Weekly Workout - Are stressed re-fi's the new restructuring? In for the long haul, shopped out

9fin analysis on European stressed, distressed and restructuring activity

If there was ever doubt that the health of the underlying HY market was a key driver for stressed/distressed pricing and outcomes, the last couple of weeks have proved the null hypothesis. Last week we saw Lowell manage to pull off an unexpected refi – albeit with a chunky sponsor equity cheque, this week we saw an even more unlikely candidate, Aston Martin. We anticipate two more widely flagged stressed refis - Boparan, and Pure Gym which has a bridge outstanding, to arrive in coming weeks. 

The UK-based sports car manufacturer secured a £125m equity injection, a valuable technical contribution from Mercedes, and committed financing to avoid crashing into a £1.2bn maturity wall in April 2022. CEO and largest equity holder Lance Stroll was ebullient on the investor call, but as in the case of Lowell, the success of the financing will likely rest on existing holders to roll into the new issues. The existing bonds were trading at 12-13% pre-announcement, with the new paper indicated in the high 8s. 

Aston Martin has ambitious plans seeking to boost sales to 10,000 cars per year, aiming for £2bn of revenues and £500m of EBITDA by 2025. Aston has launched its first SUV, the DBX earlier this year and a number of new models are due by the end of 2021. Capex is a hefty £270m per year. 

Aston’s Welsh factory, St Athan which produces the DBX, remains open for now despite Wales recently imposing tough lockdown measures. Brexit is another threat with 10% tariffs due in event of a no deal. Jaguar Land Rover remains positive on Brexit with a Canada-style deal as base case, but its experiences suggest a £1.3bn cash burn in the year to June 2021 and a tough route to cash flow positive. 

It is easy to see the read across from JLR. Despite the bullish tone, it isn’t a Stroll in the park despite the CEO’s optimism on an investor call – “Everything I’ve described is absolutely game changing.”

Grounded flights, in for the long haul

Releases from Heathrow, Finnair and Royal Caribbean highlighted the state of the travel industry and reduced expectations for 2021 as the second wave takes hold and consumers stay at home. 

Heathrow said in its 9M20 update “Passenger numbers are now forecast to be 22.6m in 2020 and 37.1m in 2021, compared to our June forecast of 29.2m in 2020 and 62.8m in 2021, and 2019 actuals of 81m. Heathrow’s losses have widened to £1.5 billion in the first 9 months as passenger numbers in Q3 remained down over 84%. Q3 revenue fell 72% to £239 million and Q3 adjusted EBITDA fell to £37 million.” 

Finnair burned through €864.5m in the nine-months to 30 September 2020. Passenger revenues and traffic were sharply down in the third quarter. The slide below shows the breakdown:

Source: Finnair Q3 Report

Royal Caribbean is still only running limited cruise operations after suspending operations in March. “The Company resumed limited cruise operations outside of the U.S. in July with three vessels from TUI cruises and two vessels from Hapag Lloyd, and in September, for a limited period, with one Silversea ship.” It added “The Company estimates its cash burn to be, on average, in the range of approximately $250 million to $290 million per month during a prolonged suspension of operations.” 

Fleet footed

Europcar provided some comfort for its beleaguered bondholders this week in its third-quarter trading update. The car rental group has sharply reduced its fleet numbers by 43% in Q3, which should provide some comfort for bondholders who feared that they would be primed by debt secured on vehicles. It’s also ahead of costs savings, and now expects to save €1bn by year-end (from €850m).

EBITDA nudged back in positive territory in Q3, but the group faces significant challenges from renewed lockdowns, withdrawing its future guidance and stating that debt is expected to reach unsustainable levels. Last week it secured approval from bondholders to appoint a mandataire ad hoc to negotiate a restructuring and has failed to pay bond coupons. The appointee Helene Bourbouloux has a fearsome reputation amongst investors, famously once threatening holders in a meeting to jail time if they stepped out of line. 

Takeway Pizza

Pizza Express’ UK Restructuring plan was sanctioned yesterday (29 October) by Sir Alastair Norris. The retired Judge rattled through proceedings, despite it being only the second under the new process – perhaps he had a lunch appointment, with just a CVA challenge livening-up the hearing. 

Sir Alastair Norris said: “there is a risk that the cost saving is not achieved and that another scheme meeting might be required if the prospects of success are downgraded.”

But Norris was reassured by comments from company lawyers that this was brought to the attention of those voting at class meetings with no formal inter-conditionality between the two processes. 

Norris said there didn’t have to be certainty that the benefits under the scheme have to occur. “It is sufficient if there is commercially a real prospect of them coming about.”

Senior secured lenders will now control the pizza restaurants business, providing £144m of new money, the senior unsecured will be wiped out, with majority shareholder Hony Capital walking away with just the loss-making Chinese assets as compensation. 

For more on the new UK Restructuring Plan click here

KCA Deutag scheme creditors have today (30 October) voted in favour of the scheme of arrangement.  Scheme Creditors representing 98.97% by value and 99.47% in number voted in favour of the Scheme. One Scheme Creditor voted against the Scheme. The sanction hearing is scheduled for 5 November. The restructuring will see debt reduced by $1.4bn and scheme creditors take 100% of the equity. 

Stressed but blessed

There were a slew of updates for stressed borrowers this week, most providing some encouragement for their beleaguered investors with no ‘tape bombs’.

Grenke appears to have caved to investor demands to integrate its franchises and hire a chief risk officer. Short-seller Viceroy Research has alleged that it is overpaying for franchises and is overstating goodwill with many of these purchases made on a related-party basis. The company will integrate 16 companies over 12 to 18 month-period based on independent value assessments. “GRENKE AG to carry out pro-forma consolidation as early as the 2020 annual financial statements and show anticipated expected effects on the balance sheet.” 

Eramet had a mixed quarter, with sales of manganese ore and nickel ore compensating for weak sales in its high-performance alloys division – exposed to Aerospace and automotive sectors. “Forecast EBITDA is expected to strongly improve in the second half of 2020 compared to the first half. Nevertheless, it will be significantly lower on a full-year basis.”  Eramet bonds have recovered into the low 80s in recent weeks, 5-10 points higher than at end-September. 

IDH says it has successfully pivoted to the public sector to compensate for loss of revenues for private dental services. H1 FY21 EBITDA is expected to be +25% higher than the same period in FY20 driven by management’s successful pivot to sales into the public sector during lockdown months. Dental revenues down by c40% in H1 FY21 but has been offset by the sale of PPE into new channels (Police, Care homes, Ambulance and primary care). IDH bonds continue their slow climb after dipping into the 60s in April, and are back into the low 90s. 

Kongsberg Automotiveraised its revenue and EBITDA guidance for the full-year and says that its order book remains strong, despite the second wave. Free cash flow will remain negative however due to increased working capital and significant capex, but should move into positive territory next year, management said on a conference call earlier today. It appeared to downplay talk of buying back its bonds (currently at 83-mid) at a discount, saying it was focused on getting to FCF positive first. 

Shopped out

Last year property asset management firm APAM warned that more than 200 UK shopping centres worth around £7bn may be in danger of breaching debt covenants and falling into administration. 

It has been proved right, with Intu the most high-profile casualty, and as React News exclusively revealed this week that Cerberus has handed back the keys to lenders for two Scottish shopping Centres – The Gyle in Edinburgh and Clyde shopping centre on the outskirts of Glasgow.

React discloses that DRC Capital the mezzanine lender to The Gyle has appointed APAM to run the shopping centre on behalf of a lender group including Morgan Stanley, Bawag and DRC. Cerberus paid around £170m for the asset and failed to find buyers close to the £125m guide price last year. 

Bawag has appointed Edinburgh house to run the Clyde – bought for £70m and marketed at £51m.