgan Housel’s The limits of Investing Sanity. Markets don’t stay within the limits of sanity, he suggests. “The only way to know we’ve exhausted all potential opportunities from markets – the only way to identify the top – is to push them past not only the point where the numbers stop making sense, but beyond the stories people believe about those numbers.”

Are bonds overvalued? What is bitcoin worth? How high can Tesla go?

You can’t answer those questions with a formula, says Housel. “They’re driven by whatever someone else is willing to pay for them in any given moment – how they feel, what they want to believe, and how persuasive storytellers are. And those stories change all the time.”

Rather than thinking that those pumping Bitcoin and meme stocks are crazy, Housel says “they are just searching for the boundaries of what other investors are willing to believe.”

Many of you might identify with this on some recent HY deals and their pricing, but in their absence this week, the Friday Workout pivoted towards Q1 earnings releases. 

There were plenty of updates to digest from those in sectors most affected by Covid lockdowns and borrowers whose runway to refinance 2022 maturities is diminishing amid business uncertainty. Preserving cash buffers appears the name of the game while management workout their best course of action, disappointing bankers and investors alike who prefer they take a trip to primary, while it remains hot. 

Later in the workout we will pick out our favourite updates, but first let’s revisit Amigo Loans whose equity investors got burned in a binary options trade this week. 

No smiles as Justice Miles makes few friends at Amigo

The English Courts are seen as very commercial and flexible in their interpretation of and the use of restructuring processes to implement comprises on creditors. Recent Virgin Active and New Look judgments reinforced this view and provided clarity on the discretion of the courts to sanction, disappointing their unsecured creditors. But Amigo Loans’judgment goes some way to allay their concerns with Justice Miles unconvinced that an insolvency was imminent.

To recap for those new to Amigo, the UK-based guarantor lender had sought to deal with redress claims via placing them in an SPV with just £15m of cash and the rights to 15% of profits from 2022 to 2024. This would be implemented via an English Scheme of Arrangement. 

But with £180m of cash sitting on the balance sheet, there was no burning platform, and Justice Miles questioned the lack of evidence on the basis for the level of pay outs and doubted the binary option offered to creditors that Amigo would be forced to file for administration if the Scheme failed to pass. 

Their regulator, the FCA, had challenged the Scheme, noting around £600m of redress claims would at best see a 10% recovery. Worst still, shareholders would be unimpaired, despite in the event of a liquidation, they would rank behind the unsecured claims. The plan was developed not only without consultation with claimants, but also without bondholders, who under an insolvency scenario are the impaired class and able to decide where the surplus was distributed. 

As we outlined in last week’s workout and in our pieces covering the sanction hearing (here and here) it was clear that Amigo faced an uphill struggle to convince the judge to sanction. But despite the asymmetry of information - there was limited number on the Teams call and little reporting in the mainstream press - the company lifted trading in their shares on Friday. 

This no doubt helped their institutional shareholders to offload as much as they could ahead of the ruling (the shares fell 34% on Friday in heavy volume), it was clear from the message boards many investors were clueless. Then again, the bonds hardly moved either, they should have got a 9fin subscription. 

Amigo was one of the top performers in 2021, with the shares more than tripling since December when the Scheme was announced, before seeing some pullback when the FCA said it would oppose Sanction on 10 May. On Tuesday, when the judgment was announced the shares fell another 50% and the bonds finally fell four points, after seeing our headline (see our chart below)

In his concluding remarks Justice Miles said: 

“Some form of restructuring of the Group is clearly desirable and indeed needed. But the question is whether, in all the circumstances, this Scheme should be approved. As explained above, I have accepted the submissions of the FCA that the Redress Creditors lacked the necessary information or experience to enable them properly to appreciate the alternative options reasonably available to them; or to understand the basis on which they were being asked by Amigo to sacrifice the great bulk of their redress claims, while the Amigo shareholders were to be allowed to retain their stake.”

He added: “I have also accepted the FCA’s submission that the court’s refusal to sanction the Scheme will probably not lead to the imminent insolvency of the Group; there is no evidence of any immediate (or even medium-term) liquidity crunch, and the directors will doubtless wish, if possible, to preserve the value of the enterprise for its various stakeholders. The FCA expects the directors to continue to explore and promote a restructuring which fairly allocates the benefits and losses among the various efforts to promote a suitable restructuring.” 

So where does this leave Amigo? 

Despite having Grant Thornton lined up as administrators, there has been no follow-up announcement from the company about next steps. Shareholders are unlikely to take this lying down if they do file.  

Could Amigo just provide further evidence as to why it can only afford £15m and just 15% of three-year profits? One argument being touted is that Amigo couldn’t offer more, as this would trigger an event of default under the bonds. In court submissions it was disclosed that Kirkland & Ellis had written to the company saying they were acting for an ad hoc group, making it clear there would be no contribution from bondholders nor write-down of their security.

The company complains that it would take six-months to launch another scheme, and that the FCA has not indicated what would be acceptable. This will delay the launch of its new shiny loan offering, the key to a resumption of lending, but which requires FCA approval to launch, they say. The FCA counters that it is highly likely to issue a no objection letter if there is a negotiated deal between all stakeholders. 

Codere payouts

Today is the lock-up deadline for Codere bondholders to sign up for its restructuring deal, with just another 1% of its dollar bonds needed to get over the 90% approval threshold.

In compiling the capitalisation table for our Restructuring QuickTake (copies available on request), we were amazed at the €100m market capitalisation (20% of the equity is free float). This appears insane - buying now results in 5% recovery of your equity and no control – surely not worth €2bn?

Is there a trade here? The equity will be delisted, with the possibility of cash settlement for shareholders, but the majority 95% will be stapled to unlisted HoldCo PIK (hope) notes, until a likely exit in 2023/24.

Prime numbers

There are a number of stressed HY businesses which are like Prime numbers - they do not have enough factors to make a refinancing calculation possible. There is an interesting list of names with debt coming due in 2022, which may fail to refinance before their debt becomes current - Raffinerie Heide, 4Finance, Haya Real Estate, McLaren, Lowen Play, amongst others. 

In recent calls, some have reined back on previous statements on hopes for refinancing. 

Raffinerie Heide said on Monday that it will need to see improvements in refining margins before making a decision on refinancing its December 2022 bonds. Whilst recognising that bond markets are favourable, making the Germany-based refiner well positioned for a refinancing, no banks have been hired.

Its Macquarie inventory financing facility was recently renewed, extended out to 2024. Management disclosed that the first extension is until H1 2022, with the second extension conditional on the bond refinancing. There is also a minimum €40m cash and cash equivalents covenant. 

Raffinerie Heide continues to prioritise its liquidity position, with cash and cash equivalents rising to €198m at the end of the quarter. But €129m of this is down to deferred taxes (€56m MOT, €73m VAT), which must be repaid on a rateable basis from July to December, noted management. However, there are proactive discussions with authorities over the extending of the payments, they added. 

Haya Real Estate says uncertainty over a new Sareb contract, extension of loan repayment moratoriums until end-year and banking sector consolidation will all weigh on 2021 activity. As a result, plans to refinance their November 2022 bonds could be pushed into next year, when there is more certainty. In the meantime, the focus is ending 2021 with the best cash balance.

Sareb, which represents 40% of AUM, is launching a new servicing tender at end-June which is expected to be finalised at end-year. The tender is going to be a very competitive process, said management who added that they are unsure on what will be included in the tender. 

“We need to see more certainty on the Sareb tender process, we are trying to mitigate risk, need as much certainty as possible [before launching refinancing], at the end of this year, we will have a much clearer view.”

One questioner asked about going concern opinion and whether Haya would need to consider a refinancing before the audited full-year 2021 accounts, noting that this could cause difficulties from a Spanish law perspective. Management acknowledged that this was “a fair comment.”

There is a €100m receivable to Cerberus that the company must repay in early 2022, based on the 2017 dividend distribution, said a distressed analyst. If they don’t, they have negative net equity and could be forced to file, he suggested. 

McLaren had a more positive first quarter but failed to give much more detail on plans to refinance its Feb 2022 RCF and August 2022 bonds. It has shored up its cash position via a stake sale in its racing business and completed a sale/leaseback of its Woking headquarters, with £85m used to tender for outstanding notes via a Dutch auction, whose deadline is today (May 28, 2021). 

The group said it continues to evaluate several capital structure alternatives “including an equity or holdco debt capital raise and a debt refinancing. Its peer Aston Martin might show the way, with some form of HoldCo PIK and/or equity raise likely to enable a smooth refinancing, given net leverage of 11.5x to March 2021. 

eDreams has more time with its 5.5% bonds due in September 2023. But investors on its earnings call yesterday (May 27, 2021) were interested in Prime numbers too – its Prime subscription membership.

Their service has just hit 1m members, well ahead of target, with the Spain-based travel agency saying Prime will provide a constant revenue stream, more business predictability and a greater share of the traveller wallet. But it is unclear how profitable this new revenue line is and how much the existing business may need to subsidise membership growth, as citing competitor confidentiality, eDreams declined to give churn nor its contribution to EBITDA. 

The vaccination programme and US travel show that demand is recovering sharply. Bookings were just 28% lower (versus 2019) by May 22, 2021, compared to April of -51%. “There is no uncertainty on recovery, just on how quickly it will come,” said Dana Dunne, the ebullient CEO. 

But the average travel basket size has dropped from €450 in 2019 to around €300 and has yet to show signs of improvement, admitted management on the call.

The main draw of the £59.99 annual Prime offering is flight discounts, which they say would be an average of £35 per transaction.

The key question is whether airlines are going to allow them to discount tickets, “or will eDreams be subsidising these discounts from subscription revenue, in which case how profitable is that revenue line,” said the analyst. Without corresponding discounts from airlines, they are praying customers are going to book less than three flights per year. “If it’s not a genuine airline discount, the costs of that could get wild for eDreams as people change behaviours quickly.”

Refinancing of the 2023 bonds will be evaluated on an ongoing basis, said the CFO. The September call is one consideration, but also the quarter-on-quarter improvement of the financials. A successful refinancing would be at equal to or lower than cost of existing debt, he added. eDreams 5.5% September 2023 bonds have rallied significantly in recent months, from the low 80s in late October, to 99.42-mid today, a yield of 5.77%.


In brief

Car Parking Businesses were impacted hard by the pandemic as city and town centres emptied as workers and consumers kept away from offices and shops. Three were in focus this week:

Emparkwas impacted in the first quarter by renewed lockdowns in Spain and Portugal, with leverage rising to 16.7x. Luckily, the springing financial covenant only triggers a drawstop event which does not come into effect as the RCF was fully drawn until June 2021. It has €126m of available liquidity. 

Q-Park raised €90m from a private placement bond and a €25m mortgage-backed loan in the first quarter, improving its cash position to €260m. Net debt (excluding shareholder loans) was €1.57bn at end Q1 21. Adjusted LTM EBITDA was negative €2.3m (€216.9m for FY19).. 

NCP Car Parks UK Restructuring Plan kicked-off today with Justice Trower presiding. Similar to Virgin Active, the restructuring uses the new process’ cross-class cramdown to force rental reductions on landlords. Advised by Deloitte and Kirkland & Ellis, the Car Park operator owned by Japan’s Park 24 and Development Bank of Japan, is looking to inject £120m into the troubled business which has suffered from a collapse in vehicle traffic during the Covid pandemic. The UK Plan will be split into five classes, with the landlord occupying four of these.

NCP landlords are asking for more information to better assess the plan. ESG Impact, an existing landlord with four sites, is working with Hong Kong family office Aberdeen World Group to propose a counter offer, but claims it is being frustrated in gaining access to information. The company counters that it needs more evidence that the offer is serious, and is concerned that they may be wearing two hats and using the offer to extract a better sponsor proposal. 

Norwegian Ferry and cruise operator Hurtigruten announced further measures to access liquidity and bridge to a Q3 reopening this week. It was able to increase its letters of credit capacity by €33m to €93m allowing it to release restricted cash. In addition, lenders agreed to reduce the minimum liquidity covenant requirement from €25m to €15m. It’s earnings were released this week “Hurtigruten Group is closely monitoring the liquidity situation as we move forward and believes that the liquidity resources currently available and the plans that have been put in place are sufficient to ensure the funding of the Hurtigruten Group. The ultimate shareholders of the Company have confirmed that they remain supportive of the Company and have indicated that they would be willing to consider providing additional liquidity if necessary.”

Norweigan Airlines has completed its restructuring, with its exit from Irish Examinership. The airline will shift to a local operator, reduce its fleet from 140 to 50, with its debt cut by around 85%, in conjunction with a NOK 6bn capital increase. Goodbody has produced a good summary on the legal process here

Takko bonds took a tumble earlier this week into the mid-80s on news that its new CEO Markus Rech will leave the company by mutual agreement. He only started in the role on 1 April. On 30 March, the CFO Andreas Silbernagel departed, with Ersnt de Kuiper appointed as interim CFO. Sponsor Apex and bondholders injected €53.5m of new money (€23.5m using super senior baskets, remainder in-line with the SSNs), but it may not avoid a full-blown restructuring. It will report on Monday, with a call on Tuesday. 

What we are reading this week

After last week’s bloodbath, there was some stability returned to crypto markets this week. But as Wolf Richter notes maybe it is not the time to but the f*cking dip. Should a store of value and hedge against inflation lose 50% of its value in a few weeks? 

Trading and investing can be about understanding how the world works, its biases and misconceptions. I identified with far too many of Morgan Housel’s 100 Little Ideas

Project Syndicate has a thought-provoking article on Bank of England’s purchase of £450bn of UK Government debt since March 2020“The fact that fiscal policy is now driving monetary policy in the United Kingdom cannot be admitted, and not only to maintain the perception of central-bank independence. More fundamentally, admitting that the Bank of England is an agent of the Treasury would destroy the intellectual edifice of current macroeconomic theory.”

My former colleague Jim Reid observed this week that debt doesn’t matter if it is held by the official sector. He cites Greece 10-year yields hitting their lowest spread against Bunds since 2008 at 107bps. Today, with debt much higher but with huge “official” sector involvement, no serious commentator is talking about short to medium-term sovereign risk." 

As the Deutsche Bank strategist concludes, "this likely makes it much easier for fiscal policy to stay much looser post pandemic than it did post-GFC with all the associated growth, inflation and long-term implications."

9fin puts the tech in front of everything we do. But most of our new features come from interaction with our subscribers observing questions they ask via our chat function and those asked on demos. Gillian Tett explains how companies such as Google are turning to anthropology and psychology to balance the insights of algorithms and AI

Finally, the latest SNAFU from the UK Government announcing local lockdowns on a website late on a Friday, but not telling anyone, reminded us of the great Douglas Adams:

“But the plans were on display…”
“On display? I eventually had to go down to the cellar to find them.”
“That’s the display department.”
“With a flashlight.”
“Ah, well, the lights had probably gone.”
“So had the stairs.”
“But look, you found the notice, didn’t you?”
“Yes,” said Arthur, “yes I did. It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying ’Beware of the Leopard.”