High Yield Bonds


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Asia Bi-Weekly: Taiwan, Xi-Putin Tango, China’s High-Yield Bond Rally (Aug. 9 – Aug. 19)

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. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners.

One of the news headlines from the past couple of weeks was that China Bond Insurance Co. Ltd. is providing full guarantee for debt issuances by six real estate developers. Chinese property bonds rose broadly subsequent to the news, with a few beneficiaries of the policy including Country Garden, CIFI and Longfor leading the rally.

Country Garden bonds’ rally would have seemed somewhat counterintuitive as it coincided with Fitch Ratings’ downgrading the developer’s credit ratings to BB+ from BBB-. Losing the last of its investment grades didn’t prevent its bonds from rising on the back of policy support, as some buyside sources said the bonds were already treated as high yield. The next day, Country Garden’s due 2024 notes edged down as investors looked to sell on good news.

In an email statement in response to Reorg inquiries about whether Fitch would have taken into account promised guarantees from China Bond Insurance Co. and how that consideration might have affected its ratings decisions, a spokesperson wrote that Fitch was “unable to comment on unconfirmed reports.”

“But generally speaking, Country Garden’s access to domestic funding was one of the main factors considered for its rating,” the spokesperson wrote in the statement. “As mentioned in the press release, ‘Country Garden’s progress in securing additional onshore capital-market financing, potentially with credit enhancement measures, is key to demonstrating viable capital market access.’”

In addition to capital market access, Fitch also monitors the company’s cash flow pressure from the decline in contracted sales and ongoing construction outflows, the spokesperson concluded.

As we reported, guarantees from China Bond Insurance Co. is the latest iteration of credit enhancement measures aimed at bolstering new debt offerings, with the last round coming in the form of credit default swaps and credit risk mitigation warrants from underwriters.

It’s hard to tell whether the latest policy incentive portends a position of strength (support of the central bank caliber is on the table) or a position of weakness (the government is running out of options). China will do everything in its power to ensure a soft landing of its real estate sector, but the interests of offshore investors are the last on its priority list. A case in point: Evergrande’s restructuring plan, previously anticipated to be announced by the end of July, is now expected to be released “within 2022.”

A larger question is: To what extent will China continue to play by the global capital market’s rules in its seeking of balance between domestic and international priorities? Recent events have made my Feb. 7 essay seem prescient, in which I wrote: “Images of Putin and Xi standing shoulder to shoulder are akin to giving the U.S. the middle finger (or two). Just hours earlier, the U.S. reported that Russia might be circulating allegedly fabricated videos of Ukraine attacks on Russian interests as a pretext for invading Ukraine. Both China and Russia have long imperial histories, feel that they have been wronged by capitalist powers and harbor geopolitical aspirations. Both have territories that they deem integral to their states—for Russia, it’s Ukraine; for China, Taiwan. Keeping Putin and Xi joined at the hip is their shared desire to stand up against Western military prowess and the conviction that they should divide spheres of influence in Eurasia and keep out U.S. sway.” Sounds familiar?

Nancy Pelosi’s visit to Taiwan pushed China more firmly into the arms of Russia—and the U.S., the other direction. What followed was a cascade of events that seemed to be out of a historical movie: more U.S. congressmen visiting Taiwan, China joining military exercises in Russia’s Far East, the U.S. and Taiwan kicking off trade talks.

Commentary about China’s military exercises around the Taiwan straits post-Pelosi visit showcasing the Chinese capability of blockading the island was viable but missed a bigger point. Zoom out on the map, and one will see that China is being isolated. Along its coastlines are U.S. allies, friends and trade partners: South Korea, Japan, Taiwan and most ASEAN countries. Its landlocked frontier provinces of Xinjiang and Tibet are hotbeds of separatist forces. Mongolia, which borders China’s Inner Mongolia, isn’t particularly friendly, either. The only sympathetic actor that matters is Russia.

Putin knows that. Xi knows that Putin knows that. Putin knows that Xi knows that he knows that.

This isn’t a tongue twister. It’s the tempo of the Xi-Putin tango, the pact for the China-Russia honeymoon.

For those who manage money invested in Chinese credit, reading history books is perhaps as important as reviewing bond indentures.

–Shasha Dai, Managing Editor – China

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Reorg Asia Bi-Weekly<br>Crypto Night (June 28 – July 11)

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. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners. For questions or comments, contact Stephen at saldred@reorg.com and Shasha at sdai@reorg.com.

Whether you regard crypto currency as the future of finance or a collective hallucination that allows retail investors to gamble away large chunks of real cash on a Ponzi scheme of epic proportions, you can’t ignore the sector.

By many accounts – including the Bank of England – the market capitalization of crypto assets globally reached the $3 trillion mark some time in late 2021, but the sector has since shed over $2 trillion of that value.

Crypto has always been volatile, even before an extended run-up fueled by a search for returns in a low interest-rate environment and legions of get-rich-quick day traders locked in bedrooms during a global pandemic and fed on a diet of headlines touting fabulous returns.

The causes of the collapse in valuations are well documented and include exposure of vulnerabilities like liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls, according to the Bank of England.

The collapse in valuations inevitably generated a barrage of memes, about fry cooks who became Blockchain Investors/Web 3.0 Experts but are now fry cooks again, or buying the dip when the dip keeps dipping.

But with the $60 billion wipe-out of Terra’s stablecoin terraUSD and Bitcoin and Etherium losing 70% of value, bankruptcy proceedings have emerged along with the meme barrage.

Concern about dissipation of assets has already emerged in filings related to the high-profile case of crypto hedge fund Three Arrows Capital, or TAC, late last week.

Foreign representatives for TAC originally filed a chapter 15 petition in New York on July 1. The company was formed in 2012 under BVI law, states the declaration, and is wholly owned by Singaporean corporate parent Three Arrows Capital Pte. Ltd., declarations accompanying the chapter 15 filing show.

Declarations state that TAC was “reported” to have over $3 billion of assets under management in April and is “heavily invested in cryptocurrency, funded through borrowings.” The declarations also cite “various news outlets,” which state that a “substantial portion” of TAC’s investment portfolio comprised Luna cryptocurrency, which “lost 99% of its value” in mid-May. TAC filed its chapter 15 facing a $675 million ‘equivalent’ demand from crypto platform Voyager Digital and a potential asset freeze.

Voyager itself filed a chapter 11 petition late in the day on July 5, seeking relief to address a “short-term ‘run on the bank’ due to the downturn in the cryptocurrency industry generally and the default of a significant loan made to a third party.”

Under its plan, Voyager said that customers with crypto in their accounts will receive in exchange a combination of proceeds from the TAC recovery, common shares in a newly reorganized company and Voyager tokens. Voyager referenced claims against TAC of “more than” $650 million in a first day relief presentation on July 9.

But foreign representatives for TAC on the same day sought emergency relief in connection with the chapter 15, pointing to a lack of cooperation from TAC’s founders and warning that absent provisional relief “there is an actual and imminent risk that the Debtor’s assets may be transferred or otherwise disposed of by parties other than the court appointed Foreign Representatives to the detriment of the Debtor, its creditors, and all other interested parties.”

The risk is “heightened” because a significant portion of the debtor’s assets are cash and digital assets such as cryptocurrencies and non-fungible tokens “that are readily transferrable,” the motion shows.

Specifically, the July 9 motion discloses that the whereabouts of TAC’s founders, Zhu Su and Kyle Livingstone Davies, are currently unknown and they “have not yet begun to cooperate with the Foreign Representatives in any meaningful manner.”

The foreign representatives argue that the provisional relief sought through the motion – which includes authority to serve discovery on the founders and others who may have information regarding the debtor’s assets or affairs – would “mitigate the risk of transfers or disposals” of the debtor’s assets by parties other than the foreign representatives “and authorize discovery narrowly targeted at obtaining fundamental information” about the debtor’s assets.

The TAC and Voyager cases will be closely watched for guidance on the process of restructuring and discovery within an asset class which, let’s be honest, gained its initial popularity among global crime syndicates because of its ability to completely avoid regulatory oversight.

To put it another way, unwinding complex derivatives contracts in the wake of the Lehman Brothers bankruptcy might ultimately lead you to an international investment bank as counterparty. The suspicion is that chasing down crypto assets might ultimately lead to an encrypted USB stick in North Korea.

–Stephen Aldred, Managing Editor – Asia

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Asia Bi-Weekly: A Year of Two Halves (May 31 – June 14)

This has been written many times, but it bears repeating at the outset: What we are witnessing in China’s real estate and tech sectors is ultimately politically motivated, and unprecedented. Ultimate outcomes cannot be predicted with precision.

In December I wrote that if 2021 taught me anything, it was that I shouldn’t try to predict 2022. The rough idea of this op-ed was to try to establish if anything had changed, and whether on that basis I could ignore what I had learned in 2021 and try to make predictions. My working hypothesis was that nothing has changed.

What is clear though is that some things have changed, but the focus on China’s “Dynamic Zero Covid” strategy and its widespread lockdowns has largely overshadowed a loosening of regulatory policy towards the country’s real estate sector. But while that regulatory loosening is positive for the sector, the impact of mass lockdowns on China’s economy is very clear, and clearly negative for the sector.

It’s hard not to focus on the economy. I’m not sure anyone had on their China real estate bingo card at the start of 2022 that the Omicron variant would lead to months-long mass lockdowns of multiple Chinese cities, a slowing of the economy to early 2020 levels, unemployment hitting 6.1%, and Li Keqiang instructing 100,000 officials via the Internet in May to stabilize the economy “by any means necessary,” as the nation’s Zero Covid policy would remain in effect. Li effectively signaled that China’s targeted GDP growth rate of around 5.5% for 2022 might not be obtained.

Authorities have imposed full or partial lockdowns on dozens of Chinese cities, including the financial capital Shanghai, where a further full lockdown was put in place over the past weekend.

Set against that, China’s policy response to the slowing economy has signaled an intention to support the real estate sector, effectively recognizing its economic importance.

A rate cut in May from the People’s Bank of China to the five-year Loan Prime Rate for new home buyers, from 4.6% to 4.45%, followed an April collapse in mortgage lending, with new mortgages down RMB 60.5 billion ($8.95 billion) for the month, and came after Li Keqiang’s call for stabilization. The PBOC’s announcement noted, though, that the minimum mortgage rate for second home buyers was unchanged, with the country’s central bank reiterating that “housing is for living in, not speculation.”

Earlier in the year, various regional cities lowered down payment ratios for first-time buyers, along with providing support through subsidies.

More significantly, five real estate developers – Longfor Group, Country Garden Holdings, CIFI Holdings, Seazen Group and privately owned Midea Real Estate Holding – are now widely viewed by the market as “golden” or “chosen,” after a May 27 virtual roadshow hosted by the Shanghai Stock Exchange revealed they had been uniquely selected to issue new onshore bonds supported by credit protection instruments from underwriters, including credit default swaps and credit risk mitigation warrants.

Subsequent to that roadshow, Seazen also priced $100 million 7.95% 364-day senior notes due June 2023 at par, in a rare instance of a Chinese real estate developer accessing offshore high-yield markets this year. The notes, issued through New Metro Global, carry a parental guarantee from Seazen Group, and Reorg reported from sources that they were issued with support from the company chairman’s associates.
However, as we also reported, the issue of the USD notes – combined with a May 30 issue of RMB 1 billion ($150.1 million) 6.5% 2+1 year credit-enhanced MTNs due May 30, 2025 – can only be taken as an indication of strength, regardless of credit enhancements or support, as Seazen issued both a rare high-yield USD note and achieved onshore quota to issue.

Again, you can set this off.

While the PBOC’s May rate cut signaled that a freefall in China’s economy would not be tolerated, and acknowledged the critical role that real estate plays in the economy, developers still struggle with reduced contracted sales and a lack of access to funding. It will likely be months before easing measures have a material impact on the market.

And if the fate of the five “golden” real estate developers seems assured, sources see high beta names like Powerlong Real Estate Holdings and Agile Group Holdings as likely candidates to hit a refinancing wall within the next month or two.

One-off 364-day offshore issuances supported by friends and family, backed by an SBLC and/ or a corporate guarantee, do get the job done and certainly bode well for those that can. But they do not constitute a viable financial market, and sources of capital available to most developers are limited in the extreme.

China’s economic slowdown and regulatory drives mean only $2.1 billion has been raised through IPOs and secondary listings in Hong Kong, down from $20.7 billion over the same period the previous year, the slowest start to a year since 2013, Reuters reported in May. Capital markets and bank loans are unavailable to most developers. The investor base that provides capital offshore and onshore is significantly reduced and substantially altered, and many funds still see China as uninvestable for the moment.

S&P noted in a May report that offshore defaults for Chinese bonds in 2021 broke the prior 2020 record by 4.2 times in terms of amount, with a 3.3% default rate driven by unprecedented failures of property firms. The same report notes that 2022 will see even more bonds due at $103 billion, larger than both 2020 ($87 billion) and 2021 ($96 billion), and that the high default rate may continue.

One critical area to watch in the real estate sector in coming months is contracted sales. While sources argue these have bottomed out, the question now is whether they will rebound fast enough to adequately support the financial needs of high beta names.

Again, it comes back to the economy and whether we will see greater government stimulus in a bid to boost home buyer confidence in the second half. Similarly, questions remain over whether onshore and offshore capital markets will fully open or remain only partially open to select issuers.

It’s easy to argue that little visible progress has been made in offshore restructuring of Chinese real estate bonds in the first half of 2022, but regulatory loosening has been overshadowed by Covid lockdowns and the country’s economic slowdown.

The extent to which the economic slowdown could affect Chinese real estate developers and restructurings cannot be predicted.

Under such circumstances, predictions are best kept broad and vague.

So, to exploit a couple of sports commentator platitudes in order to make a prediction, the game is finely balanced and could go either way.

2022 may yet turn out to be a year of two halves.

–Stephen Aldred, Managing Editor – Asia

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. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners. To request trial access to Reorg for you and your team, click here.

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Intralot’s Dropdown Restructuring Games in Butterworths Journal of International Banking and Financial Law

Authored by Reorg’s expert team in Europe Jamie McDougall, Shan Qureshi, Ben Kovacka and Shweta Rao, this article first appeared in the Journal of International Banking and Financial Law in May 2022.

Intralot is the first European group to restructure its debt using the “J. Crew”-inspired drop-down procedure, transferring its unencumbered US business away from unsecured noteholders due to be repaid in 2024, to be used to support secured debt to refinance unsecured notes maturing earlier in 2021. The trustee for the notes due in 2024 is suing and there is a separate claim for fraudulent transfer.

In this article, the authors explore:

– How unsecured pari passu and pro rata noteholders came to prime others by becoming senior secured noteholders under the drop-down procedure;
– How the drop down was achieved by a US subsidiary issuing unsecured notes due 2025, swapping them for the unsecured notes due 2021 issued by a holding company, being designated an “Unrestricted Subsidiary”, with its shares and assets then being pledged as security for the notes due 2025;
– How Intralot exploited imprecise but standard drafting of the covenants to ensure the value of the US business was low enough to fit within investment basket capacity required to be used for the drop-down;
– Why only 75% of the primed noteholders may have decided to stay being supported by the non-US business rather than exchange for equity in the US business;
– How the different bargaining power among creditor groups impacted the restructuring and resulted in unequal outcomes for creditors in the same class;
– How a minority of 2021 noteholders withheld consent to force repayment of 59% of their notes at par prior to the refinancing-by-drop-down; and
– “J. Crew” blockers as anti-drop-down provisions and their frequency in 2021.

For a copy of the full article contact customersuccess@reorg.com and you can read more analysis from Reorg’s EMEA Covenants team here.

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Global Credit Highlights – (Friday, June 3, 2022)

In the Americas, stocks rose as market participants straggled back from the long holiday weekend and distressed investors focused increasingly on companies in the auto sector, which is bearing the brunt of component shortages and wage/commodity inflation. The high-yield market had a limited reopening, with eight deals pricing across a variety of sectors including midstream and building supplies. Talen Energy’s chapter 11 proceedings continued, with Talen Montana filing an adversary proceeding to avoid the transfer of certain asset sale proceeds to former parent PPL Corp. and Talen Energy obtaining the support of 71% of unsecured noteholders for its RSA. Chemical manufacturer TPC Group filed for chapter 11, and Service King entered into an agreement that will provide as much as $200 million in new capital.

As in the Americas, companies in Europe are continuing to feel the strain from supply-chain disruptions and inflationary costs. French chilled dough and pancake maker Cerelia is seeking an amendment to be able to raise an €80 million loan amid rocketing input costs. As an added pressure, the primary markets are all but shut, leaving companies with upcoming maturities between a rock and a hard place and banks on the hook for underwritten deals.

As Shanghai is reopening after a months-long Covid-19 lockdown, the Chinese government is eyeing economic recovery and picking winners and losers in the property sector by hosting a virtual road show for five privately held developers to pitch new bond offerings. In Indonesia, a puzzling bondholder identification announcement for palm oil producer Sawit Sumbermas Sarana has market participants chattering, and an unusual judgment shows unpaid creditors can access recourse despite prior appointment of insolvency officer-holders in a company’s place of incorporation if the company can prove sufficient connection with Hong Kong.

Request trial access to Reorg here.

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Asia Bi-Weekly: Flight From Lockdown (May 17-31)
Tue May 31, 2022 5:32 pm Bankruptcy Filings  Distressed Debt  High Yield Bonds

Over the weekend, one of our staff members scored a victorious escape from Shanghai, where over the last 2.5 months, the only times she had been out of her apartment were for mandatory Covid tests or picking up grocery deliveries. The video clips she shot on her phone – while riding on the back of a delivery guy’s motorcycle en route to the train station – showed deserted streets, clean but empty. After a four-hour train ride, she arrived at a city in central China where she’s from originally. Upon arrival, she was shepherded into a student dormitory-turned hotel for a seven-day quarantine, with food and lodging paid for by the local government.

Compared with tens of thousands who are trying to leave Shanghai, she is among the lucky ones. A widely circulated documentary, produced by the state-owned Shanghai Daily newspaper, shows people who walked for hours or rode bicycles to train stations as taxis or car rides are either unavailable or exorbitantly expensive. Some slept overnight in underground parking lots hoping to be admitted into the station. Others slept on lawns outside the Hongqiao station, the main railway hub that is seeing 6,000 people departing every day. Flights out of Shanghai have also been canceled.

Those voluntary departures coincided with Shanghai starting to reopen and lifting some Covid control measures, allowing certain business enterprises to resume in-person operations and people in low-risk neighborhoods to leave homes. But the path of reopening is fraught with uncertainty, both from the implementation of the recovery policies and from the ever-changing infection rates. Some of the jobs lost, such as construction gigs for migrant workers, may never come back as development of residential buildings gets delayed indefinitely. Resuming operations can be a money-losing proposition for many small and medium-sized businesses when mandatory Covid control costs are factored in such as providing employees with three meals, afternoon and overtime snacks, PCR and antigen tests, N95 masks, toiletries, and even cot beds or sleeping bags.

Official statistics show the impact of the monthslong lockdown on Shanghai’s economy: In April, industrial production was down 61.5% year over year, exports from industrial enterprises down 57.3%, infrastructure investment down 21.4%, industrial investment down 17.7%, and real estate development investment down 10%.

The impact reaches far beyond Shanghai. Lockdown at one of the busiest ports in China has forced shipping companies to reroute, exacerbating strains on global logistics and dealing a heavy blow to China’s own exports. Disruptions to industrial manufacturing may cause demises of small businesses that are vital to the supply chain. A poll of small and medium-sized companies in Shanghai conducted this month showed that of 941 respondents, 61% said they could not survive beyond six months.

National economic statistics paint a similar picture to that of Shanghai. According to minutes of a May 25 teleconference held by the central government officials with those at the provincial and local levels, in April, industrial production value-add was down 2.9% year over year, compared with a 53% year-over-year increase in March. Manufacturers’ purchasing managers index and non-manufacturing commercial activity index were down 47.4% and 41.9%, respectively. Service sectors were down 6.1%, and retail down 11.1%. In April, the unemployment rate reached 6.1% for the national average, and 6.7% for the 31 largest cities.

All of this stands in stark contrast to what I remember from living in Shanghai in the mid-1990s. Back then, the modern metropolis was full of youthful pride and ambition to eventually rival Hong Kong to be the next financial hub in Asia. No sooner was the newest elevated inner city highway erected than it was congested with cars bumper to bumper during rush hours. On public holidays, hundreds of thousands thronged the storied Bund, where in dusk buildings and the Oriental Pearl television tower across the river were illuminated to light up Shanghai’s skyline.

It will be some time for the Bund to be crowded again.

The lockdown has had an immediate and tangible effect on Chinese real estate companies, which constitute some of the most active credits in our coverage universe. Property developers including Shimao, Logan, Jingrui, Agile and a Powerlong subsidiary have delayed release of 2021 audited financial statements citing pandemic control measures in the mainland since March.

Impediments to audit was just one direct impact on developers. April 2022 also saw the largest year-over-year declines since January 2021 in the median numbers of contracted sales, contracted sales areas and implied average selling price from 34 developers that had reported April operating stats, according to Reorg’s May 19 analysis. Developers don’t typically disclose reasons for changes in monthly contracted sales, but one can surmise that foot traffic to showrooms has diminished.

On June 9, we will host a webinar discussing Shanghai’s reopening and implications for the real estate sector. Register to attend the webinar HERE.

Perhaps what’s more disconcerting for the property sector and China’s economy at large is the brain drain. The labor exodus from Shanghai is reminiscent of the elite departures from Hong Kong over the past year, although the more recent emigration is still at its early days with no clear patterns yet. Some predict that the people departed will come back or be replaced. Our staff member plans to return to Shanghai when it reopens.

Things tend to come full circle.

-Shasha Dai, Managing Editor – China

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. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners. To request trial access to Reorg for you and your team, click here.

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Thu May 19, 2022 2:24 pm Financial Restructuring  High Yield Bonds

Over nine years, the Reorg team has analysed thousands of performing and distressed credits. Our expert team of financial analysts, legal analysts and journalists produce granular capital structures, primary analysis, tear sheets, waterfall models and more.

With long and deep connections to credible sources, we publish up-to-the minute news to help you stay ahead. In this case study, we’re highlighting one example showcasing the ongoing credit insights that Reorg’s team provide day in, day out to enhance efficiency and improve decision making for more than 25,000  investors, advisors and lawyers.

Corestate: The German real estate manager’s bonds have declined more than 30 points in April and May 2022 as Reorg’s editorial trifecta (legal and financial analysts along with investigative reporters) came together to publish various stories outlining the issues faced by the group. 

The group faces €500 million of maturities in 2022-2023 with a possibility of a restructuring looking more likely than ever. 

 


September, 2020 

Reorg initiated coverage of Corestate by detailing the company’s  €300 million bond which had declined sharply from 80 on Aug. 10 to the low 60s by Aug. 20 after the group reported its second-quarter results. Between September 2020 and March 2022, Reorg continued its regular coverage of  the latest developments, analysis and earnings.


March 30, 2022

Reorg published a breaking story as Corestate postponed the publication of its 2021 annual report due to renewed impairment test of goodwill related to its mezzanine lending business HFS.


April 1, 2022

Reorg published a scoop regarding Corestate looking to appoint advisors. The story said Corestate would consider alternatives such as an amend and extend among others if the cash conversion plan is delayed, or if it is unable to refinance the 2023 bonds in a timely manner given a challenging primary market in the light of Russia’s invasion of Ukraine.

The group’s 2023 bonds declined more than 10 points from 80 to about 70.


April 4, 2022

Reorg published an analysis highlighting €500 million maturities in 2022-2023 and potential delays in the group’s cash conversion plan. Reorg highlighted that for Corestate to tackle its maturities, a lot has to go right for the group which seemed challenging. The analysis also highlighted Pimco held about 50% of the 2023 bonds and 25% of the 2022 bonds. 

After the publication of the analysis the group’s 2023 bonds fell more than 10 points to about 57.


April 11, 2022

Reorg published a covenant analysis outlining how the asset sale covenant and director liabilities under German Law may restrict the group redeeming its 2022 bond prior to finding a solution for the 2023 bond.


April 20-21, 2022

Reorg published Corestate 2021 annual report highlighting a €175 million goodwill impairment at HFS which more than halved 2021 EBITDA to €42.1 million. In a follow-up story, Reorg also highlighted additional risk provisions related to bridge loans due to at-risk collectability and a delay in completion of the Giessen disposal. 


April 26, 2022

Reorg published a ratings alert as S&P downgraded the group to CCC on cash accumulation delay and refinancing risk. 


May 5, 2022

Reorg published a balance sheet liquidation valuation of Corestate highlighting unsecured debt recovery at 52%, though most assets on balance are illiquid and realizing value from them could take a long time. The analysis highlighted that risk provisions on bridge loans increase the likelihood of a restructuring. The analysis discussed the concerns around the bridge loans and Stratos funds in depth and analyzed each of the key balance sheet line items. 


May 6-10, 2022

Reorg published a scoop highlighting Corestate bondholders led by Pimco have mandated Houlihan Lokey as financial advisor and Milbank as legal advisor for a potential restructuring as a refinancing of the German real estate manager’s looming maturities seems increasingly unlikely.


May 9-10, 2022

Reorg published that Corestate has mandated a financial advisor and will evaluate alternative options for its 2022, 2023 bonds. The group also withdrew its 2022 guidance and delayed its cash conversion plan due to difficult market conditions.


Reorg concludes that owing to repeated delays in the group’s cash conversion plan and in the absence of any support from shareholders Corestate would have to restructure its upcoming €500 million bond maturities. However, despite the 2023 bonds being in high 40s, the group continues to stress it is in talks with banks regarding a refinancing although it recently admitted it would evaluate alternative options and has mandated a financial advisor.


Noor Sehur
Senior Analyst
neshur@reorg.com

 

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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) — New York program
Mon May 2, 2022 8:46 pm High Yield Bonds  Leveraged Finance

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

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. The expert panelists will discuss the UK’s evolving scheme of arrangement, the American municipal debt market and merger arbitrage strategies in our wide ranging array of panels.

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?

The FT’s Global Alternative Credit Summit will tackle these and other major questions. Held in partnership with Reorg, and bringing together leading investors, borrowers, lenders, regulators and advisers from the US, EMEA and Asia, our agenda will look at how private credit is evolving and shaking up debt markets, assessing the key drivers behind its current rate of growth, and where the industry will go from here.

Welcome Remarks from FT & Reorg

  • Sarah Gefter, Managing Director, Reorg
  • Mark Vandevelde, US Private Capital Correspondent, Financial Times

Market observation from Reorg

  • Kent Collier, Founder and CEO, Reorg

Fireside Chat – are alternative credit funds now too big to fail?

  • Kipp deVeer, Partner, Head of the Ares Credit Group, Ares
  • Mark Vandevelde, US Private Capital Correspondent, Financial Times

Panel: Scaling up- Is private credit freezing out banks in leveraged buyouts?

The volume of money being dedicated to private credit is growing year on year, allowing them to put their cash to work to finance bigger deals. A case in point is Thoma Bravo’s use of private credit to part fund the 2021 US$6.6bn acquisition of Stamps.com. Do deals like this suggest that the scale of some funds is turning the tide away from traditional bank financing as the go-to for takeovers? What are the advantages and risks of going the private route vs using a syndicate of bank lenders? What are the risk implications for the market when borrowers and lenders may come from the same fund – private equity on one side, private credit on the other?

  • Colbert Cannon, Managing Director, HPS Investment Partners
  • Ramya Tiller, Partner, Debevoise & Plimpton LLP
  • Alexander Popov, Managing Director – Partner – Credit Opportunities, Carlyle
  • Jean-Marc Chapus, Managing Partner, Crescent Capital Group, LP
  • Joe Rennison, Deputy US Markets Editor, Financial Times

Panel: The future of alternative credit – what new strategies, sectors and markets are emerging to meet investor demand?

Many now view alternative credit as a mainstream asset class which looks set to maintain its growth path, in the short to medium term. But capital allocations will be driven by private credit manager’s ability to offer differentiated growth and income opportunities, especially in a low yield environment, as well as potential downside protection in times of market turbulence. What does the future hold for alternative credit as the market cycle shifts? What strategies will fund managers look to to distinguish themselves from their competitors? Which regions and sectors show the greatest potential for expansion? How important will ESG considerations be in shaping the market? What are the biggest regulatory challenges likely to affect private credit managers in the coming years?

  • Morgan Dean, Managing Director, Sound Point Capital
  • David Latour, Managing Director, Strategy & Investment, Capital Solutions CDPQ
  • Joel Holsinger, Partner, Co-Head of Alternative Credit, Ares
  • Mr. Greg Racz, President, MGG Investment Group
  • James Holloway, Team Lead, Reorg

Closing remarks followed by VIP Networking Lunch

  • Mark Vandevelde, US Private Capital Correspondent, Financial Times

Please take a look at the agenda here: https://alternativecredit.live.ft.com/agenda/session/693861

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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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