U.S. Avoids Default but Treasury Supply Could Cause Disruption; Rumors of China Stimulus Have Short-Lived Impact on HY Bonds With Investors Focused on Basic Demand Problems; In Europe, Inflation Eases; Brazil-Based Samarco Lands RSA

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

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The U.S. Treasury avoided a default on its obligations, including debt service on Treasury bonds, when President Joe Biden signed into law on Saturday, June 3, the bipartisan Fiscal Responsibility Act, or FRA. The FRA suspends the debt limit through Jan. 1, 2025, while establishing discretionary spending limits. Despite the resolution to the high-stakes fiscal negotiations, the Treasury General Account had reached a low of $22 billion on June 1 and will need to ramp up issuance this summer to restore the $500 billion to $600 billion balance that it typically holds.

Treasury supply over the coming months could create volatility in fixed income markets. The last time Treasury issued that amount of debt was during the early days of the Covid-19 pandemic. From Jan. 1 to June 30, 2020, Treasury issued over $2 trillion of debt. At that time, the effective federal funds rate, or EFFR, was less than 25 bps and the Federal Reserve was a large buyer of Treasury bonds. Market conditions are much different now. The Fed is no longer buying Treasury bonds and EFFR ranges from 5% to 5.25%.

In Europe, inflation eased to 6.1% in May across the eurozone, down from 9.2% in December 2022. The slowing price growth is driven primarily by lower energy costs, offset by food prices still growing at above 12% year over year, which has reignited the “greedflation” debate on the continent and in the United Kingdom. One of Britain’s largest food retailers, Asda, agreed last week to buy a portfolio of food and fuel forecourts from sister company EG Group at a £2.27 billion enterprise value. The proceeds will allow closely followed high-yield issuer EG to reduce the size of its capital structure, which was overburdened with more than $10 billion of low-interest debt in the boom years before the pandemic. On Thursday, June 8, EG floated a proposal to amend and extend about $6 billion-equivalent of term loans to 2028. Lender calls are taking place next week.

In Asia, rumors are widespread that China is considering a new support package to boost its economy and support real estate developers. The positive impact on high-yield bond prices was short-lived. The measures are unlikely to solve basic demand problems in the real estate sector, which are increasingly the focus of investors. China’s economic recovery from its “Zero Covid” program has faltered, and housing market sales are falling back again. The fallback is despite a raft of previous stimulus measures, which initially led to a dramatic tightening in bond spreads. Those gains have also fallen away. The current weak high-yield bond market remains susceptible to volatility sparked by rumor.

Dalian Wanda Commercial Management illustrated that this week when its offshore USD notes dropped approximately eight points after an alert from data provider Qichacha showed a court had frozen about 2 billion Chinese yuan ($280 million) of its shares, with no details on why the shares were frozen. Wanda, in response to rumors, noted that the commercial management unit’s estimated value as of 2018 was CNY 243 billion, and the frozen shares were related to a CNY 1 billion commercial dispute.
 
CSC ServiceWorks

The provider of outsourced laundry equipment services designated some European entities as unrestricted subsidiaries last month, which could allow it to facilitate an asset sale without paying down existing debt or borrow money against those now-unrestricted assets. Reorg’s CSC coverage is HERE.

Samarco

Samarco and shareholders Vale and BHP Billiton have entered into a restructuring support agreement, or RSA, with certain members of the ad hoc creditor group holding a majority of the aggregate claims of Samarco’s 5.375% notes due 2024, 5.75% notes due 2023 and 4.125% notes due 2022. The company’s prepetition pre-export finance facilities, excluding the pre-export finance insured by Nippon Export and Investment Insurance, are also onboard with the RSA. The miner may potentially sidestep the need for a general creditors meeting to ratify its RJ plan. Reorg’s Samarco coverage is HERE.

Envision Healthcare

An ad hoc group of fourth-out lenders to Envision Healthcare has organized with Herrick Feinstein as legal advisor to represent their interest in the physician group’s chapter 11 cases. About $153 million of the fourth-out loans remain outstanding following two liability management transactions last year. The lenders did not grant releases related to the transactions, leaving the door open for potential litigation of a recapitalization in April 2022 that unrestricted a vast majority of AmSurg. Reorg’s
Envision coverage is HERE.

City Brewing

City Brewing lenders have signed a cooperation agreement to form a united front. Lenders are represented by Gibson Dunn and Perella Weinberg Partners. The company recently disclosed first-quarter 2023 results to lenders, reporting that adjusted EBITDA increased 13.5% year over year to $35.2 million, while revenue rose 2% to $110.5 million. Reorg’s City Brewing coverage is HERE.

Aventiv Technologies

Securus Technologies’ offering of $400 million 4.5-year first lien notes, part of a larger $1.1 billion package to refinance its existing capital structure, remains alive as discussions between sponsor Platinum Equity and certain large account holders continue. The discussions are focused on a gap ranging from $100 million to $200 million between what Platinum is seeking to borrow and what investors are willing to lend. Platinum has argued that the transaction will lower cash interest and first lien leverage, as the refinancing would eliminate expensive second lien debt. The private equity firm is, with this argument, seeking to tighten OID, and the final OID could end up being in the low 90s. Reorg’s Aventiv coverage is HERE.

Riverbed Technology

Vector Capital will contribute $80 million of common equity as part of its acquisition of Riverbed Technology, while existing stakeholders or prospective lenders will fund a new $30 million super senior revolver. Existing lenders will receive $375 million of take-back paper. The new RCF pays SOFR+600 bps, and the take-back paper pays SOFR+250 bps in cash and the rest in PIK, the sources said. The rate on the take-back paper also steps up under certain conditions. Reorg’s Riverbed coverage is HERE.

Juice Plus+

Juice Plus+ is close to finalizing an agreement with lenders to address its near-term debt maturities. The company negotiated a covenant waiver while discussing the terms of an amend-and-extend transaction with an ad hoc group of its lenders. An initial amend-and-extend proposal from the company was not attractive enough to secure support from lenders. Reorg’s Juice Plus+ coverage is HERE.

Tradesmen

Tradesmen International, the Macedonia, Ohio-based provider of staffing services to the construction industry, is working with Latham & Watkins as legal counsel in light of the company’s struggles to refinance its $378 million term loan due in February 2024. The company’s lenders have organized in two separate groups and are being advised by restructuring advisors. Reorg’s Tradesmen coverage is HERE.

TPx Communications

TPx Communications on May 22 launched a debt exchange that would uptier 50% of participating lender holdings into a new super senior first lien tranche, with the remaining half to be purchased by company sponsor Siris Capital at 40 cents on the dollar. Lenders who sign on to the deal would also receive 5% of their original superpriority claim in a third lien tranche that would be senior to nonconsenting term loan lenders. TPx had the support of a majority of existing lenders at the time of the launch. Reorg’s TPx coverage is HERE.
 
U.S. Treasury

Volatility in the fixed income markets could increase over the next few months. The Treasury General Account, or TGA, dropped below $40 billion the last week of May ahead of a compromise to raise the $31.4 trillion debt limit. While the Fiscal Responsibility Act of 2023 allows the Treasury to issue debt through Jan 1, 2025, it must refill its coffers in the near term to pay the federal government’s bills, including debt service on its Treasury bonds.

The Treasury targets a balance of $500 billion to $600 billion in the TGA, which means the market is expecting over $500 billion of supply over the coming months. The last time the Treasury ramped up issuance, the Federal Reserve was a large buyer of the debt at interest rates below 1%. This time around, the Fed is in a cycle of quantitative tightening and the effective fed funds rate ranges from 5% to 5.25%. Reorg’s coverage of the Treasury is HERE.

Illinois

The Illinois Supreme Court agreed to hear challenges to a state law that consolidates 650 municipal pensions into an $8.7 billion police fund and a $6.3 billion firefighters fund. The Supreme Court agreed to hear the police union’s appeal of the state law (PA-101-610) that the Appellate Court of Illinois for the Second District had upheld in a ruling that found that the law did not violate the pension protection nor Takings Clause of the Illinois Constitution. The Supreme Court will hear oral arguments this fall. The union’s appeal coincided with the Illinois General Assembly’s approval of a $50.6 billion fiscal year 2024 state budget. Reorg’s coverage of Illinois is HERE.

University of Pittsburgh Medical Center

University of Pittsburgh Medical Center reported a $252.7 million increase in wages and benefits to $2.3 billion during the first quarter of 2023 ended March 31. The Pennsylvania-based healthcare system reported earnings a week after SEIU Healthcare Pennsylvania and the Strategic Organizing Center, a union coalition, sued UPMC under the Sherman Act, alleging that UPMC suppressed wages and benefits for its employees. The lawsuit notes that UPMC employs 92,000 people and is the largest employer in Pennsylvania.

The complaint alleges that UPMC was able to achieve this growth through “anticompetitive conduct in both hospital output markets and in labor input markets.” Moreover, UPMC has “artificially suppressed wages for UPMC’s workers” and “further suppressed [their] effective compensation by increasing their workload over this same period.” Reorg’s coverage of UPMC is HERE.

Colorado Metro Districts

Sixteen Colorado Metropolitan Districts reported draws on reserved funds to make their June 1 debt service payments. CMDs are “quasi-governmental” entities with taxing authority. These districts are able to tax, make assessments and issue tax-exempt bonds, the proceeds of which are used to develop raw land for residential and commercial use. Revenue from the assessments goes toward debt service. Roughly nine of the CMDs had already drawn on reserves for debt service with three of them having drawn three times. But seven are new to the stressed category, showing that stress in real estate is local and appears in geographic pockets - whether office space in major metropolitan areas or dirt bonds in Colorado. Reorg’s coverage of CMDs is HERE.

Rialto Bioenergy Facility

Rialto Bioenergy Facility filed for chapter 11 protection in the Bankruptcy Court for the Southern District of California. The resource recovery facility, which is based in Carlsbad, Calif., has $100 million to $500 million of assets and liabilities, including $117 million in Series 2019 solid waste disposal revenue bonds issued by the California Pollution Control Financing Authority. In its most recent earnings for the period ended March 31, the company reported three days’ cash on hand and a negative debt service coverage ratio of 0.11x.

Rialto’s parent Anaergia Inc. stated that Rialto intends to obtain DIP financing to “operate its business and meet its financial obligations, including the timely payment of charges for labor, supplies and other obligations” during the case while it ramps up operations. According to Anaergia, the bankruptcy was caused by “a lack of feedstock available to the facility,” leading to insufficient revenue to cover costs and debt service. Reorg’s coverage of Rialto Bioenergy Facility is HERE.

Puerto Rico

Litigation proceedings over the unsecured net revenue claim estimation proceeding for creditors of the Puerto Rico Electric Power Authority began the first week of June with expert witness testimony from stakeholder experts. At issue is the recovery for bondholders and rates that PREPA customers would have to pay to satisfy the terms of PREPA’s plan of debt adjustment. The resident commissioner for Puerto Rico, Jenniffer Gonzalez, and a group of Puerto Rico businesses and community organizations and leaders announced their opposition to PREPA’s restructuring plan. They argue that PREPA’s plan of debt adjustment will drive up electric rates for island residents and businesses.

During an omnibus proceeding, however, PREPA’s legal counsel announced that a new fiscal plan for PREPA will incorporate a lower electricity consumption. The island’s oversight board will certify PREPA’s new plan on Friday, June 16, with a status report due by June 21 on how the fiscal plan will affect confirmation proceedings for PREPA’s plan of debt adjustment. Reorg’s coverage of PREPA is HERE.
 
Asda, EG Group

British supermarket chain Asda said its shareholders, TDR Capital and Mohsin and Zuber Issa, are providing about £450 million of additional equity to fund the acquisition of most of EG Group’s U.K. and Ireland business. The deal will be funded by £450 million of new equity and £770 million of term loan debt as well as £1.1 billion from property-related transactions, Asda said. EG is using the proceeds to reduce net leverage to below 5x and has launched an offer to extend its remaining term loan maturities to 2028. Reorg’s coverage of EG Group is HERE.

Casino

This week French retailer Casino said it has received consent from the required majority of its 2026 and 2027 noteholders to effect waivers to event of defaults and make amendments to certain provisions governing the notes for the duration of the group’s conciliation proceedings. A day before, the Credit Derivatives Determinations Committee determined that a bankruptcy credit event did not occur when Casino opened its conciliation procedure last month. Yesterday, Thursday, June 8, Casino said that merger talks with Teract had been terminated, and shortly afterward three investors announced they are working on a “lasting corporate industrial and financial solution” for Casino. Reorg’s coverage of Casino is HERE.

Kloeckner Pentaplast

German plastics packaging group Kloeckner Pentaplast’s 6.5% 2026 notes have risen more than 10 points to the low 70s, according to Solve Advisors. Last week the company announced that shareholder SVP injected €150 million of fresh equity into the company to accelerate its value creation plan and fund deleveraging. Reorg’s coverage of Kloeckner Pentaplast is HERE.

Naftogaz

Ukrainian state-owned oil and gas company Naftogaz has finally struck an agreement with two large investor groups holding large portions of its defaulted 2022 and 2026 bonds. Naftogaz is offering to pay holders of its $335 million 7.375% 2022 bonds accrued and unpaid interest on the notes and 5% of the principal in exchange for delaying the repayment of half of the remaining principal to July 19, 2024, and the other half to July 19, 2025. The interest rate on the extended debt would rise to 7.65%. The 2026s will be extended so $250 million of principal is due for payment in 2027 and the other $250 million in 2028. Reorg’s coverage of Naftogaz is HERE.

Solocal

French media company Solocal announced plans this week to initiate discussions with its financial creditors and solicit consent to defer the payment of the coupons of its bonds and mini bonds due in June and September 2023. To facilitate discussions, the company will request the opening of mandat ad hoc proceedings for its benefit, and invited its financial creditors to organize themselves to participate in these discussions with the company and the mandataire ad hoc to be appointed by the president of the Commercial Court of Nanterre. Reorg’s coverage of Solocal is HERE.

Idverde

Investors and advisors are monitoring Luxembourg-based B2B landscaping company Idverde over liquidity concerns and weak operating performance by its U.K. business in 2022. The group’s €335 million term loan B due 2028 hit lows of 57 in December but has steadily recovered by around 25 points to 82/85 since, supported by sponsor Core Equity-led turnaround efforts related to the U.K. business and improved cost pass-throughs, sources said. Reorg’s coverage of Idverde is HERE.

Sector Alarm

Norwegian home security system group Sector Alarm’s earnings continued to drop in the first quarter as its churn rate jumped and customer acquisition costs increased, sources said. Revenue rose 13.9% to 835 million Norwegian kroner ($75.7 million) in the first quarter from NOK 733 million a year earlier. The growth was partly driven by the weakening of the Norwegian krone versus the euro; however, revenue was still up 9% in constant currency. Reorg’s coverage of Sector Alarm is HERE.

Milieu Service Nederland BV

Direct lenders are considering financing Dutch sustainable waste solutions provider Milieu Service Nederland BV following a lenders’ education for the company. which launched last month, sources told Reorg. Quore Capital was mandated as the sell-side advisor in the auction of Milieu Service Nederland, which generates EBITDA of about €15 million, sources said. Reorg’s coverage of Milieu Service Nederland BV is HERE.

Norske Skog

Oslo’s District Court has ruled that Norske Skogindustrier ASA was not illiquid or insolvent in the spring of 2016 when the Norwegian paper company entered into the disputed Carra II refinancing transaction. Judge Helen Andenæs Sekulic’s decision follows a six-week trial in Oslo and leaves distressed debt hedge funds Bracebridge and Bardin Hill with no proceeds. The court concluded that Norske Skogindustrier ASA and its directors had a somewhat realistic hope of avoiding bankruptcy at the time. The judge added that the claimants’ suggested alternative of a controlled liquidation was not a relevant alternative because there had been no default and therefore no way to enforce on the assets. Reorg’s coverage of Norske Skog is HERE.

Merlin Entertainment

Investors considering amusement park operator Merlin Entertainment’s €700 million three-year extension of its €1.46 billion term loan B to 2029 highlighted the highly opportunistic nature of the deal, which follows the pricing late last month of €700 million of senior secured notes due in 2030, and comes amid favorable market technicals given reduced primary loan issuance and some demand from newly priced CLOs. Footfall across all Merlin’s attractions is still lagging pre-pandemic levels, but the company has compensated by hiking prices, pushing revenue up to about £2 billion (for both 2022 and the last-12-month period to April 1) compared with about £1.7 billion in 2019. Reorg’s coverage of Merlin Entertainment is HERE.
 
Sino-Ocean Group

Sino-Ocean Group told certain investors that a working group currently conducting due diligence at the company is performing a routine practice that happens every year, adding that it is close to selling its elderly care property business to China Life Insurance Co. The elderly care business is valued at CNY 2 billion ($280.5 million) to CNY 3 billion. Sino Ocean also told certain investors privately that it has made arrangements for its 2023 maturities and that these arrangements are contingent on China Life’s coordination and collaboration. Reorg’s coverage of Sino-Ocean Group is HERE.

Vedanta Resources

Vedanta Resources, or VRL, raised $200 million from Singapore commodities trading company Trafigura Group and used it to partly prepay an Oaktree Capital Management loan raised at its other subsidiaries. The funds VRL raised at its step-down subsidiary, Twinstar Holdings Ltd., from Trafigura helped it create headroom to raise a further $250 million debt from Glencore. Reorg’s coverage of Vedanta Resources is HERE.

Health and Happiness (H&H) International Holdings

Health and Happiness (H&H) International Holdings set the minimum coupon of its proposed new U.S. dollar notes at 13.5%. Management told investors during a call Monday afternoon, June 5, that in addition to a CNY 500 million 4% unsecured loan it has already drawn down in May from China Construction Bank, the company is close to getting another onshore loan from a different bank and is in the process of negotiating new financing, denominated in CNY or CNH, which will materialize in the next two to three months. Reorg’s coverage of H&H is HERE.

Japfa Comfeed

Reorg’s updated analysis on the Indonesian feed and poultry producer highlights that short-term bank loans are likely to remain elevated through the first half of 2023, and the company may encounter a base case liquidity shortfall of about 1.3 trillion Indonesian rupiah ($87.3 million) this year. The tear sheet notes that the company may not be able to depend on SGX-listed controlling shareholder Japfa Ltd. for liquidity support given the parent’s operating losses and cash requirements at its Vietnam operations. Reorg’s coverage of Japfa Comfeed is HERE.

DaFa Properties

Hong Kong High Court Judge Linda Chan on Monday agreed for the winding-up petition against DaFa Properties Group to be adjourned to July 24. Zhongtai International Securities, a supporting creditor, is seeking to be substituted as petitioner. The petition was originally filed by Quam Securities Ltd., fka China Tonghai Securities Ltd., in March. Reorg’s coverage of DaFa Properties is HERE.