Friday Workout - How to be Wrong, Robinhood to the Rescue, Staying Relevant

9fin analysis on European stressed, distressed and restructuring activity

Some events can test your resolve and challenge your thinking. We had one of those moments after Pfizer disclosed 90% efficacy on its Covid-19 vaccine on Monday. Markets went into full risk-on mode and over at 9fin we were proved wrong about bankers’ ability to offload their hung Pure Gym bridge at a sensible price without eating too much into fees. 

Stock prices in beaten-up names and insolvency candidates such as AMC, American Airlines and Carnival soared by as much as 40-50% allowing them to prep equity raises to provide some immunity for noteholders. Last week we wrote that AMC was calling for Wonder Woman to come to their rescue, the injection of optimism may allow Robinhood traders to take the fictitious heroine’s place. 

During lockdown in my home office at Haffenden Towers I’ve listened to James O’ Brien’s dissection of the UK’s poor handling of its Covid response. You may know him for his tear-down of Brexiteers arguments on his Radio Show phone-in. But as he says in his new book – How to be wrong – just by winning the argument doesn’t prove that you are right. Be willing to change when the evidence does.

Arguably there is a journalistic responsibility to be skewed to being sceptical, plus grey-haired restructuring guys like me are naturally pessimistic about economic and business prospects. But at this juncture it's worth rethinking about where we could be post Covid – assuming full herd immunity by next summer. 

By the way, one thing I am certain of, dry ice will be the best investment of 2021. 

I’ve lost count of positive comments about liquidity buffers built up to survive loss of earnings, with cost cutting and lower cash burn putting companies in better health to profit from a recovery in 2021. I countered that gross debt levels are significantly higher due to RCF draws, government loans and super-senior funding from sponsors and third parties using looser docs than seen on a UK government procurement contract. 

Revenues may recover to 80-90% of previous levels, but many companies cannot recoup losses made in 2020 by when they are due for refi, can they?

While many would like to forget 2020 – and reprice everything again based on positive FY21 assumptions, I think the only thing we can be certain of here, is uncertainty. My counter argument was there should be a discount for execution. But now we have an empirical experiment with Pure Gym. 

Barclays and Jefferies were capped at 5.5% on bringing a HY bond for Pure Gym from the hung bridge earlier this year. Our null hypothesis can be that it was won on pre-Covid economics, therefore if it is trading above par at the end-2021 their argument can be proven. 

Pure Gym’s roller coaster year

Stressed out 

At 9finHQ we scrambled to keep up with the deluge of Q3 earnings releases and updates for a number of companies on our stressed watchlist. Hats off to our analysts with their earnings QuickTakes and their dedication to taking earnings calls. We will concentrate here on the ones we’ve written about in detail and provide quick summaries and links to the rest in the in-brief section at the end of the Workout.

Haya Real Estate bonds are trading in the high 70’s yielding around 18%, despite leverage being just 5.4x as at the end of the third quarter. The Spanish Real Estate manager and servicer remains positive that it can generate enough cash to build-up liquidity to deleverage closer to its November 2022 bond maturities. Investors hopes for a quicker transformative credit event were dashed on the earnings call, when the departing CFO said sponsor Cerberus had no short-term plans to inject cash and that M&A talk was misplaced. Some may wish excess cash is used to buy bonds at a discount, but management are more cautious given the poor near-term outlook for Spanish Real Estate.  

Codere upped the blind and the stakes when it agreed an amend and extend with bondholders in the summer, with gross debt increasing to €1.31bn and cash interest costs rising from €93.4m to €126m plus a PIK element. It may be out of A&E but could remain an outpatient for some time and may suffer from Long Covid. Despite improvements in liquidity, with a €148m cash balance at end October, liquidity could be just €40-50m in the first quarter after deferred tax payments and bond interest. Leveraged surged to 11.5x in Q3 and will rise further in Q4. Management is gambling on a return to 2019 EBITDA levels in 2022, which they believe will reduce leverage to 4x and enable it to refinance, avoiding a restructuring. 

Yell is (barely) living proof that investors assumptions on industries and business models can change. Directories businesses were the darling of private equity companies in the mid-to-late noughties, attracting the highest multiples and leverage. But most struggled with the transition to online and failed to protect market share and margins. Most are now debt free after multiple painful restructurings, Solocal being the latest. Yell had a poor start to lockdown with 75% of customers failing to pay in Q2 due to payment holidays. Revenues are down 27.7% YoY and net leverage has risen to 6.1x. But management said on a conference call it hopes to be cash flow breakeven in Q2, it is not worried about liquidity. It adds that discussions with bondholders are constructive, but with the bonds in the forties and the business model struggling, surely, it’s time for a debt for equity swap and run it for cash? 

Swissport in a storm – staying relevant

9fin joined the Teams call for Swissport’s Scheme convening hearing on Tuesday replacing James O’Brien as background listening. We weren’t expecting differences of opinion, but soon turned up the volume given the ensuing debate (once Justice Trower’s dodgy internet connection was fixed).

The Senior Unsecured Notes are miffed about the lack of consultation and lack of access to supporting valuation evidence to a restructuring plan replacing €1.9bn of debt by a new €500m facility for senior secured holders plus 97.5% of the equity. The SUNs receive nothing, but the structurally subordinated PIK notes get 2.5%, plus there is further equity for them and former shareholder HNA if equity value exceeds the old debt quantum. This is a reward for not ‘disrupting’ the process. 

The ground handling business has seen a sharp drop off in activity from Covid. Swissport has indicated without the restructuring plan it would have to file for insolvency by year-end. The company relied on an EY report showing under insolvency, creditors would receive 10.6 cents to 16.2 cents in the euro. Grant Thornton estimates eligible creditors would see equity value of 40.4%-54.4% of their debt face value. An M&A process run via Houlihan Lokey contacted 80 parties but received no bids. 

English courts have traditionally accepted insolvency as the comparator for schemes when used to implement coercive restructurings. But the new UK Restructuring plan introduces the concept of a ‘relevant alternative’ which has caused some consternation amongst judges loath to rule on valuation matters. 

Perhaps mindful of this and that other new processes such as the Dutch Scheme are using post restructured valuations, Trower mulled whether liquidation was really the likely alternative for Swissport, noting at the end of the day where a comparator could be impossible – “creditors need to find common ground.” Showing surprising awareness for a member of the judiciary he noted that EY’s entity priority model – given the vaccine news could now be out of date – “stocks are bouncing back.”

As we note in our recent primers on the UK plan and the Dutch scheme these introduce more options for creditors and debtors, placing more focus on valuation and alternatives, with more forum shopping expected, with some regimes seemed more favourable to certain creditors and conversely debtors.

9fin thinks that juniors are unlikely to convince Trower they are in the money but does have some sympathy with the argument that the seniors are using Covid-induced distress to grab significant future value. We look forward to hearing the arguments at the sanction hearing on 10 December. 

In Brief

Sixt survived the crisis better than its car rental peers Europcar and Hertz. Liquidity was boosted by the sale of Sixt Leasing and a €1.5bn loan from KfW. It took advantage of competitor woes to make an acquisition out of insolvency boosting its US footprint. Its SaaS product Sixt Plus has mileage too. 

Corestate saw net debt reduced in the third quarter by €81m boosted by a €74.6m capital increase in September, with leverage down to 3.7x (4x excluding IFRS adjustments) but still above the level where it can issue new debt instruments. It guided €55-80m of FY EBITDA and expects an uptick in 2021 as real estate markets gain momentum. 

Samsonite continues to focus on cost reductions, saving $100m in Q3 compared to the same period last year, but it still burned through $100m of cash in the third quarter, in line with previous quarters. But the luggage maker has $1.5bn of overall liquidity after drawing $810m from its RCF and says it can ride out the crisis. All covenants have been suspended save a minimum liquidity of $500m. 

Arrow Global continued the trend of positive Q3 reporting for debt collectors. It has ambitious cash flow generation plans announcing the final close of its €1.7bn Arrow Credit Opportunities closed-end fund which it claims is an exciting new chapter for the UK-based buyer of unsecured and secured non-performing assets. It aims to have €10bn AUM by 2025. 

DOF ASA management adopted a bearish tone on their earnings call, with several references to ‘challenging markets.’ The Strength of the Norwegian Kronor has caused unrealised losses and net debt to grow by NOK 1bn. The Oil services company has a standstill in place since May with secured creditors and discussions around a debt for equity swap are “constructive.” The Standstill expires in mid-December. 

Maccaferri has issued a consent solicitation to its 5.75% senior 2021 noteholders seeking consent to instruct the trustee to execute a subordination agreement and to waive certain requirements under the indenture. A majority of noteholders have already agreed to the consent. Carlyle is widely reported to be leading a bondholder group who plan to restructure the business by providing around €40m of new money on a super senior basis. The Holdco and some of its subsidiaries filed for pre-insolvency (Concordato Preventivo) in May 2019. 

Nayan V. Kisnadwala, the Amigo CFO has said adios, stepping down on 30 November. The UK-based guarantor lender wasted no time in announcing a replacement, industry veteran Mike Corcoran. 

Finally, a couple of pieces of news from the US which piqued our interest. 

Our peers at Reorg have indicated via social media that Cineworld lenders are worried about an asset transfer to unrestricted subsidiaries to allow it to do a capital raise, after Cineworld had posted an amendment to clean-up its credit documents this week. 

Wolf Street sums up well the reasons why Simon Property Group and Brookfield are buying JC Penny out of insolvency – to save its malls from zombification.