42 International Financing Review September 8 2018Covenant Review said in a report on
Friday that the bond had some of the
weakest investor protections seen since the
financial crisis.
“The notes are being marketed with
extremely defective sponsor-style covenants
riddled with flaws and loopholes that reflect
the worst excesses of covenant erosion over
the last two years,” it said.
The US$5.5bn Refinitiv bond was
announced earlier last week as part of a
bigger US$13.5bn debt package that
includes leveraged loans.It is the largest buyout financing since the
financial crisis and a major test of the
leveraged finance markets on both sides of
the Atlantic (see Top News).
“The banks have a massive book of orders
to fill,” Covenant Review said.
“We urge investors to leverage the
momentum achieved over the last several
months to resist these unreasonable provisions
and insist on stronger covenants that will
safeguard creditors and the market as a whole.”
Covenant Review said of particular
concern in the terms of the Refinitiv bondswas a “new sponsor mutation” that would
make it easier for Blackstone to move
assets to unrestricted subsidiaries even in
the event that the business became
distressed.
“This wildly off-market provision would
allow the company to use basket build-up
capacity for any purpose even if it could not
meet a basic measure of financial health -
the ability to incur $1 of ratio debt pro
forma,” Covenant Review said.
“This is worse than we’ve seen in other
recent sponsor deals, which at least requireEyes turn to Rallye lenders after Casino
shares plummet
n EMEA HIGH-YIELD/CORPORATES Troubled holding company seen as unlikely to lose credit access
RALLYE’s ability to access credit lines ahead
of looming debt maturities came sharply into
focus after further share price falls in CASINO, in
which it holds the largest stake and would act as
collateral.
Analysts were already watching the French
retailer’s share price with caution, expecting
significant refinancing risk in 2019 at Rallye if the
shares came down to the €26-€27 range. The
shares hit those levels on August 31, when US
short-seller Muddy Waters wrote on Twitter that
Casino Finance, which issues bonds for Casino,
had not filed its 2017 accounts.
A Casino spokesman replied to Muddy Waters’
allegation that the delay was “technical” and
that the unit’s accounts were already integrated
into the group’s 2017 accounts, Reuters
reported.
But the share price decline puts the holding
company’s credit lines at risk as it has to pledge
€1.3 of Casino shares for every €1 it borrows
through the facilities.
And Rallye’s major upcoming bond maturities- a €300m 5% October 2018 note and a €300m
4.25% due March 2019 - are bid around 94 and
81, according to Tradeweb data, demonstrating
that a significant degree of refinancing risk is
priced in for both.
The share price was around €28 as IFR went
to the press on Friday.
Rallye’s woes continued when S&P
downgraded the company one notch to BB,
saying that the French retailer’s debt and
financial leverage had remained above its
expectations for over two years.
In a statement, Casino wrote that S&P’s
assessment “does not take into account the
ongoing €1.5bn disposal plan” and that the
downgrade had no impact on the cost of its
bond debt or its liquidity.
A QUESTION FOR RALLYE LENDERS
Officials at Rallye’s lenders think it is highly
unlikely the company would be cut off from its
credit lines, a view echoed by some analysts
given the group’s strong relationship with its
French lenders.
“It doesn’t feel like the banks are panicking. It
feels to me that Rallye will have access to some
liquidity,” one such official told IFR.
Access could be maintained by reducing the
number of shares that banks currently require
as a pledge for the provision of the secured
credit facilities, or by providing an unsecured
short-term credit facility, said Spread Research
analysts Anthony Giret and Benjamin Sabahi in
a report.
“Jean-Charles Naouri is a smart operator, so if
there is a way out, he will find it,” said an investor
whose fund has exposure to Casino, but not to
Rallye.CASINO: LIMITED LEAKAGE RISK
Casino said in response to the recent
developments that it has “operational resilience,
financial strength and immediately accessible
resources, which are not reflected in the current
stock price”.
There is the possible risk that Casino could
help Rallye by upstreaming cash, but even if this
route is opted for, the payments are expected to
be of a limited degree.
“There’s only so much leakage that can take
place. Rallye only owns 51% of the shares,
so 49% of that money will be lost,” said the
investor. 46.2% of Casino’s shares are owned by
public holders, with the rest held by an employee
mutual fund and as treasury shares.
According to S&P analysts, protections under
the French regulatory and corporate governance
framework could prevent the leakage of Casino
assets to Rallye.“I think they will look at other ways if they
can, though it seems that they’re being backed
into another corner, so there aren’t many other
options left,” the investor added.
Spread Research’s Sabahi and Giret added that
“an exceptional shareholder distribution by Casino
would not change materially the situation at Rallye
and could do more harm to Rallye, due to the
potential reaction by Casino’s share price”.
Rallye did not respond to requests for
comment.UPCOMING DEBT MATURITIES:
n^ A €300m 5% note due on October 15 2018
n^ A total of €113.2m commercial paper due for
the remainder of 2018
n^ A €300m 4.25% bond due in March 2019
n^ €50m in bank loans due in 2019
n^ A total of €42.5m commercial paper due at
various dates during 2019CREDIT LINES:
n^ Rallye has €1.7bn of confirmed and undrawn
credit lines maturing between 2019 and 2024,
€1.41bn of which require Casino share pledges
when they are drawn.
n^ Only €45m of the credit lines mature in 2019.CASINO ASSET DISPOSALS:
n^ Casino is planning on disposing of €1.5bn of
assets by early 2019, which is expected to pay off
Casino’s debts, though the viability of the plan
has played a role in the company’s recent share
price slump. The first of these disposals has
been a 15% share in Mercialys through an equity
swap with a bank for €213m.
n^ The company said it had also received
indicative offers for other assets in July 2018.
It reaffirmed its deleveraging objectives in
response to last week’s developments.
Yoruk Bahceli, Alex Chambers6 Bonds 2250 p25-55.indd 42 07/09/2018 19:30:00