Friday Workout

Learn to fly; Let the Games Begin; Working Hard or Hardly Working?

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

As we build our distressed and restructuring watchlist, we are also looking at sectors and asset-types not traditionally financed by LevFin instruments but badly affected by the crisis. This includes the airline and aircraft and leasing sectors and securitisations backed by pubs and commercial real estate. 

It requires different skills sets and the ability to understand complex structures and concepts. Our legal team got a taste earlier this week, with the Whole Business Securitisation structure and enforceability of AA Group’s B3 notes – the notes have significantly reduced protections than the notes they replace. Non-subscribers please ask for a copy of our legal Quick Take.  

Luckily, Laura Thompson our new editorial hire comes from an Aviation background, and I can dust off my old work on CMBS and PubCo restructurings from the early 2010s - such as Punch Taverns and reprise some old relationships. Keep an eye out in the coming days and weeks for more content from the 9fin editorial team in a space, we think is set to become very active in the coming months. 

Also keeping us busy this week was further analysis of the Intralot proposal which may become a Greek drama and set legal precedents. As promised, we released an in-depth analysis of working capital movements for European HY names too. 

Yesterday (21 January) the latest restructuring plan emerged from Spain – for construction company OHL – one of its high-profile projects plans to convert the Old War Office in London into a Raffles hotel and apartments. We will be taking a closer look at the mechanics and value drivers of the deal next week, together with a Spanish legal processes’ primer, and the role of the Government via ICO and SEPI loans. 

Those subscribing to our bull case on 9fin’s Douglas deep dive report (released 18 Dec) will feel vindicated by a report from German Manager Magazin on prospects for the e-commerce business - which prompted the sub bonds to jump 14-points. We are working on another German name for our next deep-dive and would appreciate your suggestions for other candidates to publish on. 

Learn to Fly – looking to the Scheme to save me

This week, we had a timely reminder of the difficulties affecting the aviation sector, with the opening of the English scheme of arrangement for Malaysian Airlines Leasing (MAB) to restructure liabilities under aircraft lease agreements as part of a wider restructuring.

Under the plan, scheme creditors have two options:

Continue to lease the relevant aircraft to the company at a revised rent adjusted in line with market rates (with optionality to receive a higher rent in return for a contingent deferral, and regarding lease extensions) with all other material terms of operating lease agreement remaining unchanged; or 

Terminate the relevant operating lease agreement and take back the aircraft (and receive a one-off payment which exceeds the upper end of the expected return in a liquidation of the company.)

Absent the scheme MAB it will run out of money by 21 February and will have to enter insolvent liquidation in Malaysia, which would terminate the operating leases. Under this scenario the scheme creditors would receive 0.9% to 1.4% on liquidation claims increasing to 3.7%-6.4% when combined with recoveries against other group companies, according to an AlixPartners report. 

Scheme creditors will vote as a single class on 22 January, with 82% (15 out 17 creditors) already signed-up to lock-up agreements. The sanction hearing is pencilled in for 22 February. 

Clipping their wings

Sticking with the aviation sector, this week the Norwegian government has expressed its support for the Norwegian Air restructuring plan which was unveiled last week. A substantially smaller airline will result, and its ambitions to be a low-cost long-haul operator are dead. 

Norwegian said: “On January 14, 2021, the airline presented a new business plan based on a simplified business structure with a focus on a European route network and discontinuing its long-haul operations, as well as significantly reducing its debt. 

The plan comprises a fleet of around 50 aircraft in operation this year, and to gradually increase to approximately 70 aircraft in 2022, pending demand and potential travel restrictions. The debt will be reduced to around NOK 20 billion [from NOK 50bn as at end September], and the company will raise four to five billion NOK in new capital.”

The low-cost airline was struggling well before the Covid-19 pandemic, being forced to raise equity three times from 2017 to 2019. Last year, it tried to avoid extinction via a series of debt for equity swaps, yet another equity raising and a state-aid package from the Norwegian Government with NOK 3bn of loan guarantees. In total, NOK 18.2bn (GBP 1.5bn) was added to equity in 2020. 

But Norwegian Air required further funds in the first quarter to support working capital for 2021. On a conference call in August, it said it had enough liquidity for another six or seven months, but renewed lockdowns hasten its demise. The Norwegian Government on 9 November decided not to provide further support, prompting the filing for Irish Examinership on 18 November

Let the games begin

Intralot’s recent restructuring proposal not only pitches pari passu bondholders for the Greece-based gaming company against one another, but it may also raise issues on how temporal seniority should be dealt with by the courts. There is an element of game theory and prisoners’ dilemma too.

Our analysis seeks to explain the company proposal, developed with the 2021s, outlining the potential options for the disgruntled 2024s, and likely routes for implementation and legal hurdles.

While the September 2021s are first in the queue in terms of maturity, they rank pari passu to the 2024s. In effect they are priming the 2024s and gaining security in exchange for an 18% haircut. The long-dated notes make the largest contribution to deleveraging the business (by another four turns) but could enjoy equity upside if the business recovers as planned. 

However, the 2024s are entitled to argue that their debt should be treated holistically, gaining equal treatment with the 2021s, but the shorter maturity notes can call a default, under temporal seniority - one for the game theorists - and we suspect the lawyers, as it likely to need a court-supervised process to implement. 

Working hard or not working

One of the topics of conversation on our ELFA webinar yesterday (slides available on request) was the effects of working capital over the pandemic cycle, and how ample liquidity sitting on balance sheets may not be what it seems. 9fin’s Ben Hoskin has produced an excellent report looking into Q3 working capital dynamics and drilling down into the main components. An abridged overview is now publicly available with more sectoral-based updates to come. 

Retailers are a good example for taking a closer examination of working capital swings. 

Matalan posted an update this week, showing that the cash position has hardly moved since the November quarter end. It retained £187m of liquidity as of December, bolstered by a shareholder injection in the summer, but as management explained on the accompanying conference call there are plenty of items to reverse out. These include rent and HMRC payment deferrals of at least £50m. Management added that “there are clearly significant outflows of supply payments over the next two-to-three months. James touched on the rework of the spring-summer buy and mentioned that there was about 50m of intake or stock inbounded cost.” This would have a large impact on cash flow in the coming noted management. 

Matalan faces significant headwinds from the renewed lock-down with only a certain number of its stores open for click and collect, and a less-developed e-commerce platform that many of its competitors. It is seeking further deferrals and is negotiating with HMRC which suggests they remain in hunker-down and cash preservation mode. Their £130m second-lien notes continue to languish in the high 30’s. 

In stark contrast, if the Manager Magazin article is taken at face value, German Beauty Products retailer Douglas has seen a significant movement of its sales move online after renewed German lockdowns in early December. Our deep-dive report highlighted the value of its online business, but if the reported 33% of sales figure is correct, that is a big jump from 19% at mid-year.

With Xmas trading a key component of its EBITDA (around 50% of the yearly total) the talk of single-digit revenue falls over the period is very impressive. It may even be enough for Goldman Sachs to secure interest in a refinancing without too much of a sponsor contribution, given that the senior secured paper is now close to par. But the subs could be more problematic, now into the mid-80s (tk) from the mid-60s, making it more difficult to capture any discount from an exchange. 

Douglas is famous for the use of Corona effects and other items in its addbacks, let’s hope that the numbers quoted in the article are not after adjustments!

Constructive progress at OHL 

Spanish construction firm, OHL has announced a deal with an ad hoc group of bondholders and shareholders. Some of the shareholders (troubled group GVM) will not participate in the planned €42m capital increase. In total there is €105m of debt reduction on day one, with around €500m of planned disposals to reduce leverage further, most notably its 49% stake in the Old War office – which has a book value of €100m and 50% of Canalejas, which has a book value of €200m.

So far it has secured lock-up agreements from 57.3% of holders of its €323m outstanding senior notes 4.75% due 2022 and €269.9m outstanding 5.5% senior notes due 2023. The ad hoc group comprises Beach Point Capital Management LP, Marathon Asset Management, Melqart Asset Management (UK) Ltd, Sand Grove Capital Management LLP and Searchlight Opportunities Fund GP, L.P. 

There are two options, an exchange for new senior notes at (€880 per €1000 of face value); or for up to 38.25% of the total principal of their notes a combination of €300 of new shares at €0.74 per share and €680 of new notes. It is seeking to get remaining holders to accede to lock-up agreements. 

It plans to implement the restructuring via an English Scheme to begin in the second half of February. To do so would require 75% of holders to vote in favour, most likely via a single class. 

Other 9fin coverage

In line with our plans to preview upcoming deals, earlier this week we outlined the potential options and the likely creditor dynamics for Tullow Oil in the coming months. Despite new management’s confidence that Tullow Oil’s new business plan can develop enough long-term operational cash flows to service and refinance its debt, creditors have appointed a number of restructuring advisors in recent weeks, leaving just the 2025 bonds unrepresented. 

The capital structure and presence of a reserve-based lending facility could create some interesting dynamics and conditionalities. Most sources involved in the situation, however, are leaning towards addressing the capital structure on a holistic rather than on a piecemeal basis. It is still early days, however, with the initial focus on the RBL redetermination, they cautioned. 

US Trustee which is charged with overseeing The Hertz Group’s Chapter 11 has objected to the restructuring proposal for the European armHertz Holdings Netherlands. As part of the restructuring, there is a ‘bifurcation’ whereby US Guarantee claims against Chapter 11 debtors (the US parent) would be sold via auction. Auction proceeds will be applied to reduce amounts of notes exchanged under the UK Restructuring Plan. 

In addition, US Trustee is challenging the expanded role of Moelis to act as an intermediary in the auction. If the objection is upheld, it could have implications for the UK Restructuring plan, whose noteholders voted in favour on 15 January, with a sanction hearing pencilled in for 3 February. 

“The Exiting HHN Noteholders will recover more than what they are owed at the expense of creditors in this Chapter 11 case,” US Trustee says in their submissions. “First, Existing HHN Noteholders will receive the Debtor Guarantee Proceeds generated by the sale of the debt instruments based on the Replacement U.S. Unsecured Claims. Second, under the LUA, they will also receive new notes issued in an amount based on the difference between the Sale Proceeds and the value of the Existing HHN Notes.  Recovery from guarantors and other obligors cannot exceed a payment in full. By allowing that to occur here, the Code’s requirements of equality of distribution among creditors will be violated.”

In advance of our Spanish insolvency primer, we highlighted the reversal of a controversial ruling by a Madrid court which is likely to force troubled steelmaker Celsa back into negotiations with its creditors. Last April, the Spain-based Steelmaker successfully managed to use a rare legal mechanism ‘rebus sic stantibus’ to allow it to unilaterally change the terms of its financial contracts. A portion of the convertible debt was due to be converted into jumbo debt under a rebalancing mechanism, but this was delayed by the court for a year, as were scheduled amortisation payments due under its senior loans in May and November. 

During the appeal it became apparent that prior to approaching the Madrid court Celsa had first tried and failed to secure a favourable ruling in its local Barcelona court. The Madrid court had been unaware at the time of this and has suspended its original decision on the grounds that the matter had already been heard and rejected by another court, the sources explained. 

Celsa now faces the prospect of reaching an agreement with creditors or facing enforcement on missed payments and contractual breaches. The Spanish government is likely to play an important role with the company applying in November for a €350m loan from SEPI – Sociedad Estatal de Participaciones Estatales (SEPI) loan – the rescue fund to support the solvency of strategic companies. 

In brief

As we predicted, Abengoa has secured another deadline extension to accept a restructuring plan. The Spanish Government remains to be convinced, according to local reports

Europcarshareholders have voted in favour of the France-based car rental operators restructuring and recapitalisation plan. Next up is a Sauvegarde Acceleree hearing on 25 January with the restructuring expected to become effective in early February.  

Rallye has announced a tender offer via a modified dutch auction to repurchase up to €500m of its bonds, funded by commitments by Mr. Marc Ladreit de Lacharrière and from banks.

Lufthansa CEO Carsten Spohr is touting a significant improvement in reducing losses, halving to an astounding one million euros every two hours. The German Govt which provided a €9bn bailout and took a 20% equity stake may be less impressed, at that rate almost half (€4.4bn) will be gone in a year. Lufthansa has already spent €3bn of the injection, Spohr said.   

Punch Taverns released an update for securitised noteholders this week. The Pub Company famously agreed with holders to use the pre-covid quarter EBITDA to extrapolate for covenant compliance

What we are reading this week

The Bit Short - inside Crypto’s Doomsday Machine 

Cineworld faces revolt by shareholders over £208m share scheme

Hedge Funds Target Firm that bet $2bn on Hotels pre-Covid

We need scepticism more than ever 

A strong recovery could be bad for asset prices

KQ denies its plane seized by lenders in Netherlands