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Debt Advisory Update
It’s been a quieter week with my favourite news being that Trump is about to renege on more debts, this time Rudy Giuliani’s legal bills. Perhaps Trump thought Rudy’s fees of $20,000 per day should have bought at least one win from his 60 election lawsuits.
TL / DR: govt guarantees exporters, prefs coming of age, worthless CDS
1. Giving credit to exporters
- Two big UK airlines have raised $4.5bn of loan financing partially-guaranteed by the UK Government: just after Xmas, £2bn for British Airways and this week $1.87bn for easyJet, both 5 years and 80% guaranteed. This comes after Rolls-Royce raised £1.6bn and Ford of Britain raised £625m of similar financing in the summer.
- Historically export-credit agency guaranteed financing was focused on helping overseas purchasers of large discrete exported projects– think ships, satellites, power stations, aircraft.
- These new financings are being made available under new Export Development Guarantee rules that support ‘exporters’ rather than just ‘exports’. Key criteria: UK-based, 20% of revenue has been export sales, activities in the UK e.g. manufacturing, services delivered from the UK, intangibles based in the UK.
- Loans <£25m under the new General Export Facility announced in December which has the potential to be very interesting for mid-market exporters – they should be easier for the borrower as everything is delegated to the lending bank and facilities include trade loans, bonding, LCs.
- In my experience of ECA financings, they can dramatically improve the availability or financial cost but can also be a ‘time sink’. Civil servants tend to be worried about being criticised after the event and don’t get bonuses for originating new business. Even where governments delegate day-to-day management to commercial banks, these banks often worry that the guarantees won’t be available when needed and so can be very cautious on consents or amendments. I’d be delighted if these new schemes can inject more “oomph” into this market.
2. Preferential terms
- Since advising Victoria on its £175m preference share investment by Koch last year, we’ve had discussions with many investors and corporates about similar “non-equity equity”.
- Many investors are keen for “structured paper” with decent yield e.g. typically but not always subordinated, with some downside protection and some upside participation – but not as dilutive as equity. As one investor put it to us “I’m not dumb money but neither do I want to run the business day-to-day”.
- As we saw with Victoria, resolving a financing conundrum can lead to massive gains in equity value – its share price has risen by over 50% since announcement in October, and that’s before any acquisitions are announced.
- This week, Hostelworld announced it is close to a €30m debt facility with cost in “low to mid teens” plus warrants. Although its share price fell 9% straight off, this quickly recovered as investors and analysts recognised the alternative was just more equity.
- It’s vital to evaluate these proposals taking into account all lifetime costs: up-front fees, ongoing coupons, early-repayment costs and potential dilution from warrants i.e. scenario analysis for how long it will remain outstanding and where the share price might move over the coming years. There’s a lot more to negotiate including board representation, caps on upside sharing, change of control implications, reserved matters.
- Listed businesses are supposed to have ready access to equity markets, so these instruments work best when there is some reason why further equity isn’t possible e.g. concentrated investor base that is unwilling or unable to follow their money, for example founders or zombie institutions. There are more of these around than you might think …
3. When a default causes no losses
- Now, this may be just too niche but it’s also too crazy to ignore: Europcar this week had to work out how much bondholders followings its default last year. The answer was “zero”, despite these bonds trading at just 75% of par.
- This was part of deciding how much a holder of Credit Default Swaps would receive because of the default: CDS is designed so that a bondholder who holds an equivalent amount of CDS should receive 100% taking into account both the recovery on the bonds plus the pay-out on the CDS.
- This is normally decided by a slightly complicated auction between dealers but for technical reasons described in an FT article here and Twitter thread here, it completely failed. The French restructuring agreement meant most of the bondholders were locked up and couldn’t tender their bonds into the auction – despite the potential for an instant 33% profit.
- It’s pretty esoteric but it’s definitely caused investors to think twice about how to approach hedging their position and how much to cooperate with corporate restructurings – which does have the potential to impact the real world.
- PS after writing this, I’ve just noticed that Matt Levine has written a better (and more amusing) analysis here.
UK debt financings:
- EasyJet signed a $1.87bn 5-year term loan backed with a 80% guarantee from the UK Export Finance, underwritten by a group of banks under the Export Development Scheme set up in July 2020.
- Halfords has signed a new £180m RCF with three new banks in the syndicate replacing their old £180m facility due to mature in Sept-22.
- INEOS Quattro is out with €2.6bn leveraged loans and €2bn of high yield bonds. Loans indicated at L+325bp, secured bonds at 3% (€) and 4% ($) and unsecured at 5%. 20 bookrunners …
- The Gym Group announced that it is renegotiating its loan covenants again, having done so twice in 2020.
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