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April 2021

Debt Advisory Update

Having been launched on Sunday, the new European Super League reached its knock-out stages on Tuesday with the English teams exiting early, leaving the Spanish and Italian teams in the Final. 
For some, this may seem like a good week to bury bad news, in the words of Jo Moore, so watch out for more announcements like the abandonment of the new £2.6m Downing Street press conference room after being used just once.
In passing, I learnt today that Credit Suisse won an award from Risk.net in February for Risk Innovation of the Year for a new tool guarding against operational risks, despite the Chief Risk Officer not knowing about a client to which it had $20bn of exposure.  I’m sure the award features prominently in the disclosure for its $2bn of mandatory convertible notes issued today.

Debt weekly image - 22 April
TL / DR: Super League & JP Morgan; Prisons & Barclays; What we got right/ wrong  in March 2020  

1.  Not so Super League

  • Slightly lost in the noise this week about a potential European Super League, JP Morgan committed to €3.5bn of 23-year loans at 2-3%.  This would have resulted in each club receiving an immediate payday for the clubs of €200-300m followed by 23 years of repayments at about €20m p.a.
  • JPM are no strangers to football controversy: they arranged £540m of debt for Glazers to buy Manchester United in 2005 which led to attacks on the homes of the Rothschild bankers who advised (resulting in their home addresses being removed from Companies House).
  • Perhaps surprisingly, according to the NYT, this deal had apparently been considered by JPM’s reputation committee.  Maybe the US bank just doesn’t view soccerball as being as important as Bill Shankly did.  But it doesn’t seem particularly wise just as JPM is about to launch consumer banking in the UK under its Chase brand.
  • Anyway, this deal has probably died now, to the relief of JPM’s loan bankers, who after the controversy would surely have struggled to syndicate this to 20-30 banks globally.

2.  Lock ‘em up

  • It’s not clear whether Barclays’ reputation committee considered its role as bookrunner on bonds to be issued to construct two new prisons in Alabama, two years after it committed not to finance private prisons, following many of its US peers.
  • At the end of March, Barclays launched a deal for the Public Finance Authority, an odd Wisconsin body that enables other municipalities and some private sector organisations to issue tax-exempt bonds.  The bonds were ‘on behalf of’ CoreCivic, a private sector prison owner and operator, but the facilities would be leased to the State of Alabama.  It seems like an elaborate way for Alabama to finance these prisons off-balance sheet.
  • Barclays appears to have thought this was OK because it (a) wasn’t lending to CoreCivic, (b) the bonds were issued by the PFA and (c) the prison was to be operated by the state.  It was also viewed as helping Alabama modernise its prison systems, akin to a ‘transition’ project.
  • It probably wasn’t helpful therefore that the spokesperson for Alabama redirected Bloomberg’s enquiries to CoreCivic since this was “responsible for obtaining financing for this project”.
  • Last week Barclays was kicked out of the American Sustainable Business Council and this week it bowed to the inevitable and pulled out of the deal, along with another underwriter KeyBanc.
  • In any event, bond investors weren’t keen on the deal, possibly because of ESG concerns: it had been downsized by $200m and pricing increased.  Fees on the deal were likely to be $3-5m so really not worth the reputational damage which Barclays has already incurred.
  • Undeterred, HIG Capital this week has launched a $1.6bn loan financing for prison services business TKC Holdings, with Jefferies acting as bookrunner.  Related: in 2019 Jefferies and Credit Suisse had underwritten a leveraged loan for Israeli spyware business NSO which most investors declined to buy.
  • The whole episode shows how hard it is to get ESG right: what might seem morally acceptable to one person is anathema to another.

3.  Looking Back: What we got right and what we got wrong

  • I was looking back at our weekly from 22 March 2020 (link) and thought I’d mark my own homework.  Overall, I think we deserve at least A-

What we got right

  • Government support from CCFF and CBILS was not enough for mid-cap UK corporates: the CBILS ultimately provided over £5bn to struggling larger businesses and CCFF access was widened.
  • Landlords did take a big hit: total arrears are expected to hit £7bn.
  • Furlough was the gamechanger: £46bn paid out so far.
  • Banks and bilateral Private Placement lenders did step up to provide waivers relatively easily, and without significant fees.
  • Direct lenders / credit funds picked up market share, as banks retreated from mid-market leveraged lending.
  • The insolvency rules on wrongful trading were relaxed – let’s see what happens when they are reinstated at the end of this month.

What we got wrong

  • Public bond markets quickly recovered and saw record issuance in Q2 last year, as the Fed, ECB and Bank of England pumped liquidity into the system.
  • US Private Placements did not pick up market share for larger borrowers: Informa and Sodexo found it so difficult to get the necessary waivers for financial covenants that instead they refinanced in the public bond markets, where no financial covenants are necessary.  This looks like a lasting problem for as long as the USPP market continues to need financial covenants.
  • Leveraged finance recovered much more quickly than we expected: total volume for EMEA leveraged finance in 2020 was up 10% compared to 2019.
  • What we missed: the growing dominance of ESG in market narrative, even if it hasn’t yet changed the world much.

UK Financings this week

  • M&S extended its loan waivers through to March 2022.
  • Kier extended its £670m RCF alongside a recapitalisation plan.  Like most new sterling loans, this now references SONIA.
  • Commercial Estates Group agreed a £73m ESG loan from Aviva.
  • Bally disclosed terms on its £1.7bn 364-day bridge loan to fund the acquisition of Gamesys; starting margin of 250bp, stepping up by +25bp every 3 months.
  • No UK corporate bond or HY issuance of note. 

Mike Beadle

Managing Director, Debt Advisory

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