Distressed Debt


Highlights of our extensive coverage and analysis of the largest stressed and distressed debt, loans, funds, companies and the distressed debt market across the Americas, EMEA and Asia. Our intelligence, reporting and analysis also includes information on distressed trading and investing written specifically for investment managers, investment bankers, legal professionals and corporate professionals.

Global Credit Highlights — (Friday, May 20 2022)
Tue May 24, 2022 12:21 pm Distressed Debt

Distressed Activity Gains Momentum in US, Debt Talks Develop in Europe as Primary Markets Hiccup; Underwriters Offer Credit Enhancement for Chinese Developers’ New Bond Issues, India’s Stalling IPO Market Generates Direct Lending Opportunities

Reorg’s editorial leadership has selected the following list of the most compelling and topical situations and distressed activity across our global coverage universe. For any suggestions please email us at questions@reorg.com.

In the Americas, distressed activity is gaining momentum, with an increasing number of companies looking to reset their capital structures amid rising inflation, near-record fuel and commodity prices and ongoing supply chain constraints resulting from the war in Ukraine and China’s Covid-19 lockdowns.

The proliferation of cov-lite deals over the last decade, during which time record volumes of leveraged loans and high-yield bonds were brought to market, combined with an expected increase in default rate, has brought an increased focus on the potential for priming transactions in distressed credits. Market participants are closely monitoring credits such as Envision Healthcare and Incora for clues on whether legal challenges brought by lenders left out of priming recapitalizations can succeed.

In Europe, where the leveraged loan and the high yield bond markets are still struggling to kick start in earnest, some restructuring talks have picked up pace too. While OptiGroup and Europcar both pulled new transactions citing market conditions, European direct lenders have been taking advantage of closure of other markets to pick up deals including Morrisons debt at a discount from the underwriters books. Elsewhere, companies and investors started to appoint advisors for debt talk on situations including Hilding Anders, Holland & Barrett as well as Adler Group.

India’s slowing IPO market is creating direct lending opportunities, as companies with stalled listings face a need for growth capital. In China, some real estate companies face a more favorable policy environment as underwriters are providing credit enhancement measures for new bond issues by developers under the directives from regulators to support healthier issuers’ return to the capital market.

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Asia Bi-Weekly: Controlling Your Fate (May 4-16)
Mon May 16, 2022 11:35 am Distressed Debt  High Yield Bonds

Long ago and far away, a deeply cynical editor once told me that there was a simple trick to writing financial trend stories: If you wait three years, he said, you can recycle each one of your stories, because markets will have forgotten that you ever wrote them. (Whether this three-year period directly correlates to the short-term memory of financial markets, I have yet to discover.)

Sadly, the deeply cynical editor may have been, if not wholly, at least partly right. Taking direct lending as an example, over the roughly 10 years since I first wrote about the growth of the strategy in Asia, the topic has been regularly recycled.

Every couple of years, a fresh batch of data shows how much more dry powder is available for investment through direct lending, how many more funds have been raised for credit strategies and how much deal volumes have risen. Headlines dutifully emerge to tell us that the direct lending market is taking off in Asia.

The truth is that the direct lending market was well established in Asia and populated with funds long before I stumbled upon it. Equally, though, it’s true that the strategy has evolved, deal volumes have risen consistently over successive years, and funds and their dry powder have expanded.

A further truth is that Asia remains under-penetrated for private credit and direct lending strategies compared with North American and European markets, as panelists noted at the recent FTLive/Reorg conference on private credit held on May 4 and 5.

(Yes, I know, I’m recycling my trend story. But there are extraordinary circumstances. Bear with me.)

Private credit dry powder in Asia was estimated at $16.2 billion in 2019, up from $6.1 billion in 2009.

Also in 2019, the Asian Development Bank estimated there was a $4.1 trillion funding gap for SMEs in the Asia region.

These of course are pre-Covid-19 numbers. But the impact of the pandemic has increased demand for private capital leading to more new fund launches over the last 12 months.

Asia is of course a diverse set of countries, cultures, currencies and legal and financial jurisdictions, offering a wide array of opportunities and drivers for a credit driven strategy, both for performing and stress-related strategies.

The GFC and subsequent Basel 3, of course, has long created funding problems for SMEs in Asia, but bank caution has been exacerbated again in the wake of the Covid pandemic, due to uncertainty over the market environment. Against that backdrop, India’s current GDP growth – as one example cited at the recent conference – is fostering demand for private capital to finance performing credits.

Meanwhile, despite border closures, Australian real estate private capital deal-making, meanwhile, rebounded to reach $27.4 billion in value in 2021, up from a low of $15.8 billion in 2020 under the impact of Covid-19, according to recent Preqin data. While still below the $29.3 billion recorded in 2019, the figure is not far off pre-pandemic volumes of 2017 and 2018, when deal values of $27.6 billion and $20 billion, respectively, were recorded, as Preqin noted.

Australia’s private capital industry overall grew to $89.9 billion AUM, up 11% from $81.3 billion in December 2020 and 42% higher than $63.5 billion in December 2019, Preqin also reported.

Now, current macroeconomic and geo-political tailwinds and a pervasive risk-off sentiment in the region are generating further opportunities for private credit solutions, as normal sources of capital supply are shut off, both in regional and domestic markets.

Asia primary bond issuance has fallen off a cliff this year, and the region’s syndicated loan markets just posted their worst first quarter volumes since 2012 in the aftermath of the GFC.

High-yield bonds have been largely shut out of the market in Asia this year following the collapse of China’s real estate market. New Issue Concessions (NICs) have risen from the previous 0-5 basis points to as high as 20 basis points. Reoffer prices are well below par on many new issues.

The impact of China’s “Three Red Lines” policy and China Evergrande’s slide towards what could be a restructuring – or a dismantling – cannot be underestimated. Evergrande has over $300 billion in liabilities and accounts for 16% of China’s high-yield bond market.

But it’s not just Evergrande, of course.

On May 5, the day I moderated a panel at the FTLive/Reorg conference, the “Asia real estate outlook for private debt investors,” out of 391 China real estate developers’ high-yield bonds, more than half were priced at 30 or below, according to Refinitiv data.

The same regulatory crackdowns that have driven high-yield bond pricing on many real estate developers into the teens and the 20s – the “Three Red Lines” policy and the reining in of the shadow banking sector not least among them – have created an environment where capital providers or solutions providers can negotiate not just higher returns, but more importantly more downside protection through lower LTV ratios, greater collateral, additional guarantees and controls over cash flows and sources of repayment.

It’s important to draw a distinction here between offshore unsecured high-yield dollar bonds of Chinese real estate developers, and senior secured private loans onshore in China, funded in RMB.

While low dollar price entries on generally unsecured offshore dollar bonds may offer an attractive entry into a long-dated restructuring, the attraction of private credit right now – and the reason for a growth in China-focused credit funds of various strategies – is the ability to perfect onshore senior secured first lien real estate loans in RMB against real collateral, for those funds that have the personnel, connections and experience onshore.

The attraction of the strategy is that the loans themselves provide not only stable, high percentage returns in the high teens to 20% and above, but they offer downside protection – as panelists again noted, in an event of default, private credit investors who have perfected security can take enforcement action, leading to quicker recoveries.

That protection empowers investors, allowing them some control over their fate.

–Stephen Aldred, Managing Editor

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FTLive and Reorg: Global Alternative Credit Summit (May 4-5, 2022) — Hong Kong program

Private credit is booming with estimates suggesting the market is now worth more than US$1 trillion. Having moved from the margins to the mainstream, this previously niche asset class is proving a real disruptor in debt capital markets, as investors seek out steady and healthy returns, and borrowers opt for new non-bank sources of finance. Hear from market leading experts on distressed restructuring, bankruptcy analysis, and the leveraged loan market in 2022 and beyond.  During the summit, we will discuss debt restructuring, leveraged finance, financial restructuring and many other topics. 

GLOBAL ALTERNATIVE CREDIT SUMMIT
4 – 5 May 2022
Unlocking Opportunities in Private Debt as the Credit Cycle Turns
In-Person & Digital l Glaziers Hall, London and Harvard Club, New York | #FTAltCredit

The potential for this market is enormous, but there are risks. For LPs, non-bank credit offers diversification uncorrelated with traditional investments; for borrowers, it promises quicker decisions on loans, better tenors and tailored covenants. Yet, despite ample capital, caution remains a watchword as the global credit cycle turns and the pandemic continues to influence the prospects for business and finance. Moreover, with growing calls for greater transparency and tighter regulation in private credit, is now the right time to join this market? Do the benefits outweigh the risks of this dynamic new asset class?

How does this shadow banking market compare to other private asset classes in terms of returns and ease of access? To what extent has it matured to meet the risk and return profile of an increasingly sophisticated pool of global investors? Can current rates of return be sustained in developed markets, against a fast changing and uncertain macro-economic and geo-political background? To what extent will Asia follow a similar growth path? As demand for direct lending, distressed debt, structured credit and leverage finance increases, where will new avenues for growth emerge? How concerned should investors be about warnings around systemic risks, market opacity, standards and illiquidity issues? Is it time to step up the regulation of private credit?

Hong Kong Program: May 5

Welcome remarks from the FT and Reorg

  • Joshua Oliver, Asset Management Reporter, Financial Times
  • Jenn Jutakeo, Head of Credit Research, Reorg

Leaders’ Panel: How should investors balance opportunity and risk Asia’s private credit markets?

Demand from global investors and local borrowers is pushing private debt to new heights across Asia. As the markets in the US and Europe reach maturity, Asia is seen as a new avenue with massive potential for further growth. Where are the key pockets of opportunity for private debt investors as the region recovers from the impact of Covid-19? What are the most effective investment opportunities in this market, from direct lending to mezzanine and distressed debt? How can LPs navigate this complex market with its multiple regulatory frameworks and diverse political regimes? To what extent is the potential for local currency swings an issue that indirectly impacts on private investments?

  • Vaibhav Chadha, Managing Director, Distressed Loans, Cantor Fitzgerald
  • Kanchan Jain, Managing Director & Head of Credit, Baring Private Equity Asia
  • Leslie Lim, Investment Director, Tsao Family Office
  • Roderick Sutton, Special Advisor, FTI Consulting

Fireside Chat: Has private debt come of age in Asia?

  • Andrew Ferguson, Chief Executive Officer, Asia Pacific Loan Market Association (APLMA)
  • Shasha Dai, Managing Editor, Reorg 

Sector Focus Panel: Asia real-estate outlook for private debt investors

Long characterised by large-scale, stable returns, downside protection, and measurable risk, real estate has been considered one of the key opportunities for private debt investors focused on Asia. But have recent events in China’s real estate market altered that picture? Have events in China impacted other regional real estate markets? How is the overall market evolving and how do yields compare with the other debt investment vehicles in the sector? Where are the regional hot spots for value, and has the pandemic affected the risk outlook for real estate? Which loan structures and strategies, from direct lending to investing via funds, are proving most effective in the current market? To what extent does private real estate debt provide an access route to distressed opportunities?

  • Ron Thompson, Managing Director, Asia Restructuring Leader, Alvarez & Marsal
  • Robert Petty, Co-CEO and Co-CIO, Fiera Capital (Asia)
  • Stephen Aldred, Managing Editor, Asia, Reorg
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FTLive and Reorg: Global Alternative Credit Summit (May 4-5, 2022) — London program

Private credit is booming with estimates suggesting the market is now worth more than US$1 trillion. Having moved from the margins to the mainstream, this previously niche asset class is proving a real disruptor in debt capital markets, as investors seek out steady and healthy returns, and borrowers opt for new non-bank sources of finance. Hear from market leading experts on distressed restructuring, bankruptcy analysis, and the leveraged loan market in 2022 and beyond.

GLOBAL ALTERNATIVE CREDIT SUMMIT
4 – 5 May 2022
Unlocking Opportunities in Private Debt as the Credit Cycle Turns
In-Person & Digital l Glaziers Hall, London and Harvard Club, New York | #FTAltCredit

The potential for this market is enormous, but there are risks. For LPs, non-bank credit offers diversification uncorrelated with traditional investments; for borrowers, it promises quicker decisions on loans, better tenors and tailored covenants. Yet, despite ample capital, caution remains a watchword as the global credit cycle turns and the pandemic continues to influence the prospects for business and finance. Moreover, with growing calls for greater transparency and tighter regulation in private credit, is now the right time to join this market? Do the benefits outweigh the risks of this dynamic new asset class?

How does this shadow banking market compare to other private asset classes in terms of returns and ease of access? To what extent has it matured to meet the risk and return profile of an increasingly sophisticated pool of global investors? Can current rates of return be sustained in developed markets, against a fast changing and uncertain macro-economic and geo-political background? To what extent will Asia follow a similar growth path? As demand for direct lending, distressed debt, structured credit and leverage finance increases, where will new avenues for growth emerge? How concerned should investors be about warnings around systemic risks, market opacity, standards and illiquidity issues? Is it time to step up the regulation of private credit?

London Program: May 4

Opening remarks from the FT Chair
Robert Smith, Capital Markets Correspondent, Financial Times

View from the Top: How resilient is private debt as the credit cycle turns?
2021 was a bumper year for private credit, with the market size growing to almost US$1 trillion. Demand from investors for new assets is high and the industry is seizing the opportunity to drive growth. But can this be sustained as the credit cycle turns? What impact does the prospect of rising interest rates and higher inflation have on the outlook for borrowers of private credit and generally credit quality? To what extent are private debt market risks reduced by the characteristics of the market, such as floating rate loans, privately negotiated deals and shorter durations? Are issues of transparency and liquidity likely to create challenges if markets become volatile?

  • Katie Martin, Markets Editor, Financial Times
  • Jonathan DeSimone, Chief Executive Officer, Alcentra
  • Ben Levenstein, Head of Private Credit and Alternative Income, Universities Superannuation Scheme
  • Magdalena Högberg, Head of Strategic Asset Allocation and Quantitative Analysis Fourth Swedish National Pension Fund (AP4)

Economist Keynote: Higher inflation and rising interest rates – a threat or opportunity for alternative credit?

  • Gerard Lyons, Chief Economic Strategist, Netwealth
  • Chris Giles, Economics Editor, Financial Times

LP Leaders’ Panel: Is this the right time to expand allocations in private credit?
Globally, the private credit market continues to experience strong growth. Fuelled by strong appetite from investors, the asset class is now a widely accepted part of the strategic allocation for institutional portfolios. However, with capital continuing to move into this space, dry power is increasing as investments with an attractive risk-return ratio are becoming harder to find. What are investors’ current and medium term expectations of returns in this market? How important is credit quality as competition for deals intensifies? How worried should investors be about transparency in this market?

  • Robert Smith, Capital Markets Correspondent, Financial Times
  • Brian Olvany, Head of Private Debt, Zurich Insurance
  • Emma Bewley, Managing Director, Head of Private Debt and Uncorrelated Strategies
    Partners Capital 
  • Mikael Limpalaer, Senior Investment Director, AustralianSuper

Keynote: From shadow banking to mainstream asset class – is private debt now better than public?

  • Josephine Cumbo, Global Pensions Correspondent, Financial Times
  • Marcie Frost, CEO, CalPERS

Panel: Is the Distressed Debt opportunity primed for a new dawn?
Defaults and distressed opportunities seemed likely when the pandemic hit, but stimulus measures and creativity in financing put the market into a holding pattern. Now, as the world economy starts to normalise, and live with Covid, and as talks of tapering become reality, solvency is once again an issue for businesses. As the environment becomes favourable again for distressed investors how is the market cycle developing and how big is the distressed opportunity likely to be? To what extent will current low interest rates affect returns? How cautious should investors be about entering this market, given the ongoing macroeconomic uncertainty?

  • Mario Oliviero, Managing Director, International Credit, Reorg 
  • Christine Farquhar, Co-Head of Credit, Cambridge Associates 
  • Ty Wallach, Managing Director, Chief Investment Officer of Credit, Atlas Merchant Capital
  • Ivelina Green, CIO, Pearlstone Alternative
  • Jason Mudrick, Founder and CIO, Mudrick Capital Management LP
  • Adam Phillips, Partner, Head of DM Special Situations, BlueBay Asset Management

Welcome remarks from FT and Reorg

  • Robert Smith, Capital Markets Correspondent, Financial Times
  • Julie Miecamp, Managing Editor – Europe, Reorg

Panel: Is tighter regulation needed in non-bank lending?
The recent pace of growth in the alternative credit market has taken everyone by surprise, not least regulators and market watchers, some of whom are raising concerns about the potential for systemic risks. Has the time come for more regulation in this market, particularly around fund leverage and liquidity risk management? To what extent is alternative credit’s interconnectedness with the wider financial sector an issue that can’t be ignored? How can market players collaborate with policy makers to shape a regime with protects investors and the wider economy, whilst allowing alternative credit to evolve?

  • Adelene Lee, Managing Editor, Reorg
  • Jiri Krol, Global Head, Alternative Credit Council
  • Nathan Brown, Chief Operating Officer, Arcmont Asset Management

LP Fireside Chat – Harnessing the illiquidity premium of private markets

  • Robert Smith, Capital Markets Correspondent, Financial Times
  • Mark Fawcett, Chief Investment Officer, Nest

Leaders’ Panel: Finding value in private credit – which strategies are most effective in the current market?
Private debt has emerged as the new frontier for private and institutional investors on the hunt for yield. As capital continues to move into this space and dry power increases, where are the pockets of opportunity opening up? What is the outlook for returns in direct lending, fund of funds, distressed debt, special situation funds, and mezzanine finance? To what extent are asset owners adapting their approach, with potential participation in co-investments and secondary markets?

  • Julie Miecamp, Managing Editor – Europe, Reorg 
  • Howard Sharp, Head of Origination – Europe, Alcentra
  • Luis Mayans, Partner and Deputy Head, Private Debt, CDPQ
  • Gregory Racz, President, MGG Investment Group

Closing remarks followed by VIP Networking Dinner

  • Robert Smith, Capital Markets Correspondent, Financial Times
  • Julie Miecamp, Managing Editor – Europe, Reorg
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Chapter 11 Plans’ Analysis Using Credit Cloud

Reorg experts recently conducted an analysis of chapter 11 filings. Using Reorg’s new restructuring dataset, included in Credit Cloud, the analysis reveals that since 2020, five debtors have emerged or will emerge from bankruptcy with more funded debt than they had on their petition dates. Three of these companies have securities trading at stressed levels, with over 10% yields. Mallinckrodt second lien notes are indicated with a 12% yield and Buckingham Senior Living’s 2021B notes are indicated 42.3/43. Reorg has not been able to secure pricing information for the other two companies.

Mall owner Pennsylvania REIT and senior living operator Buckingham obtained concessions from lenders upon exit, including extended maturities, in an effort to carry the companies through the downcycle.

Read the full article here.

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Reorg on the Record: Russia sanctions will not free parties from contractual obligations… (04/20/22)

Written by Shan Qureshi, Head of Legal Restructuring Innovation and Initiatives || The sanctions imposed on Russian individuals and entities by the U.K., EU and the U.S. over the previous months are the most far reaching seen in modern times.

In a recent webinar Reorg hosted with lawyers from Pallas Partners LLP on the impact of sanctions on the loan agreements, we highlighted that sanctions do not act as a route around parties’ agreed contractual arrangements. Lenders who find their arrangements are caught by the sanctions will be forced to act quickly to avoid being fined, while some borrowers may be prevented from making payments easily. Additionally, wrongful termination of contracts could have costly consequences.

Elsewhere, we have seen some judicial criticism of challenging creditors in the U.K. Courts. Creditors were accused of “shouting from the sidelines” in Smile Telecoms’ recent restructuring plan, rather than engaging in a proper challenge. We expect the comments to dissuade creditors with weak grounds of challenge from obstructing future plans.

Our European teams are delivering the most in-depth data, analysis and reporting on thousands of credits that are either stressed, distressed, performing, going through restructuring or post-reorg. Below is a glimpse into our editorial offering:

SMCP
GLAS, as trustee to European TopSoho’s, or ETS’s, defaulted €250 million convertible bond, has brought a claim of fraudulent transfer against the company, seeking to trace and recover 12 million unpledged shares in French fashion retailer SMCP. The shares were last known to be in a JPMorgan account in Singapore in December, transferred via the British Virgin Islands. The U.K claim is one front in a dispute that has been litigated in France, Luxembourg and Singapore » Continue Reading

Smile Telecoms
Lord Justice Snowden sanctioned Smile Telecoms’ Part 26A Restructuring in early April. Smile’s Part 26A Plan is novel for two main reasons: i) The Plan was the first to use section 901C(4) of the Companies Act, 2006, which allowed Smile to exclude it “out-of-the-money” creditor and member classes who did not have a genuine economic interest in the company from voting on the Plan; and ii) The Plan successfully altered the capital structure and constitution of a foreign company. Reorg hosted lawyers Damien Gomez and Rebecca Jarvis from Linklaters in a two-part podcast discussing the name. » Listen here

Lukoil
Lukoil faces several upcoming coupon payments in April, followed by the maturity of its $500 million senior unsecured notes in June, which are currently priced at about 71. Reorg’s analysis notes that the Russian energy giant has ample cash on the balance sheet to address these maturities – the key problem for investors is whether the company will be able to make the payment because of restrictions imposed by the Russian government in response to Western sanctions following Russia’s invasion of Ukraine. » Continue Reading

Corestate
Should German real estate manager Corestate choose to use proceeds from an asset sale to solely redeem its 2022 bonds while the 2023 bonds remain outstanding, this may be restricted by the asset sale covenant of the 2023 bonds. Reorg looks at the asset sales covenant and its implications under the 2022 and 2023 bonds’ indentures. We also consider whether redeeming the 2022 bonds with proceeds from the cash conversion plan without finding a solution for the 2023 bonds could have implications for its directors under the German insolvency regime. » Continue Reading

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Reorg on the Record: Puerto Rico exited its historic Title III restructuring… (04/13/22)

Written by Seth Brumby, Deputy Managing Editor, Americas Municipals by Reorg || After almost five years, the commonwealth of Puerto Rico exited its historic Title III restructuring in March, coincident with one of the worst municipal bond market performances in recent memory. As almost $16.1 billion in restructured general obligation and contingent value instruments broke for trading on March 15, the municipal market more broadly was on track for a loss of 6.2% in the first quarter of 2022. Continued outflows from the municipal bond market were the primary culprit in the underperformance, driven largely by the Federal Reserve’s campaign to tame inflation by aggressively raising rates. Pockets of performing opportunities still exist, as does a growing pipeline of distress, particularly in senior life plan communities.

Our Americas teams are working tirelessly to bring subscribers the most in-depth data, analysis and reporting on more than 3,000 performing and distressed credits. Below is a glimpse into our offering:

Mallincrodt
The company’s latest unsecured bond prices, at around 50, according to Solve Advisors, imply that its reorganized equity market valuation upon emergence from chapter 11 would be roughly half of the company’s estimated plan valuation. The reorganized company, which expects to emerge from chapter 11 later this month, would have a debt load, when including the aggregate amount of future settlement payments, approximately $100 million higher than the funded debt total at petition. » Continue Reading

U.S. Virgin Islands
U.S. District Judge Robert Molloy has dismissed with prejudice the U.S. Virgin Islands Government Employees’ Retirement System’s, or GERS’, suit against the government of the Virgin Islands. In an order on Friday, April 8, the judge granted the parties’ joint motion to terminate the consent judgment related to the government’s statutorily required payroll deductions to GERS in light of the recent enactment of Act 8540. » Continue Reading

CFIUS
The Senate Banking Committee held a hearing to consider the nomination of Paul Rosen to be assistant secretary for investment security at the U.S. Department of the Treasury, a position that oversees the work of CFIUS. In prepared testimony Rosen said, “As technology advances at warp speed and the intentions and capabilities of our adversaries expand, CFIUS, and the talented career public servants who support it, are a critical gatekeeper in protecting the United States from malign foreign investment while continuing to promote an open investment climate.” » Continue Reading

Puerto Rico, PROMESA
The proposed Territorial Relief Under Sustainable Transitions for Puerto Rico Act of 2022, or the TRUST for Puerto Rico Act, filed last week, seeks to expedite the termination of the PROMESA oversight board by changing the requisites for termination, and it also outlines the transfer of oversight board authority back to the commonwealth for any Title III and Title VI cases pending at the conclusion of the oversight board’s mandate. » Continue Reading

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Reorg on the Record: Inflationary pressures, supply-chain disruptions, labor shortages and commodity costs… (03/23/22)
Mon Mar 28, 2022 12:36 pm Bankruptcy Filings  Distressed Debt

Written by Mark Fischer, Director of Credit Research || In a surprising move last week, movie theater company AMC Entertainment said it is buying a 22% stake in gold mining company Hycroft Mining Holding Corp. and its 71,000-acre Hycroft Mine in northern Nevada. While operationally, the connection is still not clear, the headline at least can be used to highlight the intersection of risks in the credit markets between companies still trying to recover from the effects of Covid-19 and how companies can adapt to inflationary pressures brought on by supply-chain disruptions, labor shortages and commodity costs.

Equity markets last week posted their strongest performance since November 2020. However, as credit analysts we are acutely focused on the cash flow considerations brought on by inflationary pressures. The supply-chain issues in the automotive sector have been well documented, but after a sharp increase in nickel prices, Reorg initiated coverage of American Axle. Natural gas and power prices have hit companies in a number of ways, including squeezing margins at paper companies, forcing Norske Skog to take downtime at one of its mills. Reorg initiated coverage of another paper company, Sylvamo, which in addition to energy concerns also has considerable operations in Russia. Certain companies that hedge power prices and need to meet margin requirements are feeling pressure, such as Talen Energy.

Unfortunately, unlike its movie theater competitor, Cineworld is unable to deploy excess cash to buy a mine and take advantage of higher metal prices. The company hopes its theaters can return to 85% of 2019 admission levels later this year, but whether it can meet upcoming covenant tests is still uncertain.

However, amid all the market volatility, the week might be remembered as the week during which the commonwealth of Puerto Rico, after its nearly four-year stint in Title III bankruptcy, had its joint plan of adjustment go effective on Tuesday, March 15.

A preview of our in-depth coverage of these names, and many more, is available below.


Our Americas teams are working tirelessly to bring subscribers the most in-depth data, analysis and reporting on more than 3,000 performing and distressed credits. Below is a glimpse into our offering:

Buyk
Buyk, an “ultra-high speed” grocery delivery business with 39 locations throughout New York City and Chicago, filed for chapter 11 protection on Thursday, March 17, in the Bankruptcy Court for the Southern District of New York. After funding sources ran dry upon Russia’s invasion of Ukraine and the debtor having “relatively little cash on hand,” Buyk terminated “virtually all” of its employees and entered into a “relatively small” $6.5 million loan with Legalist DIP GP LLC to fund a liquidating chapter 11 case. » Continue Reading

Cineworld
Amid uncertainty over its liquidity, Cineworld may have to pay down roughly $300 million on its revolver to address a June covenant test. The company said that its board is assessing several options regarding additional sources of liquidity, including an increase of the rest of world, or ROW, private placement loan. Reorg concludes that the ROW segment likely has the debt capacity to incur incremental loans and should be able to generate positive free cash flow despite a potential increase in cash interest, assuming last-12-month EBITDA continues to improve following Cineworld’s reopening of theaters in the second quarter of 2021. » Continue Reading

Talen Energy
Concerns about Talen Energy’s hedge positions have intensified as power prices in the PJM Interconnection have held at near their highest levels this year, according to sources. PJM Western Hub Peak Calendar Month futures for April 2022 are currently trading at $55.75/MWh, compared with about $43/MWh at the start of the year and a contract high of $58/MWh seen in early February. » Continue Reading

Puerto Rico
Restructured Puerto Rico bonds consisting of $7.4 billion in Series 2022A general obligation debt and $8.7 billion in general obligation and clawback contingent value investments, or CVIs, broke for trading this week after the Tuesday, March 15, plan effective date. During a press conference on Thursday, March 17, to present his fiscal 2023 budget proposal, Puerto Rico Gov. Pedro Pierluisi said that market reception to the issuance of the restructured GO bonds “has been very good,” noting that some bonds have traded at a premium. » Continue Reading

American Axle
Automotive and mobility supplier American Axle, which had reported declining results driven by supply chain effects on the auto industry from semiconductor shortages and rising raw material prices, said it had expected results to stabilize in 2022, predicting flat EBITDA off an increase in revenue. However, subsequent to the company providing guidance, certain raw material costs have increased dramatically, including nickel. » Continue Reading

Register now:
Join Reorg on Wednesday, March 30, at 12 p.m. ET as we discuss how companies facing mass tort liabilities, including Johnson & Johnson, have used the “Texas two-step” maneuver to box litigation claims in a new asset-lite subsidiary and use the tools available in chapter 11 to reduce their overall liability while continuing to operate normally outside of bankruptcy. Register here.

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From Reorg Asia’s Managing Editors
In this column, managing editors Stephen Aldred and Shasha Dai take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia. For questions or comments, contact Stephen at saldred@reorg.com and Shasha at sdai@reorg.com. Send your people and fund news to asiaeditorial@reorg.com.

High-yield bonds of Chinese real estate developers regained some ground on March 16 and March 17 after a widespread selloff, as vice-premier Liu He, Xi Jinping’s closest economic adviser, announced the government would take measures to boost China’s economy in the first quarter and introduce policies favorable to the market.

The signal was reinforced when state media outlet Xinhua reported talking points from a meeting of the country’s financial stability committee, chaired by Liu, signaling a raft of investor friendly measures and indicating active support for the property sector, including through delay of property tax trials.

Policy support statements swiftly followed from the China Banking and Insurance Regulatory Commission (CBIRC), the People’s Bank of China (PBOC), and the China Securities and Regulatory Commission (CSRC), stressing stability over reform.

High-yield Chinese real estate bonds rallied on Thursday, then stalled on Friday.

Sunac sank as much as 15 points as irrational earlier gains on its bonds in the wake of the policy statements gave way to reality, and the market realized Sunac’s liquidity problems would not magically vanish overnight because of government signals of support.

The company has RMB 24 billion of offshore and onshore public bond maturities in the next 12 months, including two $600 million senior notes maturing in June and August, respectively.

S&P on March 17 downgraded Sunac to ‘B-’ from ‘BB-’, following Fitch’s March 16 downgrade, also to ‘B-’ from ‘BB-’. Both ratings agencies citing refinancing concerns.

The earlier wider market selloff was arguably technical rather than fundamental – even CIFI Holdings and Country Garden Holdings (CoGard) got sucked into the downdraft, as investors sold out to get out, or sold out to raise cash where they could.

Fears that China would support Russia’s invasion of Ukraine, rising commodity prices and rising Covid-19 cases in Mainland China all accentuated existing fears of a chaotic collapse in the country’s property market. In a risk-averse environment, investors read official industrial output numbers for January to February – which far exceeded analyst expectations – with disquiet. Those numbers, combined with the PBOC holding policy rates steady, were read as a signal that regulatory tightening would continue.

CIFI exemplified the irrational volatility. The developer is one of a select few private companies approved to register MTNs with the National Association of Financial Market Institutional Investors, a market usually reserved for state owned enterprises or companies with state backing.

Access to the regulator approved interbank bond markets had created a perception that CIFI had been selected to survive.

But on March 11, the day CIFI was building its book for a RMB 1 billion issue in the interbank market – guided at 3.5% to 4.8% and priced at 4.75% – its bonds went down 7 to 8 points.

By March 16, almost 50% of China property bonds were trading below cash prices of 20, up from 15% just two weeks earlier.

Against that backdrop, it will take more than one intervention to restore long-term confidence and stability.

While last week’s signal of support for the markets was strong, fundamental questions remain, including how statements of support translate into action.

How government support will be offered – and who gets that support – is now a fundamental question in a market where real estate companies confront a new normal where funds are no longer fungible across projects. Consumers, meanwhile, have learned the invaluable lesson that risk exists, and they remain averse to it. Liquidity sources have been shut off.

Liquidity gaps are expected to show more clearly as the annual reporting season for China’s listed property firms ends March 31. Results are expected to come late, and to be ugly.

S&P in its downgrade of Sunac noted the company faces potential debt acceleration by its offshore on-balance-sheet private placement notes holders. Most of the private notes mature within one year. The rating agency revised the China-based property developer’s liquidity to weak from less than adequate, noting that capital markets confidence was weakening rapidly.

Sunac was last week’s reality check. It may be the first to test the reality of China’s market-oriented policies.

–Stephen Aldred, Managing Editor

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