Friday Workout

Car Rental Insurance Fails to Payout, Greek Games Show, Dowry for Pronovias


By Chris Haffenden | Editor |

In previous versions of the Friday Workout we have looked at potential drivers for distress and how to identify new candidates when leverage is elevated everywhere with prices being poor indicators of value. Our in-depth analysis today on working capital movements for European High Yield - Working hard or hardly working? Capital and cash conversion in a post-covid era - is just one of our initiatives. 

As a former trader, I always was mindful of technicals in making decisions – they often Trump fundamental analysis especially on a short-term horizon – over the past few days the importance of liquidity was brought into sharp relief. 

Bitcoin is a great and extreme example of how prices can be driven by limited liquidity. Supply was already a limiting factor – from issuing a fixed number of coins - recent exponential price moves driven by hopes that institutional money will flood into digital currencies as an inflation hedge. But it’s virtually impossible to buy in size as virtually all Bitcoin is locked away – surely the very thing that institutional investors need to invest in an asset class? 

Closer to home, we’ve seen strange pricing effects, Vallourec bonds are now in the low 70’s, despite the company saying it is negotiating a debt/equity swap with just over a 50% haircut. One source close to the talks suggests this is due to one committee member buyer seeking to boost their stake. 

But the biggest dislocation seen this week was for Europcar, with its CDS auction seeing one trade in its SUNs at 87, some 20-points higher than secondary trading levels, and well above fair value. 

Car Rental Insurance fails to pay out

The LevFin Twittersphere was dominated this week with Europcar’s CDS auction debacle. It shows the inherent danger in relying on credit insurance via credit derivatives to pay out in restructuring situations. A mismatch in bids from dealers for physical settlement and limit orders caused the final price to be set at 100 cents – a zero payout for CDS holders. 

The initial market mid-point for the first round of bids during the CDS auction was 73, but after dealers submitted physical settlement orders for bonds, the €39.5m remaining of limit sell orders (between 71 and 87 cents) was below the net open interest allowing dealers to fill all their limit sell orders. 

But under the ISDA rules, the final price of the auction is the point at which dealers can only partially fill limit orders. But after all the sell orders were filled, there was €7m left to buy and no sellers, resulting in the final price being set at par, a zero payout to CDS holders. The settlement price was well above the 66/68 price quoted for the 2024 SUNs pre auction, causing an estimated 15bps tightening in the crossover index, and the SUNs to rally into low 70’s in secondary. 

So, what went wrong? Under the terms of Europcar’s restructuring the vast majority of holders were locked-up to the agreement and therefore restricted from trading, limiting the number of sellers that could satisfy dealer bids in the CDS auction. Some participants assumed that only 15% of the €1bn of deliverable debt was unrestricted, compared to €700m of CDS contracts. 

The latest debacle is likely to lead to calls to change the auction process. It provides some food for thought for holders of restructured paper, they may decide to place high limit orders in the next auction. 

New Greek Game show 

It’s been a while since game theory was introduced into a restructuring and genuine competition between bondholders sitting in a capital structure. Intralot’s announcement yesterday, is likely to appeal to gamblers on how the game over the eventual cap stack will play out. 

An ad hoc group representing over 75% of €250m Senior Unsecured 2021 notes advised by Houlihan Lokey and Milbank have agreed to a restructuring plan where they will exchange their notes into €205m of new Senior Secured Notes. But this is conditional on holders of the €471m 2024 SUNs being equitized into a 49% stake in a new DutchCo which is a direct subsidiary of Intralot Global Holdings and the indirect parent of Intralot Inc. 

While the 2021s are first in the queue in terms of maturity, they rank pari passu to the 2024s. In effect they are priming the 2024s and gaining security in exchange for a 18% haircut. The long-dated notes are in effect deleveraging the business from over 11x to below 4x and therefore could enjoy equity upside if the business recovers. However, they are entitled to argue that the debt should be treated holistically, gaining equal treatment with the 2021s, but the shorter maturity notes can call a default, one for the game theorists.  

The transactions will be implemented by two parallel cross-conditional exchange offers. The 2024 notes are being advised by PJT Partners and Dechert, who earlier today issued a statement to 2024 noteholders. Evercore and Allen & Overy are representing the company. 

Sponsor dowry 

Spanish Wedding business Pronovias has received a further sponsor injection with another €18m provided by BC Partners according to local Media reports and confirmed by a lender. In return, revolver lenders Santander, SocGen, UBS and Credit Suisse have waived the 9.18x springing net leverage covenant (if drawn over 40%) until June 2022. 

The business was in a mess operationally when BC bought in 2017, and numbers were deteriorating prior to the virus, said the lender. However, they should recoup a lot of trade post vaccine, he added. 

Pronovias debt was languishing in the 50s but improved following an upbeat sponsor update in mid-October into the 60s and in December, €48m traded in the mid-70’s, according to the lender. There is a new CEO onboard and the company has done some positive work on design and intermediaries’ relationships, as well as improving retail channels, he said. 

The balance sheet was very stretched and liquidity poor, however, and the injection buys time to see if the business recovers, if it does, more cash will follow, said the lender. It is unclear whether a deal will be struck with the second lien to PIK their debt to help preserve liquidity, he concluded. 

UK Restructuring Recognition rankles

The London-based Restructuring community have belatedly woken-up to the prospect of a no-deal Brexit for restructuring recognition across the EU. As our piece earlier today outlined they were caught out by the lack of a failsafe in the EU/UK Trade and Cooperation agreement to replace the EU Recast Regulation (RIR). Any proceedings opened after 31 December 2020 will now require applications to the courts of each country where recognition is sought, lawyers concede in a plethora of client notes. 

This could lead to an explosion of parallel processes. There is no going back to apply the law in each EU27 country that applied before, as RIR is now part of their domestic laws, notes South Square in their comprehensive briefing on the matter.

EU courts are not bound to recognise English Schemes of Arrangement or Restructuring Plans and there is no obvious successor in sight. There are some potential avenues being touted by law firms (which we go through in detail in our article) - but it will take time and require the express approval of the EU and/or member states – who may decide to oppose on political and commercial grounds. 

Some practitioners retain hope that London can retain its pre-eminence for global restructuring citing the sheer number of experienced professionals here, tried and tested court processes and the preference for English Law contracts in finance documentation. 

The latter is reinforced by one of the oldest and most contentious pieces of case law ‘The Rule in Gibbs’ which dates back to 1890 and says that “a foreign proceeding designed to bring about the cancellation of a debtor’s obligations will discharge only those liabilities governed by the law in the country in which those proceedings took place.” 

An English court will likely not recognize the discharge of an English law loan agreement or contract by a court in a foreign insolvency proceeding, notes Stephen Phillips from Temple Bright. 

Gibbs is a huge problem, said one eminent restructuring lawyer, who expects at some point a challenge to it could end up at the Supreme Court. “If Gibbs goes, we [The UK] have nothing.”

Legal wrap

Elsewhere in the UK courts this week, we saw the first cross-class cramdown for a UK Restructuring plan, for DeepOcean.  As reported, Havila Chartering had intended to challenge the DeepOcean1 plan but settled its dispute with the company just hours ahead of the class votes on 6 January. However, DeepOcean Subsea Cables (DSC) one of three company entities subject to the plan failed to garner the 75% voting threshold for one of its two voting classes and would need to be subject to a cross-class cramdown.

After listening to submissions from the company and its senior secured lenders, Mr Justice Trower said he was satisfied that the conditions – most notably under section 901G of the new act were met - it was appropriate to sanction the plan. A written judgment will have to wait, with Justice Trower cognisant of the precedent set under the new process he wanted time to work out how to express the issues relating to cross-class cramdown and put in clearer terms than via an oral judgment. 

The Dutch subsea services operator is the third company to use the UK plan, after Virgin Atlantic and PizzaExpress. The Triton-owned business is seeking to wind-up its loss-making cable laying and trenching (CL&T) division activities based in the UK (Darlington and Blyth). It would retain the IMR division – inspection, maintenance and repair business. 

We also had a no-show. gategroup was listed for today (15 January) for its initial UK Restructuring plan hearing. But the matter was dropped from the list, according to the clerk of the court. 

The plan is for gategroup Guarantee Limited, a wholly-owned subsidiary of the Gategroup Holding AG, the Switzerland-based airline caterer. The issuer, gategroup Finance Luxembourg established a primary office at 33 St James Square, London on 7 December to facilitate a COMI shift to the UK. 

On 13 November, gategroup announced a recapitalisation and amendment of its financial indebtedness. On 26 November it confirmed that lenders, shareholders had entered into a lock-up agreement to implement the transaction which was expected to complete by the first quarter of 2021. 

Under the restructuring plan shareholders RRJ Capital and Temasek will provide CHF 500m of new funding via CHF 25m in equity and a CHF 475m subordinated, convertible loan upon completion plus:

  • CHF 200m provided as a senior secured interim liquidity facility extended by shareholders repayable upon completion of the Transaction or latest 6 months after issuance; and

  • The extension of the maturity of the Group’s syndicated loan facilities to 20 October 2026 and certain other amendments. The margins on the debt are unchanged but step-ups no longer apply and the borrowers may elect to PIK interest

The deal is conditional on bondholders agreeing to the extension of its CHF 350m 3% February 2022 bonds to February 2027. On 11 December, a practice statement letter was issued to bondholders outlining the deal. But no mention was made at the time (or subsequently) of the level of bondholder support. There is no change to interest rates and a change of control event is to be waived. It remains to be seen if the company decides to use the process to cram them down if they fail to agree. 

In brief

Vedanta Resources this week launched a consent request to bondholders to allow it to make an open offer for up to 10% of the shares of Vedanta Limited. 

McLarensale/leaseback of HQ falls through due to financing issues for the property buyers. 

Premier Oil shareholders’ approved the reverse takeover from Chrysaor earlier this week.