Hello, and welcome to the Credit Edge, a weekly markets podcast. My name is James Crumby. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Aidan Cheslin from Bloomberg Intelligence. How are you Aidenkay?
Thank you, James Hailing very.
Good, Thanks so much for joining us today. We're excited to get your thoughts on the telecom sector, especially Altis. Also delighted to welcome back Irene Garthia Pees with Bloomberg News. Great to see you again, Ay, Ronny.
How are you glad to be here?
And also from Bloomberg News. Brilliant to see Eleanor Duncan, who covers leverage finance in London. How's it going?
Thanks for having me. I'm good.
So we're here to talk about Altis. It's a sprawling Europe based telecoms company with a colorful billionaire at the helm, now tipping into distress. They have about sixty billion dollars in debt and there's a fairly high chance of them not paying it all back, which will affect a lot of different types of investor and will weigh on the sector and more broadly on credit markets, particularly in Europe.
It's a vast debt complex and a frequent issuer. They're also doing some fairly creative maneuvers to try and shift assets around the balance sheet and shield them from claims if things do go bad, so called unrestricted subsidiaries. I'm hoping one of you can help explain that and what kind of precedent is being set here. But the sheer volume of debt in a variety of currencies makes it a widely held name by credit investors, hard to avoid in the bond and loan market, and there are implications
too for collateralized loan obligations. So let's start there. Can you speak to that eleanor what's the mood in the market when you ask about Altis?
As you mentioned Artisse has, I mean especially Artist France. So artist has an enormous debt pile of you know, kind of around sixty billion dollars and Artist France has about twenty four billion euros of that. So I think some bank analysts are estimating that ninety percent of European clos are exposed to Artis. So Artisa's troubles are impacting,
you know, the entire market. The issue is that when you know now Moody's in S and P has downgraded Artise France to triple C. The problem is that clos are restricted in how much they can hold of, you know, the kind of riskiest junk debt. I think it's something like they're allowed to hold something like seven point five percent in terms of their overall portfolios. So now there'll be under pressure either you know, to sell Autie's debt or maybe some of the higher priced triple C debt
that they have in their portfolios. The reason that that matters, I guess in the broader leverage finance market is because triples sorry, clos are a crucial cog of the market. They're the biggest buyers of leverage loan and so this might impact, you know, kind of how eager banks are to underwrite new LBOs. It might also impact, you know, how easy it is for some of the riskiest borrowers to refinance their debt.
Just to make it easy for some of our readers who don't know, clos, they basically buy leverage loans, which are risky company loans, and they repackaged them into securities and sell them at some different levels of risk, right right exactly, And so in terms of like the impact just one single name, one company is having this kind of massive effect on Europe and also other parts of the world. I mean we be saying the same in the US.
Yeah. I think Bank of America analysts had that when Artise France was downgraded to triple C, something like thirteen percent of US clos have already breached that you know, triple C requirement. So this is something that we're seeing across the world. And again kind of goes to the fact that this single credit has built up massive amounts of debt mainly during the era of easy money and thanks to kind of very aggressive acquisitions, and now you know, creditors are paying the price of that.
Is it a big enough event to shut down that market? I mean, they're just so much cash chasing every deal at the moment. I mean that the yields are so high that investors just seem to love credit generally. But is this name big enough to cause that kind of you know, dislocation.
I mean, Celos have had a very good start to the year. I think you know, something like record issuance at least for you know, a number of years, so they've had as opposed to last year when issuance was in the doldrums, they've had a very strong start now. COLO managers and bankers tend to stress the point that even if a credit is downgraded into this you know,
junkiest junk territory, they're not forced sellers. So they might choose to you know, hold on to Altis debt and maybe until the prices recover and as in, you know, kind of stay in breach of that these kind of triple C buckets. They might look to sell other CLO collateral. But that means that we're seeing the impacts of Altis's
troubles on other leverage loan issuers in the market. So I think when when you know, France was first downgraded into triple C, we saw impacts for example on you know, the five billion dollar loan from ZAO, would say a US issuer, their prices were hit in the secondary loan market. So people aren't saying that the CLO market is clogged up yet, but it's for sure that a lot of
managers are going to be impacted by this. I mean one CLO manager described alties Front's impact, you know, the downgrade as a quote widow maker for some managers in the market. We've yet to see that, but you know, hold this, hold this.
Page sounds grim widow maker, So there's definitely some contagion there. Let's talk about the drama at the company level, and it gave us a flavor of what's going on. There's a very colorful billionaire there, and there's all sorts of stories about artworks and you know, colorful phrases like Dayton switch, bullyboy tactics. What's going on.
There is a very colorful character controlling the company who's built this empire basically with mergers and acquisitions funded with debt at a time when dead was very cheap. And it's been a while since this kind of structure has been a concern. Already, back in two thousand and sixteen or seventeen, we already had stories that pointed about Eltis
having sixty elties the whole empire. Now it's divided in three seals after an inter all your organization, it's International, it's Front, and it's alts US and overall, the sixty billion has been a concern, in particular for the twenty four billion that they have in Europe. It's the largest junk kissure by far, and then he has been very open about this. The fact that I'm so big in the credit market is not my problem as much as the bank's problem, or in this case, bondholders and other
investors problem. IF's what's the worst that can happen to me? If I can't repay my mortgage? Well, okay, fine, the bank will get back the keys of the house. But I've enjoyed all these years and I've been happy in that has He said that very very openly. So that's that's the mood, and that's the playbook now. He what was interesting, The timing is interesting and also the approach.
Let's go back to last year. August last year, there were summer last year there were news that Portugal was investigating Altis Portugal, which is part of Altis International, and in particular they were investigating a few individuals, one of them Aarano Pereda is the co founder of Altis, so very very close person to Patrick Dry for corruption and Patrick Dry whent he appeared on on the company's earnings in August to kind of reensure reassured investors that Altis
was a victim of this corruption case and that well he was not aware of this and that he was very, very disappointed with the these individuals. Then he went on a road show in September in London and New York to tell investors that everything and anything in the Altist universe globally US, Portugal, Israel, and France and American Republic was up for sale at a price, and that he would use that to repay that. So the asset sale process started and he for for the French silo. They
agreed on the on the disposals of two assets. So the assumption in the market was that they were going to use the proceeds to repay that. But then the company had a surprise for creditors, which is that right before agreeing on the sale, they removed those assets from the restricted group and moved it to unrestricted entities, which
essentially means that it's out of reach of creditors. If it ended up in a bankruptcy case, then yes, as in an an insolvency procedure, yes, creditors would have records against those assets. But what the company can do in the meantime if before it ended in that scenario is it can raise debt from third party, for instance, against those assets, and that collateral would be for the new
money provider. And so what the company did was in the last earnings call in March, they told investors about this move and also that they would only consider using the proceeds to repay that if creditors participated in discounted transactions. Now that of course shifted the mood because everyone was expecting a repayment and all of a sudden taking they were told like, actually, you know what, you need to take a haircut. We don't know how big the haircut,
we don't know. That's what's the plan. But there he's he's created some bad blood, let's put it that way with creditors.
So these the bully boy tactics you've been writing about.
That's yeah, that's exactly why it does. For a lot of people, it does feel like a ransom.
Why is he doing this? And I mean, obviously you say that it's a situation where you know, he owes a lot of money, so it's more that the lenders problem at this point because there's so much outstanding. But doesn't you know, isn't his company one that has to come back to the market. Aren't they one that you know, they require a lot of capital to run their business. So he's kind of burning his bridges with creditors. Isn't there a long term negative impact for him?
Yes, although there are different theories about why he is doing it now, and I probably it's not down to a single one, but the most likely one is that because everyone was expecting to for the company to starty peeing dead, the price of the bonds and the loans had had increased, so the window for the comp need to take advantage of the discounts to do buybacks, for instance,
was closing. So it did feel like they wanted to send the message that no, no, no, Actually, like the only way to solve our leverage problem is if we do this haircut thing, and they want to cut ten billion, which means that they will still have about fourteen billion outstanding in the French silo. So yes, they will need to come back to the market. But I guess to an extent they're betting that creditors will forget in a couple of years.
It's tony possible. So I do want to bring in aiden, but before we do that, I'll know what's the kind of emotional impact on the market of people furious at this billionaire.
Yeah, I mean people are upset, I guess speaking to high bond investors, and that's you know, I'll tease makes up a huge amount of the high old bond market too. You know, everyone is suffering pain, everyone has exposure. They haven't been able to avoid it. You know, they've built up exposure to the company over this you know kind of era of easy money, when getting a return was
the priority. I guess they kind of saw what telecoms for a long time was like the darling of the high old market, and so now they I guess they see themselves as having you know, helped Drahi to where he's got. He's a he's a billionaire, he lives this, you know, kind of fairly, you know, lavish lifestyle, and now he's turning to the secured and they see him as you know, having turned to the secured creditors who have got him there saying actually, you guys are going
to have to take the pain. So there's there's a lot of there's a lot of bad feeling in the market, and they say, you know, there's a number of these companies are headed up by I guess similar figures to Drahi, maybe like the call sens of this world in the case of you know, the ardor chairman that are pulling similar tricks, and they're saying, you know, Altisse France was the last straw. We're not going to support these kind
of companies anymore. And you know, as Ernie says, maybe in a couple of years time, they'll eat their words or you know, kind of least. Memories are sometimes short in this market. But for now that they're upset.
Let's talk to Aidan Cheslin at Bloomberg Intelligence. You look at this stuff in great detail. You have described Alts as teetering like a Jenga tower. So what's the situation and aiden how do you view things?
Yeah, I I think you know, clearly the company themselves have said that the current debt structure is not sustainable going forward. You could certainly argue they've made that worse by taking assets out of structure. Not just now, by the way, but that behavior dates back to twenty twenty one when they sold their tower business. Hevery and yank those proceeds out of the company rather than reducing debt. You know, you have leverage of six point four times
at the end of last year. The company is guiding that ebit DA will be down mid to high single digits this year. They're also interest costs because of where we are in the credit cycle, interest costs are going up fast than they're able to cut the capex, which means they'll be free cashtro negative this year. So you know, we have on our numbers leverage going from six point four to seven times this year and seven point seven
the next year. Recent transactions where we've seen European telecoms companies being traded or bought and sold, they've been going for EVY to ebit DAR multiples of close to five five and a quarter times. So clearly, this kind of level of debt we have now there's no equity value in the business is probably you know, if it was to go into into a hard restructuring, you'd probably wipe out the subordinated debt as well, and the and the leverage is spiraling. So please, something needs to be done.
And I think that's that's the crux of what the company was trying to get at on the call. It's just a question of how much gets done and who takes the pain.
And selling the assets. We've talked about that on this show. Are they kind of getting rid of the crown duels. Are they undermining the value by by selling the assets the.
Businesses that have been stripped from the group so far a kind of non core. I think the problem is fundamentally that the leverage of the core s FR business is just way too high relative to to the value
of the company. And that's that's what's kind of hurting them, and it's part of what will form the negotiations between the creditors and the the shareholder, because obviously, if the company is worth around five to five and a quarter times ebit DAR, if you can cut the leverage down to four times or below, which is where Artista saying they'd like it cut down to through debt haircuts, you are recreating equity value to the shareholder when none exists
today as well. So that's that's one part of the discussions. How much will creditors want to give into the to the shareholder and create value there versus preserving value for themselves.
And what about all the shenanigans with moving the debt around? I mean, is this something that investors should have known about because it was in the bond docks or the covenants and they you know, they were warned, but they just didn't take any notice, and now it's coming home to roost.
Yeah, I think it's a symptom of weakening and documentation that we've seen as a process over the last decade or more. Companies as clearly entitled to do this. It is clearly aggressive, but you know, the limitations were there
in the documentation. And we're seeing a deal this week with Telecommentalia where they're offering their bondholders the chance to move into the network business, which is essentially being bought out and lbo' by KKR at the starting leverage of four point three times, but we think going up to over five times, and they're being offered a security package but otherwise basically the same terms of the largely investment
grade style documents they had before. And many investors probably will do that switch into the tower company because in the long term it's probably a more stable asset, But they're going to be sitting in a company over five times levered, run by KKR with investment grade style documents, and that's been the way of the market for quite some time now.
And let's say they do come out at the other side of this, you know, they do put some losses on creditors, but they they come out at the other end and then they have to come back to the market. Do you expect there to be any premium on, you know, or any you know, having to pay a bit more to access the market after that, or is it just such such a big name that investors will forget.
I think investors will remember this one in particular for some time. Don't forget through the other silos, whether it's Alti's international for example, They basically put, with a very few exceptions, the entire company up for sale. So I think the plan is to try and extract as much value as they can and kind of carry on selling assets and taking the value that they can out and
repaying debt elsewhere. So probably if you if you, you know, take a straight line extrapolation of that, and they're probably hoping that once this debt haircut is done, they wouldn't necessarily need to issue a substantial amount in the next two to three years.
So these aggressive debt management move they've been seen before in the US, for sample J Crew, but fairly new in Europe at this point. Creditors are organizing, right it only just like they do in the US. How does that work? What's the next stage? What are we looking for?
So what they've done so far? There are two in the case of all these trands that are too credator groups. One is a group of crosshold of investors that have crossholdings in the unsecured bonds and the secure bonds that that one has about four billion of alt is dead.
And then there's a bigger group of secured lenders and bond holders that these ones have signed a cooperation agreement so called that basically what is we're going to stick together so that the company can't play tricks and can't try to to split us and play us against each other. What is interesting, which is again for Europe, is very unusual because it's often seen as uncompetitive, so it's a bit of a gray area depending on what they're used for. The thing here is that we have no idea what
the company wants to do. We don't know what they will come up with. So they know that they want to band together and push against any potential abuse, which is don't know what the abuse is going to look like. And then the interesting thing about this one is that it's six months, which is way longer than they usually are because typically it's like ninety day agreement and then they get renewed. This one is for six months, which you can extend twice for sixty days.
So do you expect them to be successful in any way? I mean, is there any sign that this might work? You know, the credits can band together and they can defend themselves.
There have been instances before, like Dish in the US, where creditors pushing bag was a successful move. The thing is that this one is also a very very big group, so it's also TVD if they will manage to stick together given the size of the group.
So just going back to the impact more broadly, I mean, elen'tor mentioned it and aid and I just wanted to get your take on the kind of ripple effect through telecoms, you know, through other sectors or is it really just a standalone Altias story that people just putting this in an Oltis box.
Now we've seen obviously things like the situation with Arda at the moment as well. There's a few of these kind of restructurings going on at the moment, and I think there's been I think you mentioned it earlier. Ins of the weakness of the documentation and the availability to move assets around has been part of the problem for creditors. You also have in several of these situationstions in Outis France is one of them, even have competing interests between
different creditor groups. So within out Ease France, there's obviously some creditors that are solely in the senior secure debt and there are some that are in the subordinated debt as well. And if you're trying to preserve value in one area, it means you have to give up more value in another area, and you end up having some creditor on creditor violence as well, and certainly see you
there's instances where that can happen. You know, every each of these restructurings have their own unique circumstances at the root cause of it, although, has been a combination of higher interest rates, weak financial performance, poor documentation.
We talked to a big investor in Europe not that long ago, a couple of episodes ago about you know, the risks to credit markets. We always bring those up, and it's she said her biggest concern she's based in Europe was the spread of credits or on credit of violence from the US to Europe. As you just mentioned, aiden this is kind of like, you know, the beginning of it potentially. I don't know. Do you think this marks the beginning of the spread of this to Europe.
Well, we certainly are seeing it in capital structures where there is a big US component, as in there are a lot of US investors and advisors that are used to do these tactics. I don't know if when we It's true that one of the issues about doing it in Europe is that you never wanted to be the first one to try. You wanted someone to try and fail first, and then if it didn't fail, then you would think about it. We'll see. Another reason why in Europe it doesn't tend to work is because the market
is smaller. That's if that's that's a theory. The market is smaller and people tend to be where investors tend to be nicer to each other because they see each other more often, perhaps than in the US. I don't know if that's that true, but we'll we'll see if that's really the beginning of a more aggressive trend in Europe or if it's used an exception for like huge capital structures where this is just like more more prone to happen.
You'll probably find out, Irony, you're you're here in New York for three months, usually based on your you'll find out whether people here are more aggressive than they are in Europe. What do you think? Do you think that's reasonable sumption that the market there is a is a is a kind of one.
Yeah. I would just echo what Ironie said, which is that I mean there's some fear among investors that you know, some of these kind of more aggressive US style tactics are coming over here. But you know, the CLO market in particular is very small. Everyone knows each other. I mean, we'll see, right, And.
So as as Aiden said that there may be others in the same boat, are there any other situations out there that we think are going to go the same way?
In Europe there's introm that could potentially clay or try to play creators against each other. It's still early days and there's no plan on the table yet, but in that case there is. There are two groups as well, and they have different interests depending on the maturities of the dead that they hold. If the company will use it to try to extract as much value as possible.
Will we'll see longer term. Does this kind of put pressure on covenants or on documentation or do you think people just kind of will will move on.
I mean, something that I heard yesterday from some of the banks was that at least a few banks are being a bit more cautious around underwriting new LBOs after you know, kind of what they're seeing in terms of what's going on with alties fronts, so not necessarily on leverage, but they're being kind of much more cognizant about keeping investor protections intact, so you know, maybe in some cases stepping back from deals where sponsors are being too aggressive
on some of the baskets, so especially around dividend distribution baskets and you know, company's ability to sell assets without paying down debt. So I thought that was kind of interesting that this is, you know, spiraling out in some senses to the way people are looking at new leverage buyouts.
I think at the end of the day, it will depend on offer and demand, because this could be an issue. It was something known and investors bought it anyways because the demand was so strong, they didn't really have the negotiating power to push back when they do, like we do see it in the market that when they do,
they do push back and they get better terms. But in general, I wouldn't be surprised if in the next months or next year we start seeing loose documentation again just because of a matter of for and demand.
It sounds to me, based on what you're all saying, is Altias kind of has the upper hand here. Is that fair to an.
Extent, yes, although I was having this discussion with some investors and the idea seems to be also that he kind of needs to be not too bad with at least part of his investor is because they're also involved in alts Us, so he kind of he can be mean, but just to an extent, I guess.
I think this series that he has the upper hand comes to the point that he's holding the media and then Data Center proceeds as a sort of a carrot for investors to agree to this haircut, and it makes a big difference to the size of the haircut that you need to take. You know, we ran some scenarios
in our research. We looked at, well, what's the worst case scenario if they want to get leverage below four times, and those proceeds from those disposals are not recontributed, then you'd be looking at a subordinated debt haircut of around seventy percent and a senior debt haircut of around forty.
Now bear in mind, if you're a senior debt holder, recovery values probably around eighty percent at the moment if you wiped out the equity and subs, so that would be a bitter pill for probably too bitter a pill maybe the senior debt holders to swallow. If you put those disposal proceeds back into the group, then the senior
debt haircut is nearer to twenty five percent. And if you said, actually four and a half times leverage is okay instead of four times as well, you're getting down to fifteen to twenty percent, which is, you know, where the bonds are kind of already pricing in, so that might not be seen as quite such a bit of
pill by the senior debt holders. So I think that's why people are saying that you know, he's holding a lot of the cards because he can decide what to do with those those proceeds, and that will have a big influence on the negotiation. Bondholders do have some cards of their own to play, particularly the senior holders. I don't think the subordinated debt holders have a huge amount of leverage, but the senior debt holders have maybe two
things in their favor. One is the fact that if this went into a full restructuring, their recovery value is probably eighty percent or better. And the second one is that there is a maturity clock that's ticking that could potentially get you there in twenty twenty five if there was no agreement.
And really, why does the US side of the matter.
They will have to negotiate refinancing there as well at some point, not that it's urgent in any case, but there is part of the investor who is that it's involved in Artist France is involved in Altis US as well.
Okay, And when you talk to the company, what do they say, How do they defend themselves?
I don't think they feel like they need to defend themselves. And what was interesting was what I was mentioning earlier about Drying the calls is that he was in the calls last year to explain that Altis was a victim of the fraud, but he didn't show up in the calls where investors were at all about the haircut, so that I found was an interesting move from him. But now the company is like, we we need to cut leverage and this is how we plan to do it.
But when you talk about bait and switch, bully boy tactics, Genger towers, I mean, what do they say.
They don't seem to disagree. They don't push back at the very least.
Okay, So I'll ask all of you just to wrap things like what's the next thing to watch for here and why? Probably starting with aiden, you know, final thoughts.
Yeah, I think it's the negotiations between the company and the various creditor groups. You know, I ran through the debt haircut scenarios already. We said in our note that it feels like that there is, you know, some room for compromise, given that that you have those proceeds out there, given that recovery values in the senior dad are probably that better than those implied by what would happen if if you were to try and force leverage all the
way down to where the company wants it. So I think you need to let those those investor groups forms and those negotiations to start between the company to see if they can reach a compromise somewhere in the middle.
Is there a calendar for that or a trigger or some kind of date that we're looking for particularly or is it fluid?
I think that's still relatively fluid. Obviously, you have the deadlines on that were mentioned before and some of the creditor agreements. But I think it will take some time. You know, the maturity cliff is more in twenty twenty five rather than this year, so there's time for those negotiations to happen.
Yeah, they have two once maturing January in February. I think it is next year. But the interesting thing is that everyone is expecting this to take some time.
Okay, so get some popcorns, settle back. But is there anything on your short term radar at any that you're looking at.
Well as at sales, what's happening with the sfar in particular, or It's interesting because in that one they were looking more into a minority stake sale. You don't really find easily someone that is willing to have a minority stake in a company where a Dragi has the driving seat. That's put it that way.
I don't know final thoughts.
I mean, I guess I'm interested in how this is going to play out on a broader scale. You know, there are a lot of these bloated cap structures out in the market, which is having you know, kind of an outsized impact on investors. You know, the high yield
market has shrunk while these capital structures have grown. So it would be interesting to see whether this is going to hit you know, like I said before, the real economy where it's you know, riskier businesses are finding it more difficult to refinance, especially at a time when interest rates have surged, and if we're going to see a lot more investor caution around say other of these kind of large say maybe like be three rated structures and potential downgrades.
Great stuff. Ellen Duncan with Bloomberg News, Ierni Garthia Pees also the Bloomberg News, and Aidan Cheslin from Bloomberg Intelligence, thank you so much for joining.
Us, Thank you for having us, Thank you, thank you.
Check out all of Aidan Cheslin's excellent analysis on the Bloomberg terminal, and you really do need to be following the great work by Ireni Garthia Pees and Elenor Duncan at Bloomberg News, Market Moving Scoops on the Terminal and at Bloomberg dot com. And please do subscribe wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including the Bloomberg Terminal. Give us a review, tell your friends, or email me directly at Jcrombie eight
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