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Debt Advisory Update

I used my Best Reasonable Efforts to get this Weekly out on Friday, but – well, sometimes it’s just not possible.

Debt weekly image - 31 January
TL / DR:  GameStop from debt perspective; Contract confusion; White-hot leveraged finance

1. GameStop

  • I suppose I need to come up with my own take on the “degenerates” on WallStreetBets and how they broke the financial markets, which is pretty tough given that Matt Levine spent all week writing about it.
  • There were a few angles that related to debt and credit.
  • The fun only stopped when Robinhood ran out of credit with the DTCC: as I was discussing with my kids last week, whenever you buy something, you need to trust the other side to perform: someone has to go first, whether by paying or providing the goods / service.  This is exacerbated by the fact that it takes two working days to settle equity trades, presumably to allow a stagecoach to take the share certificates across the country.  Following Dodd-Frank, systemic risk has been reduced by removing counterparty settlement risk from clearinghouses – but now customers (brokers) need to provide intra-day collateral.  WSB caused so much volatility that DTCC increased its margin calls on Robinhood, which drew down several hundred million dollars on bank lines to meet these calls.  This must have led to some heartache amongst its banks – I’m pretty sure this was not part of the credit paper.
  • The overflow of into AMC fascinating: its share price increased by 700% in 11 days – lucky Silver Lake was long a call option through a convertible note it had bought from AMC.  The strike price for this was way out of the money on 26 January – but not on 27th January when Silver Lake converted at $13.51 and sold everything for over $700m, not an enormous profit on the $600m notional but definitely a great escape from a terrible position.  AMC benefits too, as it now has $600m less debt.  Maybe they’ll sell some equity themselves this week.
  • And generally, GameStop is all about leverage.  Lending is effectively selling a put.  And buying a call option is equivalent to buying the stock outright and then buying a put.  So a call option is like 100% non-recourse debt on buying a stock outright.  Let’s not forget short-selling involves borrowing too.
  • Over the weekend, WSB surged to 7.6m “degenerates” so there is likely to be more fun on the way e.g. a short squeeze on silver.

2. Best Reasonable Efforts

  • The fight between the EU and AstraZeneca this week seemingly turns on what “Best Reasonable Efforts” means in its supply contract.  There’s a great analysis here. Of course, it’s really about politics but still we can enjoy contractual disputes along the way.
  • Sadly for those lawyers hoping to resolve decades-long disagreement over what “reasonable efforts” means compared to “best efforts”, it’s a defined term in this contract.
  • This adds to another setback in the centuries-long battle for legal clarity after Wex and TravelPort settled out of court, rather than persevere to find out what Material Adverse Change actually means (I wrote about this back in October).  Given Wex managed to chip $1.2bn off the $1.7bn purchase price for eNett agreed in January, I suspect TravelPort felt there could well have been a “material adverse change”.
  • I am still holding out for final clarity on “not to be unreasonably withheld”, “electronic messaging system” (apparently, email is not one of these) and “and / or” which has sadly led to several hours with lawyers this week.

3. It’s getting hot in here

  • Back in January 2007, before iPhones were invented, I remember a deal for 3i’s buyout of Dockwise.
  • During syndication, the bookrunners (including famous / lost names such as Fortis and Lehman’s) decided they’d been so conservative in structuring the deal that not only would they tighten pricing but that 3i could get a $65m dividend by including a new PIK tranche – 3i had owned by the business for 3 months and had already got back 25% of its equity.  I remember thinking that this made no sense and that the markets must be stupidly hot.
  • In the past week, Bain is getting back a third of the equity they invested into White Cap only 5 weeks ago through a $400m PIK Toggle bondCenterbridge and CD&R are doing similar deals.  And Aspen Dental is repricing a loan that it issued only last month.
  • Some of this is because acquisition funding is always more cautiously underwritten than best efforts.  But most of it is just that leveraged finance markets are even more on fire than they were in December (and probably than they were in 2007).

UK debt financings this week:

  • Schweitzer-Mauduit International has signed a $1.55bn for its £403m acquisition of Scapa (including refinancing $1bn of existing debt), provided by JPM.
  • ICG signed a 3-year £550m ESG linked RCF with nine banks and was oversubscribed.
  • Moonpig has lined up a £195m (£175m TL and £20 RCF) post-IPO financing with Citi, JPM, HSBC (all on the IPO) as well as Barclays, SVB, CA, Investec, CIC, ING and Santander.  Interestingly, this is a 5-year deal but margins of 400bp are a little more than corporate UK is used to paying.
  • Card Factory and Lookers obtained more covenant waivers but both have more work to do over the coming weeks.
  • TalkTalk tapped its existing sterling HY for another £100m following the acquisition by Tosca, pricing at 4.5% yield rated BB- / B+.
  • Thames Water tapped (geddit?) its 2026 at 4.4%.
  • There was no UK investment grade corporate issuance due to earnings blackouts.
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Mike Beadle

Managing Director, Debt Advisory

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