Friday Workout

Take-off from a Sticky Runway; Last orders above the Par; Extreme Ways

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

Noted political wordsmith Boris Johnson unveiled a roadmap to UK reopening this week (an ironic term given travel restrictions) saying the Government would be driven by the data, not dates. He then gave a bunch of dates, raising hopes when we could have drinks outside and then inside a pub - get a haircut - and when we can jump on a plane to leave what some have cruelly called Plague Island. 

“Thanks to the vaccinations there is light ahead,” said the PM as he rolled-out his not before dates, leaving it to Chris Whitty to give the data (Boris was never a details man) and sound words of caution that despite falls in numbers, we are at higher levels than early December, and near the April peak. 

For many UK borrowers and analysts covering them, it was the first time in several months they could attempt to model the route to reopening and get a better idea of how FY21 might look. The only caveat is Rishi Sunak’s budget statement next week and if he, as many expect, extend furlough, tax and rent relief, and other Covid measures. 

Last orders above the Par - for 20x leverage 

Stonegate Pub Group’s earnings call on Wednesday (24 February) was dominated by analyst questions on how to reconcile the past, current and future cash positions and how adjustments to working capital and deferred rents and taxes would flow through.

It was unfortunate that the November £120m tap of its 8.25% SSNs wasn’t included in the liquidity slide. Luckily this was rectified just before the call started, but it did show how reliant the UK pubs group is on revolver draws and other measures to bridge itself to reopening.  

Despite reported leverage at 17.9x at end September (likely over 20x after the add-on and subsequent lockdowns) the 8.25% SSNs are focusing on Boris Johnson’s sunlight uplands, quoted at 104.50-104.87, to yield 6.75% on the bid side.

But the company admitted on the call it would need sources of liquidity to bridge until Step 3 (May 17, 2021). Management disclosed they had received a number of inbound enquiries and are considering their options. The company is unable to tap the bonds further and has just another £87m available under its senior secured debt baskets, they noted. 

In their investor presentation, Stonegate says there is £125m available under the RCF (NB it drew down a further £25m in February). But they could be in breach of their 9x springing covenant test in April if they draw down further, and may have to find other means of liquidity - unless they can secure a waiver (no mention of a waiver secured or request in the release or on the call). After the success of Carnival’s unsecured notes, you wouldn’t bet against Stonegate going down a similar path. 

Taking off from a sticky runway 

Another business with a significant cash burn and heavily reliant on the reopening is Heathrow Funding. Despite revenues falling 62% and annual passenger numbers collapsing  from 80.9m to 22.1m, the London airport has reduced cash burn to a mere £110m per month, from £240m previously. 

Heathrow says it is well placed to benefit from the summer reopening, with management saying: “it is ready to take-off from a sticky runway,” on its full-year earnings call on Wednesday. 

It reached agreement with securitisation lenders to increase the Regulated Asset Coverage covenant threshold to 95% from 93%, but the facility is in cash trap, meaning no money can be streamed outside the ring fence. But following a series of capital raises and bond issues, there is £400m of cash sitting at Heathrow Funding, to service the high yield notes until 2024, said management. Net leverage, however, is a lofty 50.1x up from 6.7x in FY19, but like Stonegate, the £330m Senior Secured 4.75% 2024 notes remain above par, yielding 3.4%. 

The airport operator is lobbying the government hard for clarity and support, after lockdown quarantine measures led to a collapse in passenger numbers, amid concerns about new Brazilian and South African variants. The operator is calling for additional help from the regulator and government, being in discussions with the Civil Aviation Authority to secure a regulated asset base adjustment and is calling for inclusion in business rates relief and for Rishi Sunak to extend furlough measures.  

IAG group’s FY 2020 results presentation shows how badly impacted the sector has been, reporting an operating loss of €4,365m before exceptional items and €7,426m including exceptionals. But the airline operator has secured over €3bn of government loans, €2.7bn via  a rights issue and several aircraft finance facilities to keep a cash position of above €9bn. 

Cape Fear 

Following the sonic boom from last week’s landmark gategroup ruling, there was more turbulence for the aviation sector and UK restructuring lawyers this week with two more legal cases threatening to cause further diversions to the original flightpath.

To briefly recap, Justice Zacaroli was asked to determine whether UK Restructuring Plans were an insolvency process, in order to allow gategroup to use the bankruptcy exclusion under the Lugano convention to impose a compromise on its bondholders. But following Brexit, this could close down routes to the Hague and Rome conventions for recognition of UK processes, prompting an unusual intervention from lawyers Kirkland & Ellis to write to the court urging a different interpretation. 

Zacaroli eventually sided with the company, deciding the UK Plan was indeed an insolvency process. But most experts still believed that the English Scheme is different and is not. Earlier this week, in a verbal ruling at the sanction hearing for Malaysia Airlines’ MAB Leasing Justice Snowden seemed to agree, saying “don’t quote me, but I think there is a very, very, strong reason to think that a scheme doesn’t amount to an insolvency event.” 

Snowden differed from Zacaroli on whether ‘the court has supervision or control of the assets/affairs of a Scheme company’ but added that it may require a broader international approach “to what that might mean rather than our own, English-centric eyes on it.”

But airlines and aviation lease agreements can be subject to the Cape Town Convention (CTC), which preclude obligations being altered without their consent if an ‘insolvency-related event,'' has occurred, says a client note from Allen & Overy. Clarity on schemes and UK Plans is essential to see if these can effect rescues as a going concern and avoid formal insolvency processes, said A&O who believed that both processes do not fall within the insolvency-related event provision. 

A recent Malaysian High court ruling for AirAsia X, the Malaysian Airline however, disagrees. The airline was seeking to use a Malaysian Scheme to bind unsecured creditors including aircraft lessors to receive just 0.3% in recoveries. The judge said, “the fact that the Scheme must receive the sanction from this Court and AAX and the creditors must also comply with directions from the Court on the implementation of the Scheme, to my mind, meets the requirement of control or supervision by a court.” He sided with an annotation to the Cape Town agreement by Professor Goode that Schemes are insolvency processes, disagreeing with other expert evidence to the contrary.

It is unclear if Justice Snowden will decide to opine on this matter in his written judgment, which is expected in the coming days. Restructuring professionals believe the three English judges taking such cases – Justices Zacaroli, Snowden, and Trower, will be keen to clarify these issues in upcoming schemes and plans. 

It is unclear whether the Cape Town issues will spill over to create wider impacts, caution legal experts. But it is clear that workarounds and innovation is needed to find a solution to the recognition and implementation problems. 

Next week we at 9fin will delve deeper into the potential options and alternative routes available. 

Extreme ways – The Sea Bourne Legacy – Do you want to live, cause I wanna live

Moby decided to take the plunge into icy waters this week, by suing its ad hoc group of bondholders in New York. The troubled Italian ferry operator claims the group of funds that bought into its debt in the 30s in 2019, deliberately caused its distress after attempting to block a sale of two vessels to DFDS in an agreement struck in the summer of 2019.

The funds filed for Moby’s insolvency in Milan that September, and also sought to block agent bank Unicredit from distributing the €75m net proceeds to bank lenders and the company under threat of litigation, Moby alleges. Unicredit had its own motives for not complying, as it was the main lender to Grimaldi, Moby’s primary competitor in the Mediterranean, they add.

NB this is not a Moby vessel - Source: Bourne Legacy

The insolvency filing was unsuccessful, but it led to the sale falling through and the group losing €16m of business from two main customers, and for suppliers to reduce payment terms from four-to-six months to less than a week, Moby claims in its petition. 

With business further impacted by Covid, Moby filed for Concordato, a court-supervised pre-bankruptcy procedure (for more, see our Italian Insolvency Primer) last summer. The ad hoc group purportedly blocked company restructuring proposals in December, and on 15 February, to force Moby as it claims, to give up and cede control, with one PM from Sound Point allegedly saying “he would rather see Moby bankrupt than accept the deal.”  

Watch out for a more detailed case analysis and an update on the restructuring process 

PIC in the mix for Eskom 

Eskom, the South African Energy utility, could be the world’s largest restructuring for 2021, with almost $32bn equivalent of debt, including over $20bn backed by contingent guarantees from the Government. Graft, mismanagement, and a lack of plan to transition ageing coal-fired plants which generate 80% of SA’s energy, have meant the inevitable restructuring has been parked for years, despite frequent breakdowns of its plants and rolling blackouts.

The Public Investment Corporation, the state pension fund, holding over ZAR 100bn of the ZAR 450bn of debt is going to take most of the pain, according to local reports

In a former life, myself and Nick Smith-Saville outlined the main issues two years ago in a primer most of which are still relevant. 

In brief

Abengoa finally succumbed to insolvency this week– after failing to secure agreement with creditors and secure new funding, after a series of deadlines came and went. But with Spanish Government guaranteed ICO loans due and no further time left under the pre-insolvency process, directors were forced to file. With €6bn of debt, banks and funds will be fighting over Abenewco 1, the most important subsidiary with the most valuable assets and concessions.

Voyager Aviation announced it had entered into a restructuring support agreement with the beneficial owners of approximately 60% of the 8.500% Senior Notes due 2021. The SUNs will receive 100% of the equity and up to $150.0 million of new 8.500% Senior Secured Notes due 2026 and up to $200.0 million liquidation preference of preferred equity of an intermediate holding company.

Garrett Motion is marketing a $1.25bn term loan B to refinance pre-petition indebtedness and DIP facilities as it seeks to re-emerge from Chapter 11 protection. Our loan credit quick take is available here

We have also reviewed the Termsheet for Garrett's $1.25bn Term Loan B. To receive our Legal QuickTake analysis please contact loans@9fin.com, attaching your copy of the Term Sheet so that we can validate you have access to the documentation. 

Amigo Loans is working with a ‘skilled person’ to produce a report for the Financial Conduct Authority (FCA) ahead of a March English Scheme of Arrangement to deal with customer complaints. The UK-based guarantor lender is working on a new ‘Amigo 2.0’ lending proposition that will ‘blow the market away.’ But the blueprint is yet to be agreed with the FCA and will not occur until after the Scheme is approved in May and will be rolled out on a ‘limited’ basis. Without fresh lending, the loan book has reduced significantly, by 42.9% in the nine-months to end-December. 

eDreams has done a good job in surviving on tight liquidity while awaiting the reopening. It had relied on revolver draws for liquidity in 2020, but with €55m drawn it will bump up against the springing covenant once €62.5m is drawn. Management said it remains confident of bank support and hinted further draws might not be needed, in a conference call for investors.  

Aston Martin added another £70m to its 10.5% notes this week, the same day as management decided against a run-through of the 27-page presentation on the investor call and went to Q&A after just four minutes. Management said that cash burn in 2021 would be significantly less than the £532m in 2020 but would still be in the triple-digits. 

Codere confirmed in its Q4 2020 earnings report that it had hired advisors “to assess financial alternatives to improve its liquidity and support the company to be able to meet its financial and operational obligations in 2021. The wording suggests they may seek to use further headroom under super-senior baskets (around €100m) rather than a full restructuring. 

Tullow Oilannounced the redetermination of its RBL, lowering the amount from $1.8bn to $1.7bn, taking into account the effects of six months production and the removal of the Equatorial Guinea and Dussafu assets (sold to Panoro Energy). 

Hurtigruten has announced amendments to its facilities agreements, extending waivers to leverage tests, adjustments to minimum liquidity and minimum consolidated EBITDA tests, and more importantly increased the basket availability of the revolver during the suspension period to €166.5m from €120m. We suspect that this may be needed in the coming months. 

What we are reading this week

Uber loses High Court case on whether its drivers are employees or contractors

Could have a significant impact on the gig economy, and business models of some major tech companies. “If it quacks like a duck, it’s a duck,” said Steve Garelick, at the GMB union. 

This reminds me of the excellent Duck Tales – the story of an investment analyst who uncovered the fraud at Stanford Bank – it’s old, but well worth a re-read. 

Alex Dalmady’s tests for financial ducks are still relevant: It’s too good (to be true); it can do what no one else can; there are few people (or only one person) overseeing everything. 

Our colleagues over at the FT would echo that and fresh from their success on Wirecard – last year they turned their attention last year to Greensil – this week rumoured to be looking for financing from Apollo and other PE firms.

For the start of former SA President Jacob Zuma’s corruption trial, and Eskom’s restructuring, Jacques Pauw’s excellent expose ThePresident's Keepers: Those Keeping Zuma in Power and out of Prison. Ironically, the book launch was abandoned after the power supply was cut – with Eskom employees seen fleeing from the scene. 

And finally, with tech markets finally correcting and traders being spooked by rising US Treasury yields, this was prophetic The only reason to be bearish is that no one is bearish