Friday Workout

Flattening the Distress Curve; Countering Cyclicality; lower-yielding paper

By Chris Haffenden | Editor |

Speaking to advisors and funds in recent weeks, many bemoan the lack of deal pipeline for the first half of 2021. The appetite for risk assets and ready availability of cheap funding have allowed businesses to build liquidity buffers and as Stuart Mathieson says in a recent Barings podcast – has flattened the distressed curve - by enabling stressed refinancing, liquidity add-ons and amend-and-extend transactions. 

As secondary prices for stressed credits continue to move higher and beyond fundamental value, distressed funds are finding other ways to deploy their immense dry powder. 

Providing bridge liquidity finance is becoming super-competitive, say funds and advisors, with rates being offered dropping from 10-12% in recent months to 8-9%. Increasingly, funds are going into less liquid situations, and financing smaller situations – businesses with less than €50m of debt. CFOs of stressed European HY businesses such as Pure Gym, Aston Martin and Stonegate have seen a number of reverse enquiries in recent weeks for private placement taps from a number of distressed and special situation funds.   

As activity returns and there is more forward visibility, many companies will look to tweak their capital structures. Does it still make sense to remain fully drawn on their revolvers and retain high cash buffers? Why go through the hassle of securing further waivers from lenders, when the bond market is so hot? Is 2021 the year of the debt advisor rather than the restructuring advisor? Will distressed funds change their mandates to become special situations funds and niche direct lenders?

We think many stressed borrowers will follow Shelf Drilling’s recent lead in tinkering with their debt mix to repay restrictive drawn RCFs and refinance nearer term maturities. This brings the language under the bond docs and particularly the availability under baskets to insert more debt into existing capital structures into sharp focus for holders wary about being primed.  

But capacity can take analysts days to calculate manually. 9fin subscribers, however, have an edge, with instant insight into availability by using our covenant capacity tool. 

Countering Cyclicality

Recent sharp rises in commodity prices, supply chain shortages and consequent spikes in shipping rates have not only raised the spectre of inflation – the jury is still out on whether this is a short-term phenomenon – but it has seen cyclical credits such as Tullow Oil, Norske Skog and CMA CGM return to favour. 

Some experts are calling for new super-cycles, but market veterans will be wary, as often companies not content with super-profits will add excess capacity and the seeds for the next distress cycle are sown. 

The shipping, paper and oil & gas services sectors are serial offenders in this regard.

We are also wary when we see reports whose main thesis is that this time it’s different. But AlixPartners 2021 Container Shipping Outlook – Carriers have a chance to break the cycle. Will they take it – does make some interesting arguments. 

As its intro outlines, for at least three decades, the container shipping industry has been locked in a recurring boom-and-bust loop. In times of growth, operators will reinvest their profits in new even-larger vessels. And when the economy goes into a downturn, rates plunge, and operators burdened with heavy debt and idle vessels tumble into bankruptcy or face difficult discussions with creditors. 

But AlixPartners (who advised on many shipping workouts in the past decade) say that the fundamentals that would support a breakaway from that cycle are in place, with most carriers exercising restraint despite record shipping rates (most experts expect these to abate somewhat in coming months). Industry consolidation and with low-sulphur regulations shipowners are hesitant in acquiring additional assets and many have to slow ships to reduce emissions, they suggest. 

This should be supportive for Danaos and CMA CGM, both of which underwent restructurings in recent years, but have been well received by bond markets of late.

The former has a strong backlog and should be able to monetise its stakes in Zim equity and bonds in the coming months to mitigate a rise in leverage to 4.5-5x after a recent bond issue, to return towards the 3x level from its restructuring in 2018, after it wrote-off $550m of debt. 

CMA CGM has benefited from a recent ratings upgrade, with its €650m of 6.5% senior unsecured 2022 notes (going current in July) now yielding 5.625% from 8% four months ago.  It intends to keep a PGE loan from the French Government and with bank lenders less keen to lend to the sector, we expect it to refinance in the coming months, potentially following in the footsteps of peer Hapag Lloyd in a green financing as operators move to implement low sulphur fuel regulations. 

Both leverage and interest cover for the sector are moving in the right direction and with bumper first quarters expected, we wouldn’t be surprised to see more bond market issuance by early Summer. 

Lower-yielding paper

What a difference a year makes. 

Last May, Sappi, the South-African paper producer, pulled an opportunistic €250m five-year HY bond to plug liquidity, citing market conditions. At the time, expectations were for a bond with a seven-handle. The group had seen a sharp downturn in orders and had just secured a covenant holiday from lenders until March 2021. Prices for dissolving pulp had collapsed with the industry suffering from a poor record in HY with peers Norske Skog and Lecta being in and out of restructuring in recent years. 

However, this week, it sold €350m of senior unsecured 2028s at 3.625%, refinancing its outstanding 2023s. Investors appear to have shrugged off elevated leverage (especially if the pension deficit is included and special items excluded) and the cyclicality of the paper business (dissolved pulp prices have recovered, but more capacity is coming), preferring to look at the yield pick up over other BB- paper. 

The sector has seen a lot of activity in recent weeks with Norske Skog issuing a €150m senior secured E+ 550bps FRN due 2026, refinancing its June 2022s. The Norwegian speciality paper business which emerged from restructuring in 2017 is pivoting towards recycled containerboard production, as its publication paper business is in structural decline. 

But despite the bullishness of its peers, Finnish paper company Ahlstrom-Munkjsofaces a tougher ride with investors, due to aggressive documentation and concerns about EBITDA add-backs. In addition to a €1bn equivalent loan piece (400-425bps margin), it is marketing €400m and $305m of senior secured 2028 notes. 

As our legal quick take states: “Very aggressive documentation which contains sponsor friendly provisions plus novel concepts for the European High Yield market.” 

"The docs allow the company to pay out more dividends than would be typical on a normal high-yield deal," said our CEO Steven Hunter speaking to Reuters LPC. "Essentially on our reading of the docs, they allow the company to pay dividends or restricted payments to a very high level if it refinances the pref instrument which is already in the company's capital structure," said Hunter. Ahlstrom-Munksjo's covenants package puts it in the same ballpark as Merlin, Refinitiv and ThyssenKrupp - leveraged buyouts that were also seen as including very sponsor-friendly provisions, he said.

At time of publication, it’s unclear whether investor pushback on the deal will be successful. Ahlstrom is also pushing the envelope on EBITDA add-backs with an extensive list including run-rate adjustments and synergies over 24-months and normalisation of Covid-19 impacts. 

Another company with a reputation for liberal use of add-backs, Kantar reported this week. The former data analytics division of WPP has aggressively reduced staff costs and factored over $175m of receivables, with $172m of process improvements last year to improve working capital by $364m. The conference call replay is on our to-do list and worth a listen.  

Rearranging items on the Shelf 

After listening into the Shelf Drilling earnings call late last week, we expected some corporate actions, but not to happen so quickly. 

Management said that meeting the amended 4x net leverage test for its $225m RCF in September will be challenging. They said it could seek further amendments with its lenders, paydown the facility from proceeds of rig sales, or “look for other financing solutions.” 

The shallow water offshore driller, established in 2012, after buying 37 jack-up’s and one swamp barge from Transocean, has recently suffered from contract suspensions and early termination notices. Earlier this year it hired Moelis and Walkers as financial and legal advisors, with holders of the $900m Senior Unsecured Notes due 2025, appointing Akin Gump as their lawyers. 

The industry remains oversupplied with too many rigs – despite a modest decline in aggregate supply. Rig sale prices are depressed, given a number of operators are in or exiting restructuring and many looking to reduce their fleets. Most have emerged with little or no debt, with just working capital lines. 

Shelf Drilling management said that they expect a degree of consolidation, with the potential for more ‘pure-play’ jack-up operators. They added that with various cross holdings [in a number of restructured businesses] it will be “driven by commercial not industrial logic.” If you look at 2019 statements, you can see that PIMCO, Goldentree, Canyon and Oak Hill are big in most of the names, noted a legal advisor active in the rig space. 

But Shelf Drilling shareholders are unwilling to give up control, having rebuffed bondholder overtures for a debt for equity swap, said one bondholder.

The new $300m first-lien financing will pay down the RCF and other loan financing and remove the need for further waiver requests. But it will be interesting where it will price compared to the outstanding SUNs which have clawed their way back into the low 70s (18% yield) from 40 in mid-December. We would guess that a seven or eight handle makes sense, but we’ve been surprised to the downside before. 

Closer to home, this week, UK-based E&P producer Tullow Oil Management was very impressive, delivering a very slick, informative and in-depth presentation. But most on the call wanted to know about progress in dealing with its 2021 and 2022 bond maturities

“The combination of strong business delivery, increased liquidity, recent asset sales and higher commodity prices is providing a positive impetus to constructive discussions with creditors,” management said.

They added, “the objective of which [the discussions] is to raise new funding and/or agree certain amendments to the terms, including the covenants and/or maturity dates, of some or all of the RBL Facility, the Convertible Bonds, the 2022 Senior Notes and the 2025 Senior Notes with, if necessary, such amendments being approved by shareholders.” Management said they could not provide specific details on the refinancing given the commercial sensitivity, but they are hopeful of agreement by the end of the first half of 2021.

Tullow Oil bonds have improved significantly in recent weeks, following rises in oil prices to the high 60s and the redetermination of the RBL facility. Its 2022 bonds have risen from 76 in mid-December (and the 20s at their low point) to 94.0/95.0 currently, to yield 11.75% (mid).

For DCM bankers reading this, we suspect the refinancing window is wide-open and we can remove Tullow from our restructuring watchlist.

Bunda Blunder

In the current bullish financing and risk-on environment, we are unlikely to see few new restructurings appear unless it is a blatant case of fraud or mismanagement. 

Greensill continued to provide most headlines this week, with yet more developments and insights. On Monday it filed for administration, saying that GFG had told it that it would be insolvent if Greensill withdrew its funding. But it also emerged that Greensill was lending against future receivables with invoices from over 40 companies in Sanjeev’s Gupta’s empire. GFG Alliance has hired Alvarez & Marsal and PJT Partners to find ways of plugging a financing gap from the Greensill insolvency. 

It is now clearer where some exposures lie, but there could be further casualties to emerge. 

Insurance Australia Group appears to have the most insurance cover exposure, but as Bronte Capital show in this excellent post, most appears to have been reinsured by Tokio Marine, with the insurance apparently written by a rogue broker in Sydney. 

Credit Suisse continues to receive negative press on its involvement. Apollo’s deal to take the best parts of the Greensill operation and its best clients, appears to be on the verge of collapse

Other 9fin coverage

Another potential restructuring candidate is lining up a refi. After shoring up its liquidity in 2020, Dufry is in advanced discussions to refinance its 2021 and 2022 maturities. “We are evaluating and fine tuning our debt options. These are at an advanced stage, we have a very clear plan, and will execute in due course,” said management declined to say whether the refinancing of the November 2022 term loan would include a bond option. Dufry’s sensitivity analysis suggests that it will break even at -40% of FY19 sales (-65% in first half (CHF 350m H1 outflow) and -25% in second half) on a EFCF basis and burn through CHF 40m per month based on a -55% scenario.

CGG management is working on and making preparations for a refinancing, the team revealed on a conference call last Friday (March 5, 2021). The existing capital structure will be replaced by one instrument with a revolving credit facility brought back. The first technical window will be until the end of April, prior to the next blackout period. Market conditions for issuance are attractive, and we are looking for funding opportunities, said Yuri Baidoukov, CFO. CGG has $1.2bn of upcoming debt to refinance, with its $300m 9% and €280m 7.875% first lien bonds due in May 2023 and $559m (equivalent) of second-lien due in February 2024. The call schedule on the first-lien steps-down on May 1, 2021.

Worldwide Flight Services (WFS) has extensively used the US CARES payroll support programme to maintain and boost its liquidity in FY20. The Independent Cargo handling services company is in close contact with its lenders and financiers over sources of liquidity and how to improve amounts available and increase its options, said Francois Mirallie, the CFO, speaking on a conference call for investors on March 10, 2021. But in an answer to a subsequent question on whether the group was considering an early refinancing of the 2023 notes, he downplayed refi hopes stating, “there is more than two-years to maturity.”  

In brief

There was a fair amount of news and activity this week. We were a little distracted by earnings releases and product development but will aim to follow-up on the names below.

Today Douglas announced it would be redeeming both its 2022 senior secured, and 2023 senior unsecured notes, in full, and at par. The successful stressed refinancing marks a sigh of relief for the SUN holders, who were perhaps in danger of a take-out discount. The new funding will come via a €1,080m TLB, €1,000m of other senior secured debt, a €220m shareholder equity contribution, and €300m of junior debt. Speculation around the junior tranche hints at potential HoldCo PIK notes. You can read our December Deep-Dive on Douglas here.

Virgin Active faces an application from one of its landlords today in the High Court for summary judgment on a £741k payment, but as Sky’s Mark Kleinman outlines they may be crammed-down under the new UK Restructuring PlanAs our primer details – the Plan has the advantage of avoiding an accompanying CVA to deal with rents.. Shareholders are reportedly proposing to inject £65m into the gym group with lenders and landlords taking significant haircuts. It was disclosed in the court hearing this am, that the UK Restructuring Plan convening hearing is scheduled for 25 March. 

Moby announced that it has voluntarily dropped its legal action in New York against an ad hoc group of bondholders, “because the lawsuit has facilitated productive discussions between Moby and its creditors including the defendants towards reaching a long-sought agreement on Moby’s restructuring. The Italian ferry operator has until 28 March to file a revised restructuring plan. If no agreement is reached, it is timed out, and the process will be converted into a Concordato Preventivo pre-insolvency process, which will take another 9-12 months, according to a source close to the situation. For details of the plan click here.

Takko, the German fashion discounter announced that it failed to secure a €60m government-backed loan from KfW and is looking at various options including with existing creditors to provide a stable platform.  

After weeks of deliberations, SEPI finally granted a €120m loan to Duro Felguera. But only €20m is available until the CEO Jose Maria Orihuela departs, according to Vozpopuli.

Abengoa creditors and suppliers have bought more time prior to the start of formal insolvency proceedings with their long stop date  extended until March 31, 2021. The release alludes to the participation of SEPI – the Spanish Government fund for strategic businesses. 

Celsa has increased its request for SEPI aid to €800m from €350m, as the company and its creditors go back to court today (March 12, 2021) as the company appeals the decision of the court in January. A local press report today suggests that the amount that will be granted is likely to be between €400m and €500m.

There was the first sign of consolidation in the airline leasing space, with the jumbo $34bn AerCap merger with GECAS, with Citi and Goldman Sachs providing $24bn of committed financing. Regional operators such as Avation and Nordic Aviation Capital however, may miss out on the acquisition spree. 

What we are reading this week

Citi appears to be getting its revenge on the group of funds which failed to return Revlon proceeds received in error. 

The Retail involvement in SPACs is causing a voting problem. Some deals are failing to execute as retail shareholders wondering how to vote on Reddit. 

You have to love volatility – Who has been buying Gamestop $800 calls expiring this Friday?

if you thought the situation in Venezuela was bad - Lebanon could be worse 

What is journalism for? The short answer: truth