Friday Workout

Anarchy in the US; Pretty Vacances; Distressed Marshmallow test

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

Anarchy is all around US, and it has now moved into the financial market’s arena. 

This week we were all transfixed by the fight between retail investors fired up on r/wallstreetbets Reddit pages and professional short sellers in Game Stop, the most traded stock in the world on Wednesday with $20bn of volume. An ironically named stock to pick, methinks, given that gamers bored of computer games are turning their attention to stonks. Funded by stimulus checks and stories of overnight millionaires (you’ve got to love survivorship bias in action) and armed with the ability to play in instruments offering extreme leverage and instant gratification such as one-day calls, nowadays anyone with an internet connection can be the Wolf off Wall Street.

There is another element, which draws some parallels with QAnon and the rise of Trumpism. A number of people who view themselves as outsiders have suddenly had an ability to create anarchy and found a sense of community by disrupting the financial establishment. Many of them would have loved to have been Wall Street traders but their jobs were taken by HFT Algo’s and Quants. The irony is that they are the ones in control of the game – for now – making the smarts look foolish. 

To fully understand what is going on, and why we missed it coming, this Epsilon Theory post on the information ecosystem for trading and investing is a must read. I admit I was slow to take note of the full implications for the wider market, seeing Tesla and Bitcoin as an entertaining side show. 

As Ranjan Roy notes in his latest Margins blog post, retail is not just college kids and mom and pop investors – “my friends in tech (who often make more than my friends in Finance nowadays) and doctors are sending me $GME or $AMC porn. “Lol GME to 1000 🚀🚀🚀 ”

I used to find message boards for listed distressed companies entertaining, amused by day traders’ conspiracy theories and misguided views on businesses which clearly had no equity value. If I wasn’t precluded from shorting by our journalist rules and ethics, I would have made a small fortune on names such as British Energy and Yell, still trading with market caps in the hundreds of millions, despite them being technically insolvent at the time. 

Notwithstanding the effects on household incomes when this goes pop (there are echoes of 1929 and Japanese crash in the late 80s of retail investors' latest stock market fixation) we may be close to the point where regulators may take notice of the implications and potential risks to risk assets. 

But is this market manipulation? As someone said to me yesterday, it is in plain sight rather than via collusion via private insider trading concert parties, so may be difficult to prosecute. Incitement to financial violence is currently not a crime.

Perhaps the easier option is to limit access to derivative instruments, access to leverage and freebie trades, witness Robinhood yesterday closing out margin accounts causing a sharp drop in GME. Conversely, the Fed and regulators might see it as a cheap way of supporting corporate America and may allow it to continue as long as it doesn’t get out of control. 

Many of the most shorted stocks are locked and loaded up with debt. Some have risen sharply of late driven by r/wallstreetbets buyers, boosting their theoretical equity cushions. This is a get out jail free card for some of our LevFin companies such as AMC, who said in December it was set to run out of cash as early as this month. Now, the Cinema operator has been pardoned and able to issue further equity and provide an unexpected home run for some convert holders, as this FT story explains. 

The emphasis is on distressed companies to quickly take advantage and gorge themselves on these free lunch vouchers by issuing ATMs. This window is probably open for days and weeks, not months. This arguably makes our job even harder in finding restructuring candidates, given yet more funding options available for all but the worst companies. But we would caution investors in taking much stock in perceived equity cushions, they could prove to be illusory.  

Another fascination is the popularity of SPACs. Are these structured equity vehicles just another way of profiteers taking advantage of investors' almost religious belief in the deal making abilities of financial superstars and even their favourite celebrities. 

This week, we observed that Ion Group’s Andrea Pignataro has jumped on the SPAC bandwagon. Our CEO Steven Hunter suggests he may be able to use his two SPACs as a backdoor to IPO elements of his financial software and data empire, generating personal returns for Pignataro that Robinhood traders can only dream of. 

Back in November, we thought it was three strikes and you’re out, as investors baulked at disclosures and add-backs for Ion Analytics – the combination of Acuris and Dealogic. This followed failures to refinance Ion Corporates and a pulled facility to back Ion’s acquisition of Openlink in 2019. But this week Ion Analytics is back again to test investors' capacity to believe in a plethora of adjustments. 

As our CEO Steven notes, “it’s ironic that a business so closely linked to capital markets has been unable to correctly gauge investor’s appetite in recent years.”

Topping out

Ion Analytics coming back for another go at its re-fi and Pignataro issuing a SPAC (and WeWork too) is arguably a sign of a toppy market. At 9fin Towers we were ticking the boxes of our top of the market LevFin checklist this week. 

Our list is below – let us know of any more 

Beautiful results

One of our favourite special situations, Germany-based retailer Douglas may tick off another 9fin box, the HoldCo PIK. The Beauty products Group is certainly looking more attractive to investors, with its E-Commerce division gaining admiring glances after hitting €1bn of revenues for 2020. An impressive makeover for Douglas, whose SUNs were seen as ugly by investors trading in the 50s and 60s just a few months ago. 

The group is planning to close 500 of its 2400 bricks and mortar stores and move online, mostly in Southern Europe, which will boost EBITDA by €120m by July 2022. Our calculations suggest this would get EBITDA to above €400m and leverage with a five handle, from 7.6x currently. 

Goldman is working with the company on refinancing options, lenders and analysts which know the business well suggest that their principal investments team and direct lenders will be licking their lips. 

Pretty Vacances – En France 

France has had its fair share of distressed and restructuring situations of late. As one, Europcar, finalises its trip to the courts to sanction its sauvegarde acceleree restructuring, another name has appeared on the SatNav as the next French restructuring, Pierre & Vacances

The France-based operator of Center Parcs Europe (unconnected to Center Parcs UK) said this week that it was considering its restructuring options. It had received waivers from bank and bond creditors in June, with an A&E on its RCF and securing a €240m government-backed loan. Today, P&V announced it will enter into conciliation, a court-supervised negotiation with creditors. 

As we mentioned in our French insolvency primer, whereas there are notable successes such as Europcar there have been cases such as Rallye which are debtor friendly with the process being used by debtors to maintain control and keep creditors at arms-length. 

Comexposium may be using the same roadmap as Rallye. The trade fair and industry events business filed for Sauvegarde in September causing its €486m TLB to fall by around 30 points into the 50s. Similar to Rallye, sponsors Credit Agricole Assurances are using the process to term-out the debt for 10-years, said a source close to the process. Lenders led by KKR, Hayfin, SVP and Attestor have offered to put in €150m, equitise around 50% of their debt and term out the remainder to 2026. Similar to Rallye, the filed borrower is a HoldCo and therefore no classes are formed to vote as the company is below the necessary thresholds. This means there is no formal route for creditors to file their proposals, and according to the source, it is likely to end up at a similar destination to Rallye. 

Vallourec’s negotiations with bondholders and RCF lenders are smoother and more consensual, but disagreements remain over final allocations, according to a source close to the situation. The France-based steel pipes maker has submitted a proposal overseen by a Mandat ad hoc where just over 50% of the debt will be equitized. A deal must be agreed by 9 February, when the RCF is due. There are some minor disagreements over the strip of reinstated debt and equity both receive as the RCF wants to vary the amounts and receive a higher debt element, the source said. The deal is complicated by a large number of cross holders. “It is solvable, but it will probably get agreed at the last minute.” 

In the meantime, the bonds have traded up significantly into the high 70’s, mainly due to one steering committee member trying to increase their position, the source said. 

Distressed Marshmallow Test

Late last week, Rallyelaunched a tender offer to its SUNs, offering them the instant gratification of a payout between 12.5% and 20% of face value. As you may recall Rallye bondholders are reliant on upstreaming of dividends from Casino to repay debt termed-out under a Sauvegarde plan last year. There is a big trigger event in February 2023 when a big chunk of first lien bank debt and SSNs are due to be repaid, secured on Casino shares. But in order for payments to be up-streamed, leverage at Casino level must be below 3.5x.

As I suggested on social media last week, this is the distressed debt version of the marshmallow test. Holders gain some liquidity and the option to be cashed out at a small premium to secondary trading prices, but there is a chance of more if the 2023 hurdle can be overcome. Plus, if others take up the offer, it significantly reduces the debt burden at the back end, admittedly a long wait, in 2030. 

For shareholders, you can see the attraction, €75m paid now, reduces overall liabilities by €500m. 

Wiese after the event

For a restructuring processes nerd like myself, Steinhoff International’s English Scheme sanction hearing provided plenty of intellectual exercise. The complex case brought an interesting challenge from Conservatorium LLC, a US fund involved in a legal dispute with former chairman Christo Wiese. 

Steinhoff International Holdings NV is seeking to use the scheme as part of a wider process to implement a global settlement agreement to pay out $1bn to settle litigation resulting from accounting fraud disclosed in late 2017. The retail group requires the scheme vote to remove the unanimity threshold needed to approve the agreement and gain further headroom by extending the €1.9bn A1 and €3.6bn A2 facilities by 18-months to June 2023 and granting lenders security over shares of the South African HoldCo.

But the fund says this is manifestly unfair, as £380m of the payout to be escrowed pending the resolution of a legal dispute between a Wiese-owned vehicle and Conservatorium, will now be paid out to Wiese. This is after lawyers for Wiese last October threatened to pull out of the settlement agreement if they were not paid, and the agreement was subsequently amended two days later. 

Conservatorium which bought €1.5bn (face value) of margin loans (now in default) used to fund the purchase of 314 Steinhoff shares by Wiese’s vehicle in 2016, says rights to the claim should be transferred as part of their security under a Dutch-law asset sale agreement. This is disputed by Wiese and is currently being litigated in the South African and Dutch courts. 

Steinhoff claims Conservatorium’s rights remain unaffected by the Scheme, as it has two bites of the cherry in inter-linked processes in the Netherlands and South Africa. But the fund is unconvinced and has made an application to the Dutch courts under the new WHOA process to appoint a restructuring expert. If successful at a hearing on 8 February, it could complicate matters even further.  

In brief

The written judgement for DeepOcean was handed down this week. Justice Trower’s reasoning for the first cross-class cram down under a UK Restructuring plan will be carefully read by lawyers. 

Amigo loans has announced the timetable for its planned scheme of arrangement to deal with complaints claims which had threatened to push the guarantor lender into insolvency. The FCA has yet to agree to the plan to hive off the claims into a new vehicle. The court convening hearing is set for March 30, 2021. 

Premier Oil’sconfirmed that a Scottish scheme of arrangement has been opened with creditors to vote on 22 February, with the sanction hearing expected on March 19, 2021. The plan envisages a reverse takeover with Chrysaor and a debt restructuring. 

Tullow Oil issued a trading update, revising down production estimates and extending its RBL determination talks with its banks by a further month to end-February. To read our restructuring preview click here

Maccaferri has called a bondholder meeting on 8 February to approve the latest iteration of its restructuring plan. Holders led by Carlyle are proposing injecting new money into the Italian geotechnical solutions provider. The equity is already in their hands after an auction run by the Court of Bologna earlier this month. 

What we have been reading this week