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Debt Advisory Update

It felt like spring this weekend – a bit of sunshine and my first BBQ of the year.  One year on since COVID-19 hit Western markets, I’m starting to feel more optimistic.  Let’s see what Johnson says this evening.

Debt weekly image - 22 February
TL / DR:  Citi’s systemic error; ESG scores; Football finance fun 

1.  Citibank’s “6 Eyes”

  • Legal upset of the week came as Judge Furman made no friends at Citi by ruling that the hedge funds to which Citi accidentally sent $900m last August were in fact entitled to keep it.
  • Before the loans were repaid in full, they were trading at about 20% of par, so I’m sure HPS, Brigade and Symphony Asset Management will always be willing to buy Furman a drink.  Other funds (like Investcorp) are probably feeling less generous after they returned their $400m portion leaving Citi ‘just’ $500m out of pocket.
  • Revlon had been in dispute with some of its lenders: a small group of lenders agreed to extend more credit on a super-senior basis, thereby ‘priming’ the other lenders.  To execute this, Citi (as Agent for Revlon) had to pay some interest early – but instead of just paying interest of $8m, Citi accidentally repaid the full principal of $900m as well.  Full background here.
  • Broadly the judge said (more detail here) the creditors could keep the cash as they had no reason to suspect that Citi (as Agent for Revlon) had not intended to make the payment – this follows precedent set 30 years ago by a case called Banque Worms which effectively enshrined “Finders Keepers”.
  • The real culprit was not the unfortunate staff but the terrible IT systems that required the staff to tick three unremarkable and poorly labelled boxes to prevent cash from leaving the bank.  Effectively the equivalent of “please do not untick the box if you would not like us to avoid being in touch in the future”.  A whole load more examples here.

Some of the interesting follow-on questions:

  • Does Revlon now owe anyone this $500m? If the hedge funds can keep the cash, it is because it is there has been a “discharge for value” which must surely mean Revlon no longer owes it to anyone.
  • As Agent under the credit agreement (here), Citi is indemnified by the Lenders for any “losses, suits, disbursements of any kind” – unless this is due to “such Agent’s … gross negligence or willful misconduct”.  Ouch.
  • Those creditors which voluntarily returned their portion of the $900m when Citi asked for it back – are they now at risk of litigation from their end-investors as they ‘should’ have kept it?
  • Citi’s had a “6 eyes” system i.e. three people required to make payments.  But 4 of these six eyes belonged to an Indian outsourcer called Wipro that Citi used for part of its processes.  Is Wipro liable for this loss?  Or only 4 / 6 of it?
  • What is the true operational risk of acting as Agent under a New York law loan and will the price of this service increase to reflect this?
  • My takeaway is that the sophistication of lawyers and investors to introduce ever-finer gradations in priority has outrun the ability of people and systems to actually execute all of this.  Perhaps the whole point of banking is to generate complexity?

2.  ESG: Evaluation is Seriously Gnarly

  • The news hook for this was a pair of recent stories about Trafigura (a) its acquisition of 10% of Rosneft’s Artic Oil exploration project for $1.5bn and (b) its new $5.5bn ESG-linked loan!
  • ESG is fast becoming a key way for active equity funds to differentiate themselves in a world of low investment returns and plummeting fees – Peter Harrison of Schroders has made it a key part of his strategy, writing to every FTSE350 company to ask them for their costed plans to become zero carbon by 2050.  Many of our clients would struggle to produce a 3-5 year budget …
  • Our Building, Property & Real Estate team has analysed the vast divergence in ESG ratings from different agencies for the same companies – illustrating Matthew’s report that “the last shall be first, and the first last”.
  • A more formal analysis backs this up: ESG ratings diverge because of scope (looking at different attributes), measurement (different ways of assessing the same attribute) and weights (different views of the importance of each attribute).
  • There has always been some divergence of views from the credit rating agencies – called “ratings shopping”, it has partly been responsible for the growth in newer agencies such as Fitch and Morningstar.
  • Maybe this divergence in ESG ratings is not a flaw but a feature of the framework: there is common agreement about what credit risk is and how to measure it.  Fitch does an excellent job of describing it here.
  • But I think there is far less consensus about what it means “to be good at ESG”, let along how to assess it.  Perhaps this reflects that there isn’t (yet?) much agreement in society about how to achieve the nirvana of a “sustainable global economy”.
  • I am going to read Bill Gates’ new book as he’s much smarter than me.  I’m particularly glad he calls out simple “carbon offsetting” – if planting a tree is so good for the environment then why wait to take a flight to do it?

3.  Back of the net

  • A flurry of fun football financing features this fortnight.
  • Currently borrowing just over £0.5bn from the Bank of England are: Arsenal (£120m), Spurs (£175m), the FA (£175m), the Football League (£75m).  This will need to be repaid in 12 months – are they a going concern?
  • Inter Milan’s Dec-2022 bonds are yielding c. 6% which is pretty good considering it is apparently hurtling towards financial crisis – perhaps testing the “bankruptcy remoteness” of the deal which is secured on media rights.
  • While Juventus’ football performance is lagging Inter, its credit spreads are 280bp ahead with a yield of 3.2%.  However, both of these are booted out of the park by Manchester United with yields on its $2027s of just under 2%, which is about the same as British American Tobacco.  I don’t know what is the worse vice.
  • This week, Elliott tightened control over AC Milan which it obtained a couple of years ago following a loan default.
  • Finally, the Hollywood actor Ryan Reynolds recently formalised his takeover of Wrexham AFC.  This is only the second best thing to happen there ever, after its role as the centre of UK production of the AZ vaccine.  I grew up near Wrexham and I remember the late Rik Mayall beginning a comedy gig there with a shouted “Hello people of rectum!”

UK debt financings this week:

  • Sage Group issued £350m 10-year bond for £350m at 1.625% (Gilts +100bp) – this was its debut public issue after previously using the US Private Placement market.  While Sage’s equity performance has been lacklustre in recent years, its strong cash flows underpin its credit rating of BBB+.
  • Odeon Cinemas finalised a $561m loan this week with only partial support of its parent AMC, at a rate of c. 11% for 2 ½ years.
  • Book publisher Quarto signed a new $20m deal, down from $35m previously.
  • Vodafone’s soon to be listed tower business Vantage secured €2.3bn to refinance intercompany debt. 

Mike Beadle

Managing Director, Debt Advisory

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