Friday Workout

Topco will eat itself; Lobbing Grenades; We need to talk about Douglas

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

One of the first things I look for when analysing a new stressed or distressed name is the group structure - especially the org chart - to see where the debt sits and what guarantees are in place. Over the years, group structures became more complex and impenetrable, despite some pushback and wins on structural subordination from investors along the way. 

In the early days of the European HY market the Opco/Holdco model was popular, with investors protected from structural subordination by guarantees from operating subsidiaries. Restricted payments and asset transfer language were inserted to avoid value leakage to shareholders, but over time carve-outs have proliferated. Over the years group structures and restricted groups have morphed into a myriad of subsidiaries and guarantors with additional layers of intermediate Opcos and Holdcos making it more difficult to fathom how to extract value in a restructuring scenario.

This week, we focus on two companies where without value leakage and weak documentary protections their highly indebted Topcos are unable to survive without taking bigger bites out of their listed Opcos. Both have well-connected billionaire owners adept at keeping the wheel spinning.

Vedanta Resources latest attempts to issue new bonds to take out their 2021s, intrigued me. Even with structural enhancements and bondholder protections it looked a tough sell at mid-teen yields.

I was told by one analyst that the easiest way to think about the group structure between Vedanta Resources and Vedanta Limited was Casino/Rallye in France, with added complexity and nuance. 

But even with additional Twin Star guarantees (closer to Opco) and a cap on indebtedness at guarantor subs the current LTV was 100% if it issued $670m to take out the 8.25% June 2021s. 

Vedanta Ltd shareholders have raised concerns about inter-company loans and governance issues. There are doubts over its continuing ability to upstream dividends and authorise intercompany loans to service over $6bn of Vedanta Resources debt with a significant portion due in next two years. 

Vedanta’s CFO indicated on marketing calls that it will make another push to increase its stake in Vedanta Limited – after failing earlier this year to take the business private. Without increasing its stake further, it is tough to see how it can dividend enough up the structure to service the c.$500m per year interest burden outlined in the company presentation. Alternatively, it will have to leverage up the opcos irking its shareholders and local lenders by making yet more controversial intercompany loans. 

Earlier this week, I likened the new deal to the prisoners’ dilemma, expecting to get this deal done, a significant number of the 21s would have to roll into the new 23s. But in turn many might selfishly decide to take the highly unexpected par repayment and run, risking the conditional deal’s success.  

But reflecting the incredible worldwide appetite for risk assets, the deal priced on Thursday (10 December) at 13.875% with $1.9bn in orders, with the deal upsized to $1bn and trading up two points on the break. 

Casino takes another spin of the wheel 

While Vedanta was in marketing, its French facsimile decided to spin the wheel once again. 

Casino tinkered with liability management exercises throughout 2020 taking advantage of weakness in bond prices to buy back debt at a discount. It readily admits in its lender presentation it is undertaking an opportunistic €500m debt raise, taking advantage of strong market conditions.

The France-based food retailer faces a similar problem to Vedanta, needing to deleverage enough at Casino level to enable sufficient dividends to upstream to Groupe Rallye to service a hefty c.€3bn debt burden. Rallye secured a win in its French Sauvegarde restructuring process in 2019, enabling it to term out its debt for up to ten years, with 65% due at maturity. But it didn’t entirely go its own way, under the restructuring plan it has to make a significant principal payment of €1.215bn in 2023. 

Similar to Vedanta, the latest Casino bond issue came at the cost of increased protection. The January 2024 senior secured bonds added an incurrence covenant limiting special dividends to 50% of net profit attributable to the owners of the parent. There is a cap of €100m per year if gross debt/EBITDA is above 3.5x.

Faced with significant debt maturities in next three years, Casino is looking to meet springing maturity conditions under its RCF to extend to October 2023, add €200m to its Jan-24 TLB, issue €300m of new 2026 SUNs and initiate a liability management exercise to buy back up to €1.2bn of ‘near and medium term EMTNs.’ 

On 2 December, S&P Global ratings cautioned that despite its deleveraging efforts it sees material event risk related to the high levels of debt at Casino’s parent companies. The agency estimates little headroom under RCF covenants - gross leverage test at 5.75x in 2020- steps down to 4.75x in 2021. 

“At this point in time we are unable to estimate whether Casino will deleverage to or below 3.5x by 2023 or not and therefore, whether it will upstream the necessary cash to repay Rallye's debt maturity. This creates, in our view, event risk for the company.”

We at 9fin will be closely watching the structure and pricing of the new 2026s when they appear. 

We need to talk about Douglas 

Over the past few weeks, Douglas has cropped up several times in discussions with funds and advisors. The Germany-based beauty products group has an impressive online platform which has part mitigated the effects of the pandemic on its revenues from its physical stores. But with the second lockdown affecting Christmas revenues in Germany and significant maturities in 2022 and 2023 the runway on its refinancing catwalk is getting shorter. 

But Reuters’ scoop earlier this week that Lazard was recently hired as restructuring advisor saw the bonds fall by around five points. Admittedly, the headline didn’t tell the whole story, as refinancing and amend and extend are also under consideration with CVC reportedly prepared to open its chequebook.

The name divides opinion amongst funds and advisors almost as much as the debt collectors. Perhaps Lowell’s injection and stressed refinancing could be a template for CVC? Bulls think that there is a route to a par refinance for the senior lenders, but the extra turn of leverage for the SUNs could be problematic. The sponsor may still harbour hopes of reviving an IPO or undertake a partial sale of the online business to address 2022 maturities, if the business can recover by then. 

But strong comps will hurt LTM figures for the fourth quarter, and arguably it will need to find a solution ahead of February, as the 2022 revolver becomes current. 

9fin is doing a lot of work on this name – let us know if you want to engage in the conversation.

Lobbing Grenades

There was virtual courtroom drama at the Swissport Scheme sanction hearing with the SUNs unexpectedly withdrawing their challenge. But despite their QC signing out of the zoom call, their five objections were debated anyhow to avoid a blot on the scheme, with some interesting points.

The company QC has accused the SUNs of ‘lobbing grenades’ where they have no legitimate interests. In their letter to the company and the court they offered to procure a new €200m facility to take out €300m super senior bridge maturing on 2 January. Their offer has since been withdrawn.  

But Justice Trower said that focused arguments can be helpful to the court to allow it to see what objections could be made. He agreed that it is not the job of the company to address every conceivable argument. But it is useful to have an Aunt Sally or Straw Man, he said, adding that conversely the company might say that this is an abuse of process. 

Of the five objections, most time was devoted as to whether the scheme is confiscatory and if the contribution deed (used to avoid an event of default and establish sufficient connection to the UK) is a sham document. 

Trower was asked by QCs acting for Swissport and the senior secured committee to provide guidance on the latitude of the court to hear challenges from non-scheme creditors. Widening circumstances for a challenge would allow a scattergun effect in an attempt to extract a ransom payment or hold up a scheme, they said. 

Trower talked of a need for balance. “By the same token, there are cases where rights were not given proper consideration. The system must be astute with rights and given a proper airing.”

In his judgment today sanctioning the Scheme and dismissing the five points, he said:

“While sometimes it is important – indeed, very important for the court to take into account affected parties even when their rights are not directly varied or rearranged by the scheme the court should do what it can to guard against the scheme sanction hearing turning into an occasion on which a series of miscellaneous points are ventilated sometimes at great expense.”

He went on to say: “The position is made all the more acute where the interested party withdraws their complaint at the last minute after causing considerable expense and inconvenience before they do so. It may well be that closer attention may have to be given in the future to ensure that in the way in which such parties are permitted to appear to file material and make submissions, including the proper disclosure of their identities at an early stage which did not happen in this case is subject to tighter direction.”

In brief

Bondholders to Naviera Armas will demand a capital structure overhaul in return for providing funds to bridge a €100m liquidity need, according to a source close to the bondholders confirming an article in Expansion. The troubled Spanish Ferry operator has applied to the Spanish Government for a €120m SEPI loan, but this could take some months to arrive, with its cash needs much more urgent, said the source close. 

Intralot is making significant progress in restructuring talks with bondholders, is very close to agreement and hopeful of a cleansing announcement in the near-term. The Greece-based gaming group is seeking to address a €250m 6.75% senior secured bond maturity in September 2021, but negotiations which began earlier this year were complicated by cross-holders of its €490m 5.25% 2024 senior unsecured notes with a blocking stake in the 2021s, say advisors tracking the situation.  

AMC disclosed today that it has received $100m of 15/17% Cash/PIK toggle first lien financing due 2026 from Mudrick (who also receive 8.24m shares of class A stock). Mudrick will also exchange $100m of 2026 PIK toggle second lien for 13.7m shares. 

AMC adds that it remains in creditor discussions over a number of creditor proposals, with the first lien lenders indicating their support in providing DIP financing in a bankruptcy scenario and conversely second lien lenders such as Mudrick are supportive in providing new money “potentially in connection with converting 2L debt to equity.” AMC has previously said without further funding it could run out of funds during the first quarter. 

TAP yesterday (10 December) submitted its restructuring plan to the European Commission. According to Reuters the Portuguese government’s plan calls for up to €2bn of state-aid. If the plan is rejected, it has to repay a €1.2bn loan granted earlier this year, which could lead to insolvency. TAP’s bonds jumped in early December by over 20 points into the 70s on hopes of approval. 

Norwegian Air Shuttle’s Irish examinership was approved on Monday. It was also granted additional protection in Norway. To read our primer, click here.