The curious case of Stonegate Pubs CDS

Some quick observations on the very unusual Stonegate Pubs announcement this morning. 

The Company released the following statement. 

"Update on financing structure in relation to outstanding existing CDS February 12, 2020: Stonegate Pub Company Financing plc today announced confirmation that as part of its proposed upcoming financing to support the transaction of Ei Group plc that the new funding structure, which will consist of an issuance of notes, or bridge loans which in turn are anticipated to be refinanced by an issuance of notes, will incorporate Stonegate Pub Company Financing plc as one of the guarantors of the new notes and/or bridge loans."

We're still digging for more intel as this is a developing situation... but we've been told that the Company had previously indicated it would issue debt from a new entity, NOT from "Stonegate Pub Company Financing plc" which is the issuer of the current outstanding Notes. You can see an Org Chart here

This ties with the Bridge facility docs which reference a new SPV "Stonegate Pub Company Financing 2019 Plc". The old Notes issuer is not mentioned as a borrower, issuer or a guarantor. This would likely have orphaned existing CDS on the outstanding Notes rendering the contracts near worthless as there would no longer be a deliverable. 

This morning's statement makes clear that the Company will involve the old issuer as a guarantor of the Notes under the new deal. If structured correctly this could prevent existing CDS being orphaned. 

Out of an abundance of caution, we note that there are differences between ISDA definitions on whether a guarantee is qualifying or not, but the Company's statement seems to suggest they have been persuaded to structure the transaction to ensure that the existing contracts are not orphaned. 

Someone somewhere who has bought CDS protection is happy with this announcement - we  don't yet know who. It is purely speculation, but there may have been discussions behind the scenes with regards to participation in the upcoming financing in exchange for ensuring existing CDS is not orphaned.  This 'orphaning-negotiation' has happened in the past, both in connection with the manufactured defaults scandal but also in more vanilla financings of performing credits. For example it was reported that sellers of CDS protection offered support to Matalan's 2017 new bond, provided it was issued out of a new entity - therefore rendering the protection worthless. 

In any case, it is incredibly unusual for a company to explicitly reference CDS in an announcement about an upcoming financing - we can't find any historical precedent statement for a European HY issuer (although Wind was previously a subject of market speculation with regards to orphaning). 

We can't help but notice that this press release is drafted a lot like a cleansing statement, anyone who previously had confidential or inside information about the structuring of the transaction is now brought back onside and free to trade CDS. This is a real focus area with regards to insider trading & market manipulation for the SEC - so it makes sense to be on the safe side. 

Finally, we note that AlbaCore have underwritten PIK in connection with the upcoming M&A transaction, although there is no suggestion that they are in any way connected with today's press release.