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Debt Advisory Update

It may be a quiet August but plenty of our clients are planning for a busy autumn and there is plenty of UK leveraged finance emerging: Ultra (£1.9bn), Morrisons (£5.4bn) and maybe Sainsbury’s. 

Debt weekly image - 22 Aug

These take-private deals are testament to the liquidity sloshing around the leveraged finance market – a little like 2007, except that back then, interest rates were 5% vs zero now. Two contrasting relevant quotes: Herbert Stein (“If something cannot go on forever, it will stop”) vs Chuck Prince (“As long as the music is playing, you’ve got to get up and dance”).

Another quick boast: we recently advised RPS Group on its new 7-year private placements with Legal & General and Aviva, totalling £55m. There are some interesting takeaways here for those that may have thought the PP market was inaccessible – get in touch if you’d like to know more.

TL / DR: flexing;  China and crypto;  how Credit Suisse managed to lose $5.5bn

1.   Your flexible friend

  • Not Access, but underwriting banks: as I mentioned last time, we recently arranged two loans for acquisitions where we put in place a permanent bank club from day 1, rather than have the deal underwritten by 1-2 banks for future syndication.
  • Using banks to underwrite a loan transaction, where they take the risk of finding future banks at a maximum guaranteed price, comes at a price – underwriting fees are typically 0.75-2% depending on the end-market for syndication, how much is being underwritten (vs being held by the arranging banks) and the risk of failed syndication.
  • Banks will only underwrite a deal if they are certain it be syndicated, so it’s hard to recommend it unless some external factor makes it necessary e.g. very large deals, minimising leak risk, the Takeover Panel’s Rule of Six or just a stupidly short timescale.
  • Even for an underwritten deal, the banks aim to share the syndication risk with borrowers through “market flex”, where the underwriters can vary loan pricing or other terms if this is needed to sell the deal – while always guaranteeing sufficient proceeds to complete the deal.
  • In addition to the cost of underwriting, borrowers lose control over which banks will be in the final syndicate – underwriting banks may “consult” with borrowers (and there may be a black or whitelist) but the underwriting banks will not cede control over their ability to derisk.
  • All of this poses some tricky conflicts between banks and borrowers – we have plenty of experience of advising on these situations or even better finding a way to avoid underwriting altogether.
  • Naturally, underwriting banks like to keep secret just how much flex they have to offer new lenders, which is why UK public offers pose a problem, as the financing documents have to be posted on announcement.  The Takeover Panel will often let flex terms be redacted until later in the process to ensure that they are secret during syndication.
  • CD&R this week posted its financing documents for its agreed bid for Morrison’s and, while the market flex had been indeed redacted, it was quickly noted by 9Fin that the flex terms were still present underneath the blob.  Some poor junior banker / lawyer is still having difficulty sitting after being motivated to fix this …

2.   Evergrande?

  • I’m slightly wary of raising this as it’s well off my beaten path, but it could be something significant: Evergrande is one of the biggest Chinese property developers, as well as owning a football club and mineral water brand.  Some of their property looks amazing, others less so.  More importantly, Evergrande currently has about $300bn of liabilities and a ND / EBITDA ratio of 8x.
  • This Forbes article is a good primer and Michael Pettis is worth following on this and China in general.
  • I first saw doubts raised about Evergrande back in 2015 (this blog was also prescient on Tesco’s off-balance sheet financing) but it does look as if the music is now about to slow down.  Evergrande’s $2025 bonds are currently quoted at 40c in the $ and the ratings agencies have finally caught up with all three now rating at CCC area (next stop, default).  That its market cap is still >$8bn probably owes more to opaque Chinese offshore structures than fundamental equity value.
  • Last week, Evergrande was rebuked by China’s central bank and other regulators and agreed to mend its ways – which can probably only be done by selling very substantial parts of its business.
  • Bear with me now: Tether is supposed to be a “stablecoin” in the crypto world: one Tether is pegged at one USD, making it easy to move money around different crypto currencies.  The idea is that Tether takes the USD and holds it 1:1 against its own Cryptocoin but it seems that Tether has worked out (like most banks) that re-lending the deposits is more profitable: its recent disclosure showed that $30bn of its deposits were invested in “AA rated Commercial Paper”, but Tether won’t disclose who / where is borrowing this, and apparently no-one on Wall St has been selling CP to Tether.
  • One explanation is that Evergrande is the biggest borrower from Tether i.e. the rush into crypto / BitCoin could be financing Chinese real estate.  I’m sure it will all end up just fine.
  • Separately, I found myself re-reading JK Galbraith’s ‘bezzle’: “the inventory of undiscovered embezzlement in the country’s business and banks” which is revealed in harder economic times.

3.   Credit Suisse and Archegos

  • I would strongly recommend reading at least the exec summary of the Paul, Weiss report into how Credit Suisse managed to lose $5.5bn in its dealings with Archegos (GS and MS escaped with minimal damage).  If you can’t manage this then Bloomberg’s Matt Levine is inevitably excellent on this (full article here and free taster here).
  • It turns out there was nothing unusual about the trades CS had with Archegos: they were probably the same as every other bank, at least to start with.  What was different was the persistent lack of interest in the vast risk building up in its Archegos trading book.
  • Various teams in CS knew what the potential risks were, they knew the risks greatly exceeded its risk limits, they knew Archegos needed to post more collateral and they knew that CS had the legal right to call for that collateral.
  • But for some reason, no-one at CS wanted to actually enforce their rights and instead just let Archegos continually increase its positions, probably taking on business that GS and MS had unwound.  Archegos literally responded to a CS request for more collateral by replying that they “hadn’t had a chance to take a look yet, but were hoping to look today or tomorrow.”
  • Incredibly, in the week before Archegos defaulted, Credit Suisse paid $2.4bn to Archegos, because this was apparently “excess variation margin” that Archegos didn’t need to be posting.  This was despite another part of CS gently asking Archegos if it wouldn’t mind awfully providing some more collateral (and even then only $250m rather than the $3bn CS was due).
  • It really is a long list of mundane and low-rent failures including: juniorisation of the risk function over many years; appointing “business people” to lead risk functions; poor IT systems; adverse incentive systems; meetings and committees with no accountability; “co-heads” that led to no-one being responsible.
  • Total Archegos revenues for CS were $35m in the three years leading up to the $5.5bn loss …
  • Fair play to Credit Suisse for commissioning and rapidly publishing this report, and for implementing many changes in response.

UK Financings this month

A bit quieter in the debt markets but a few deals around:


  • Morrison’s: CD&R’s £6.4bn of debt underwritten by Goldman Sachs, BNP Paribas, Bank of America and Mizuho, which will involve term loans, secured and unsecured bonds, in sterling and EUR.  The main loan will pay SONIA+400bp, with the Euro tranche paid E+325bp.

Some private placements:

  • RPS put in place £55m of 7-year PP to refinance an old Pricoa issue (NUMIS ADVISED).
  • TT Electronics put in place £75m of 7-10 year at 2.9%.
  • Essentra placed $250m of 7-12-year USPPs in July.
  • Bankers Investment Trust also agreed £74.5m-eq private placements, extending out 24 years, with a coupons of £2.28% and €1.67%.
  • Rolls-Royce extended a £1bn term loan from 2022 to 2024.
  • Brickability upsized its RCF from £30m to £60m with HSBC and Barclays, and extended for a further 3 years.
  • RSK Group agreed a £1bn ESG-linked loan from Ares – RSK should save c. £0.5m p.a. from the refinancing and has agreed to donate half of this to sustainability-related initiatives or charities.
  • Capita agreed a £300m forward start RCF – a structure first developed in 2009 as a good way to coax more liquidity out of an unwilling bank group.
  • Gatwick is back with another waiver of its covenants, this time out to 2024, offering more information and a 0.05% fee.
  • Wood Group agreed $600m 5-year loan 80% guaranteed by UK Export Finance – through a scheme set up to support exporters looking to invest in low-carbon growth markets (e.g. renewables).  Looks like an interesting scheme.
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Mike Beadle

Managing Director, Debt Advisory

Email Mike

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