High Yield Bonds


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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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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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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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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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Webinar: Russia: The impact of sanctions on loan obligations with Russian parties

Join Reorg and Partners Fiona Huntriss and Matthew Getz from law firm Pallas LLP as we examine the effect of U.K. and EU sanctions on the obligations owed by borrowers to Russian lenders. We will explore the possible unexpected issues that borrowers might face and flag where non – Russian lenders could also be caught out

Thursday, Mar. 24, 11 a.m. GMT

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Reorg on the Record: Trust issues… (02/23/22)
Thu Feb 24, 2022 9:45 am High Yield Bonds

Written by Stephen Aldred, managing editor, Asia Core Credit | Current volatility in high-yield bond prices of Chinese real estate developers points to a loss of trust in information sources the market previously used to gauge the truth.

It’s the natural result of a steady stream of previously undisclosed private notes and guarantees, revelations of defective capital structures and resignations of auditors. But more fundamental to the problem is companies themselves being economical with the truth.

Zhenro Properties is the latest developer to execute a U-turn on previous public guidance. The strong suspicion is it won’t be the last.

Logically, any company that is perceived as having hidden private debt, or to have guided that it could meet a maturity when it could not, or could not meet a maturity when it could, should face censure of the markets when it tries to raise new notes.

But it’s debatable whether the current loss of trust will persist.

Investors could simply refuse to lend to any developer they consider has deliberately misguided the market on its intentions.

However, they could look on current events as a one-off, driven by regulators in Beijing. In that scenario, investors will see a set of Chinese developers chastened by their experience, reformed, restructured and, most importantly, with unencumbered offshore assets ready to pay 12% for three-year money.

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

Shimao Group
Chinese property developer Shimao Group Holdings Ltd. is in the midst of negotiating with Citic Trust on a repayment plan relating to an RMB 6.2 billion ($978.8 million) outstanding trust loan for which RMB 1.4 billion was due Feb. 17. Reorg has further reviewed documents on the trust loan and various company disclosures – there are indications that use of proceeds from the trust financing (original size of RMB 8.7 billion), while ostensibly meant for the underlying Shenzhen Shenggang/Longgang project’s development and construction capex, may have been redirected to another trust financing company and/ or offshore. » Continue Reading

Garuda
Irfan Setiaputra, CEO of Indonesian flag-carrier PT Garuda Indonesia Tbk, told Reorg that the airline’s restructuring proposal features a 19% recovery rate for lessors and sukuk holders, comprising two-thirds in 10-year 7.25% bonds and one-third in equity. However, restructuring terms differ across creditor groups and debt claims, Setiaputra said. » Continue Reading

Peking University Founder Group
Justice Harris’ recent decision dismissing interlocutory applications lodged by the Mainland administrator Peking University Founder Group Co. Ltd. (PUFG), attempting to stay keepwell proceedings in the Hong Kong Court, provides more guidance as to potential issues keepwell beneficiaries may need to be cognizant of in order to utilize the protection offered by the so-called credit enhancement used by some Chinese companies to secure their offshore borrowings. » Continue Reading

Srinagar Banihal Expressway
Asset reconstruction companies (ARCs) are in talks with lenders to Srinagar Banihal Expressway Ltd. – including Jammu & Kashmir Bank, Punjab National Bank and Union Bank of India – ahead of potential auctions for the company’s nonperforming loans which are expected to kick off as soon as next week, said three sources with knowledge. » Continue Reading

Srei Group
A second forensic audit report conducted from April 1, 2016, to Sept. 30, 2020, by chartered accountant firm Saxena & Saxena, on INR 11.798 billion ($157.3 million) loans disbursed by Srei Infrastructure Finance Ltd. (SIFL) to IL&FS Group, has found the loans worth INR 10.798 billion “were not disbursed in the normal course of business,” and alleged round-tripping of funds, according to two sources with direct knowledge. » Continue Reading

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