Friday Workout

Back to the Future; Party like it's 2007; ZIRP paradox

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

The final Workout of 2020 goes Back to the Future (I would trade-in the DeLorean for a McLaren in 2020 version) trying to make sense of the unprecedented reach for yield.

It reminds me of 2007, with a brewing subprime crisis and signs of a LevFin bubble. 

Chuck Prince from Citi famously said in an FT Japan interview in July 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Just days later the music stopped with a hung Alliance Boots deal, and the three-point OID for ProSeiben to get off the Leads books.

I remember one advisor telling me in 2007 that the market was so hot the only businesses going into restructuring were a result of gross mismanagement or fraud. 

This week it was Déjà vu all over again – as one analyst complained to me - I’m going to have to write a foreword to our watchlist along the lines of “here’s a list of what should be distressed but don’t get too excited, we’re back to fraud and incompetence being the only triggers of distress”

European High Yield Bankers certainly have their dancing shoes on with plenty of deals appearing in the past couple of weeks despite proximity to year end. Suspect many of these deals were brought forward from Q1.

We at 9fin watch in bemusement at the ability of stressed borrowers such as Boparan to get deals away, first with 8-handles, giving way to 7-handles and now a 6.625% print for Casino’s new 2026 unsecured, following on from 7.5% paid by House of HR earlier this week.

As we’ve said, market access and perception are everything. But beware of confusing price with intrinsic value - should stressed unsecured debt in a difficult jurisdiction start with a six?

So, what is driving this unprecedented demand and dramatic spread tightening?

It’s not company Q3 revenue performance. We highlighted and scoffed at companies using EBITDAC - but arguably the HY market is doing the same – using FY19 numbers instead and deleting the Excel column for 2020. 

A glib answer is a widespread belief in the Fed Put, low to zero interest rates with volatility reduced by active yield curve management and the Magic Money Tree (MMT) funding it all. 

But more simply, it’s an insatiable demand for yield. An unprecedented $18trn of debt is at negative yields, and the argument is that this will force managers to move down the credit curve. Even worse, outside of HY and subordinated financials, there is precious little debt yielding more than 1%.

Are we also looking for new paradigm’s using different means of valuation as validation?

Rusty Ginn’s excellent recent post The ZIRP paradox, says Tesla, Uber, DoorDash, Airbnb are not valued as consumer stocks, nor growth tech stocks, but as platform stories. 

“A platform story tells investors what matters, is the full range of outcomes for the numerator of the most distant conceivable year of a theoretical DCF.” But we are now a stage further. “Under a ZIRP narrative everyone believes in the CB put and that the denominator in that DCF doesn’t matter.”

There is a convincing argument that in such a low interest rate environment pricing must tighten given increased demand for risk assets – with a huge number of HY tourists. Dedicated HY investors will have to convince themselves to accept lower yields to compensate themselves for heightened corporate risk, using the wider narrative as comfort.  

BofA's latest European Credit Survey shows this adjustment process is happening, with 44% of EHY investors most concerned about 73% of fixed income assets yielding less than 1%. They are bullish on spreads, with 87% expecting them to tighten to an average of 304bps from 357bps today. 

Should we care about bad capital allocation today and wrong entry points? 

As Rusty concludes, “the story might be about long-term value creation, but the objective is artificially cheap capital in the short term.” 

It was a good week at Casino, with the stressed French Retailer managing to get its upsized €400m senior unsecured 2026 bonds away at 6.625%, an incredible result given that its outstanding 2024 senior secured bonds were yielding higher around 7% in early November.  

The transaction and proceeds from Leader sale allowed it to meet the springing maturity condition to extend the RCF by one-year to 2023. The tenders (albeit at high cash prices and via relatively expensive unsecured debt) help remove maturities in between now and 2023. It must get secured leverage below the 3.5x threshold by then to allow dividend upstreaming to make a €1.2bn maturity for Rallye, which has claims over Casino shares if it fails to repay.  

Casino’s owner Group Rallye may have taken advantage of House rules, when it used the French Sauvegarde process to term out its creditors in 2019. As our piece on French insolvency reforms outlines that as a holding company it meant Rallye was not obliged to form creditor classes, and therefore its creditors were denied the opportunity to present their own proposals to the court. But new rules will block this route for others and use of the default ten-year term out if there is not an agreement may not survive. 

Standing by your Hotelbeds

A rating report from S&P Global has confirmed a €175m injection into Hotelbeds by sponsors, Cinven, CPPIB and EQT. The funds will be provided via a €175m shareholder loan to the ultimate parent HNVR Topco which will then flow through as common equity to the restricted group. This is in addition to the €400m Term Loan D provided by the sponsors in April. 

The Spanish B2B hotel accommodation distributor is seeking an amendment to senior-secured facilities (including the RCF) requesting a two-year maturity extension. The debt structure currently comprises €248m Sept 2024 RCF; €1bn TLB due Sept 2025; €400m TLC and €400m TLD, both due in September 2027. The sponsors have made a further concession, with a reduction in one of the debt baskets – intra group loans to non-obligors have been reduced to €75m from €300m.

S&P sees severely depressed earnings over the near term and expectations that the international travel industry will take at least until 2023 to recover 2019 levels. Its ratings-adjusted leverage above 15x (including shareholder instruments) until at least FY22. According to the agency revenues for the second half of FY2020 were just €451m compared to €3.4bn in the same period in 2019.

The TLB is indicated at 90.5-91.5, up from 83.25 around a month ago, according to LPC.

DRS funding window open for McLaren 

McLaren received a speed boost this week seeking to overtake its rivals in a race to secure equity and cross the finish line to refinance. Valuing the racing division at £500m, the MSP Sports Capital consortium said it will put £125m into McLaren racing over two-years. 

The deal avoids funds diverted from the sports car business to fund racing, and it shows that McLaren can find high-profile investors. But it is still way behind its £300m-500m target it needs to secure a refinancing. McLaren has hired HSBC and Goldman as lead advisors to find equity providers to repay short-term debt and then seek to refinance their outstanding bonds and RCF. It burned through most of the rescue funds from its Middle Eastern shareholders (£291m equity cheque and a £150m loan) during Q3, saying in its Q3 release that liquidity is “sufficient through to 2021.”

In brief

Hema has secured a final agreement with Parcom and Mississippi Ventures, with acquisition funding secured and due diligence conditions secured. The acquisition should be completed in February. 

As reported, the €402m sale of the Dutch Retailer to the Parcom consortium was conditional on eligibility for the Dutch guarantee scheme and whether ABN AMRO, ING and Rabobank will commit to €300m in loans (around €150m supported by the guarantee scheme). 

On 19 October, Hema’s debt restructuring was completed via a Court of Amsterdam supervised proceeding with €600m of SSNs were converted into €300m of new 2025 SSNs with €150m of the SUNs written off. The SSNs received €120m of ‘hope notes’ PIKs sitting at a distant HoldCo stapled to their equity. Completing the transaction were €42m of new 2025 private placement notes.

Hertz was granted permission on 11 December by the English High Court to vote on restructuring proposal for Hertz UK Receivables Limited. The plan envisages €250m of fresh funds from the parent with the €225m 4.125% 21s and €500m 5.5% 23s exchanged for new 5.5-year first lien and 7-year second lien notes. 

Holders representing 78% of the scheme debt have signed lockups in support. A scheme meeting to vote on the plan will be held on 15 January. 

Naviera Armas has launched a consent solicitation to allow an ad hoc group of bondholders to provide a 100m super-senior bridge facility. The provision of the bridge is a condition precedent for stakeholders to enter into a restructuring support agreement. The troubled Spanish Ferry operator is seeking to amend the docs to allow majority consent to approve a loan from SEPI - the Spanish Government bailout fund for strategic businesses. 

An unsourced article in El Confidential suggests bondholders will write-off €250m of debt in return for 50%-60% of the equity – exact amounts dependent on level of shareholder support. 

KCA Deutag published its Q3 earnings update this week. EBITDA dropped 25.2% to $55.7m, with $34m of cash outflows. It said its restructuring which sees debt reduced by around $1.4bn and scheme creditors take 100% of the equity should close next week. For our coverage of their UK scheme click here

TAP bonds retraced into the low 70s from low 80s as its restructuring plan delivered to the European Commission on 10 December disappointed investors. They had rallied up from the low 60s on hopes that the bond debt would be unaffected. 

What we are reading this week

We’d like to thank all our subscribers for their continued support in 2020. We wish you all a Merry Christmas and a Happy New Year from all the 9fin team. The Friday Workout will return in 2021