Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome it enly Garthia Pees, who covers distressed debt and also football for Bloomberg News in London. How are you, Renie?
All good?
Thank you? James.
Ru also delighted to have Tolu Alamutu, who covers real estate and banks for Bloomberg Intelligence based in London. We'll be coming back to Tollu later in the show to talk about the crisis at SBB, the poster child for Sweden's property meltdown. But first it Garcia Pees with Bloomberg News traveled companies distress debt. Why are we seeing so much drama right now?
Well, it's been a long time coming because a lot of companies accumulated a lot of debt during COVID times. Also some of them that had you know, big, big leverage because they were leveraged buyouts when that was cheap. Those kind of structures worked well while that was very cheap, not so much anymore, in particular when they face refinancings.
So we are now starting to see the cracks showing up more often and higher interest rates is already hurting those that have floating dead, but also the ones that are trying to refinance. They know that it's going to be more expensive and in some cases just prohibitedly. So that's one and then the other thing is inflation, which of course it's also hurting. Not all the companies have the same pricing powers, so some have been able to pass through to consumers at least for most of last year,
and others haven't. So we are also starting to see this disparity between borrowers of the ones that have this power and the ones that don't.
So in basic terms, rates are going up. That means that debt service, you know, the cost of your debt increases. Also, the economy's slowing, so your earnings are going down. Consumption is probably suffering because of inflation across the world. But where are we in the cycle any Is it going to get worse from here?
It does look like it's definitely going to get worse before it gets better. Part of the reason is because we're still seeing high levels of inflation, so central banks
are not likely to lower rates anytime soon. And the other part of The reason is that we are coming from from an era where lenders or creditors in general, where keen on amending and extending the dead and wave covenance, et cetera, because they understood with COVID, they understood that most of the companies were in that situation for reasons that were outside of their control or had reasons that
had little to do with their performance. Now that they are a lot of them are running out of passions in some cases, when you know, you've seen a lot of of the restructurings that we're seeing now actually are second time structurings. In some cases even third time companies that restructure during COVID, and that hasn't been enough because the business hasn't rebounded as strongly as expected. So they are coming back for a second or third round.
So what kind of companies at most risks do you think? I mean, in the US, we've seen a lot of stress in retail and healthcare, and commercial real estate is under a lot of pressure as well. But what about in Europe? Is it the same kind of cast of characters, the same same same sectors that are in trouble.
Yeah, it does look like it's it's very similar retail has been distressed for ages because of the change in in online shopping. It was a change of partying people not going to to shopping malls as often that that kind of of trend that was already the case before COVID, and of course with COVID things accelerated even further. And then for real estate it is now it's a sector that accumulated a lot of debt again when when it
was cheap to do so. But now a lot of these structures are suffering because of property value going down also with the pandemic. In the case of the of the businesses that have offices, a lot of those are suffering because depending on the on the geographies, people are not going back to the office as often as for so not a lot of companies don't need the same office space that they used to. They need less, So landlords in that part of the market are are struggling.
Depending on the on the countries, you do see more higher back vacancy rates in that part of the of the real estate market than in others. But but yeah, real estate companies are are suffering a lot with this combo of lower lower value of the properties plus higher rates.
So the borrowers that are out there that are really struggling right now, but we think that they've got a future. They're not going to file for bankruptcy. What are they doing to relieve the pressure here?
So we are seeing more and more companies that are trying to sell assets as a way to pay down debt, or they are that are announcing that they are doing reviews to sell assets to pay down that and for now it's non core assets. They're not selling the duels of the crowns or to speak, but they are starting
to look into it, if not doing it already. One reason why there haven't been even more asset sales so far is because the mismatch in valuation in terms of what the sellers were hoping they would get for their assets and what the buyers want to pay for them. So the sellers that can hold to the asset are waiting for a better moment to sell it. But that's not the case for everyone.
And you say they're not giving away the crown jewels, but are there any sort of being forced to sell assets or units that they really do need to keep in order to generate the cash that they'll need to stay alive over the long term.
I think more than I mean perhaps Friends supermarket Casino is the best example. It's still holding to its its main business, which is Friends, but it did have a bigger stake in SAE, which is I think the third largest retailer in Brazil. That was a pretty good asset, but it had to sell part of those shares in
order to raise money to to pay down debt. Again, it's holding to its core business, which is Friends, but it's also it also had to sell some of the businesses that were actually pretty good for its you know, existence so to speak. I guess what we are seeing more when it comes to that core part of the business.
What we are seeing more is debt for equity swaps, so creditors to taking over the business because a private equity owner doesn't doesn't see a way forward for that for that company, so it's just giving up on it altogether.
And on Casino, I mean, you've been all over that one. It's a really fascinating story. It's the biggest supermarket, one of the biggest supmarket chains in France, and so why is that one getting so much attention? What's the drama there?
So it's a very interesting situation. It has been cooking for a long time.
It was already.
Short sellers had it on the radar many years ago. It started in twenty fifteen, and then in twenty eighteen the main accuisition of short sellers was that the company actually had more debt that it was reporting because of the way it was consolidating different assets in its portfolio in the group. And then from twenty eighteen the company compromised medias announcement that it was going to sell assets to reduce the debt because it was overlabored and it
was doing so. But definitely COVID didn't help in terms of valuations and in terms of the calendar to some extent. And also now it's got to a point where even after selling a lot of assets just in time to pay the next the dead that was the next maturity, it not has come to a point where it has to restructure and it has started talks with creditors and other stakeholders to decide how it's best to restructure the
company for the business. It's also very interesting. It's also a very interesting case because it's for the French government. It's a very important asset because it employs over fifty thousand people in France, and it's also critical for feit security in some of the French regions. It's very important in Paris, for instance, in the Paris region, it's important in the Lyon region as well, and in the south
of France. So of course for the French government it's a very it's a very important asset and also it's interesting and it has a massive capital structure. It's about seven billion of debt, so a lot of creditors involved, a lot of suppliers involved, and it also has very interesting characters involved in terms of well the chairman of the company is a very interesting character, but also Jean, but also different parties that have made offers for the
company to inject equity. If you know, the company managed to cut debt to sustainable levels. We have a check billionaire called Daniel Kratinsky that has made such an offer, teaming up with an existing shareholder of the company. And we also have a tree of French businessmen that have done a separate bit for it. And Lastie is interesting because of the implications he may have in the French
food retail industry in general. Because O'shan, for instance, has already approached Kratinski to team up if he's bid wins after the restructuring, and Carfu has expressed interest in the past for some of the assets. The company has already agreed to sell some some of the some of its sites to Antarache. It's another French retailer, so there is a lot of interest for the assets in France, so it will be it will be interesting to see how it plays out after the restructuring.
Sounds like a fascinating story with It's like a Shakespeare in drama. What what scene? What actor we in the drama? Is it act three? Scene one? Or are we getting towards the end of the two? No more?
Oh no, we're nowhere near the end. Because they just entered conciliation laid may May twenty fifth, so they have until October twenty fifth to negotiate the restructuring. Ideally they would like to have it earlier, of course, because it's
also listed companies, so the earlier the better. And also summer is typically a very bad quarter for supermarkets in terms of liquidity because they need to do all the purchases for them for the Christmas season, so they need to stock basically, so Yeah, we were starting the talks of the restructuring and after that they will have to go to accord to validate the agreement, vote on etc. But yeah, we're starting.
Okay. Interesting. So just going back to the asset sales generally, I mean, you're talking about European asset sales to support companies through difficult times. Is it confined to Europe orre you seeing it in other parts of the world.
We are seeing it in other parts of the world as well. In the in the US, we've seen different cases and there was also a poll by EY that mentioned that in the US there were about forty four percent of chief executive officers that are planning to the investments this year. And we have already seen in Chapter eleven, although of course you can say Chapter eleven is the place you want to avoid if you can. But we are seeing examples of companies that Genesis Care, for instance,
is an example. It's in the healthcare space. It has businesses in Australia, in Europe and in the US, but the US one is the one that wasn't working and that was dragging performance in general. So eventually they put the police a company in they file for Chapter eleven and they are announced that they are planning to sell the US business. But again that one's as part of the chapter eleven situation.
Right, got it. So basically, these companies that are trying to sell assets they think are worth more than the market is willing to pay. At the same time rates are going up and the economy is slowing. It all sounds like a recipe for disaster. It seems going to get worse.
Yeah, it is complicated because, for instance, or Pea, which is a French care home operator, it had to restructure twice last year. And part of the reason for that was that in the first restructuring it made a deal with the French banks, but it also was planning to sell a lot of assets to cut down that. But then because of the valuations, it realized, well, if we do this now, it's we're going to get paid less
than we think they're worth. So it's better if we do a broader structuring and then we sell the assets as we see fit. The other thing is that when everyone in the market knows or thinks you have problems, of course the price that they're willing to pay for those assets are not necessarily the best or fair value or what you could get if they thought your situation was more stable. And that's something that SBB, for instance,
is facing. That they announced they were planning to do asset sales, but then the new management was very clear. Now it remains a question on whether they will be able to stick to the plan, but that they don't want to do fire sales, so that they will try to sell them, that there are a lot of parties interested in their assets, and so that they will do them as they see fit, slowly but surely. Slowly will depend I guess on the offers that they get, but
they don't. They're not planning to sell at deep discounts.
So just to be clear, you're talking about SBB there from Sweden, right correct? Yeah, okay, great, we all get to catch up with Tolu al Mutu in the moment from Bloomberg intalience about that, but before we do, only what's the next big story to watch on your beat? Are there any big football scoops out there coming? That's soccer for our US listeners.
It is. It is getting busy. That's busy. It's definitely getting busy. I guess in that front, we're all watching what happens with the Italian League if they're going to sell their broadcasting rights the same well revenue from their broadcasting rights the same way that the Spanish and the French league did. And also any any clubs that are
potentially for sale, that's something we're always looking for. And then in the stress, Yeah, it's it's a matter to see, well what what the owners of the companies are going to do, if they're willing to inject more money in their companies, or if they will give up and just hand the cues to creators, and to what extent we will see like real fights or it will be you know, less less aggressive.
Great stuff. Gartha Perez with Bloomberg News, thanks so much for joining us. Thank you for having me read all of it and is great scoops on the Bloomberg terminal and of course at Bloomberg dot com. So, as I mentioned earlier, we're very pleased to have with us. Tolu Alamutu, who looks at real estate and banks for Bloomberg Intelligence based in London. What's going on in real estate toler It seems like nothing but bad news when it comes to offices with not enough people going back to work.
After the pandemic.
Well, it definitely seems like that from where we're sitting in London. Not only are you seeing some of the real estate issuers report negative valuation adjustments, but you're seeing that result in losses at some of the companies. You're also seeing negative actions from the rating agencies, and you're not seeing the supply that you would have expected in the bond markets from these issues. So there's concerned about financing as well. So a lot going on and the
concerns are not going away. It seems I think, you know, looking forward to the second half of the many of the issues that people had earlier in the year are going to carry through to that period unfortunately.
So let's talk about SBB. It's the landlord at the center of Sweden's property crisis, which is wearying a lot of people, especially in Europe. They loaded up on cheap debt to snap up schools and healthcare centers that local governments were looking to offload. Now they're facing off against local councils who want the properties back. That sorry. They recently postponed dividend payment for at least a year to try and ease a funding crunch caused by sharply higher
interest rates. And we know that SPB has about eight billion dollars in debt, So what is the situation TOALU, how bad is it going to get? Do you think?
Okay? Well, SPB is being seen as I guess you know, the canary and the coal mine in some ways in some ways, and there are a number of reasons for that. First, they've been under pressure since at least the early part of i'd say last year because there was a short Sellar report that targeted them. And since then, SBB has done a number of things, including a spin off, including changing some of its reporting to include some alternative reporting measures.
They've also carried out some asset sales, but none of this has really worked. And most recently they got downgraded by Pitch, SM and Scope, so they lost their investment grade ratings at S and P and Fitch and a Scope. There is a possibility of a further downgrade and as a result of the S and P downgrade, as you mentioned, they decided to skip the dividend. They also postponed a rights issue with SBB. It's basically at a point where we're getting at least one headline or one story a day.
So yesterday we had a story about them converting a mandatory convertible of about I think two billion krona or so into shares, which I think would have been expected.
And today we had the pleasure of a headline saying that the Swedish FSA will be probing SBB's accounting, primarily focused on the twenty twenty one reporting, but also potentially twenty twenty and SBB has has responded to that sorry, saying that in their view the valuations and other metrics that they reported are correct and they're looking forward to
having a constructive dialogue with the Swedish FSA. The problem from a bondholder perspective is clearly the headline risk is extremely elevated at this point on SBB, and every day
the headlines that we're getting and not particularly encouraging. In the meantime, we are waiting for the outcome of what SBB is calling a broad broader strategic review, which is supposed to look at whether they should sell all or some of their assets and so on, and I think what this probe from the FSA does is increase the urgency of them completing that review.
And as you say, they were cut to junk in May, and since then the share price has dropped very deeply. Now hedge funds and rival landlords are circling the trebled company's holdings. You mentioned, you know, we're kind of getting this bad headline to day. What exactly we're looking for next? Is there a deadline on the horizon that we're trying to you know, focus on and what could happen next?
So there are to me every day it seems like a deadline at the at the moment because of the level of headlines that we're getting, all the amount of headlines that we're getting. But there is one date that people are focusing on at the moment, and that is towards the end of this month, I think around twenty
ninth of this month. The reason for that is that according to a report, there are bondholders that have written a letter to SBB stating that they have reached an interest coverage ratio covenant and SBB has i think ninety days to respond to that or to remedy that. SBB has already publicly said that they meet the covenants or the covenants under their Euroborn documentation. At least that's what
we know in terms of what they said publicly. We don't know whether there's been any bilateral negotiations between them and this bondholder group, but if the report of the bondholder action is correct, then I guess the bondholders will expect some action from SBB before the end of this month.
Having said that, there is another bondholder group that's on the other side of that argument that's stating that SBB actually has not reached that covenant, and I think one can understand why there would be players on that side as well. That's because if SBB were forced to in default at this point, that would obviously potentially mean that they'd have to pay off all the debt that they have or the senior debt that they have, and they don't necessarily have the cash on hand to do that.
So the outcome for the bondholders may not be positive if they were to precipitate a default at this point.
And is that the base case right now, that they will default on the debt and there will be a restructuring.
I wouldn't say so. I think that there is still hope. I guess that some kind of resolution can be reached and that there will be progress with the broader strategic review and that there will be some way to appease these bondholders that have raised concerns. I should say that the issue is all around definitions and so on, and it's the definitions of the interest coverageeration that of its
obviously have come into focus in this instance. The problem is there are many ways that one, I guess, can calculate that, and I guess SBB is justifying its own calculation.
The bondholders will be justifying their own. The issue with SBB is that they restated their Q one results, and restatements are never could right, and the restatement didn't contain as much information as the initial reporting, and I think that's also added to the worry basically, and is one of the reasons I guess why you're seeing this bondholder action.
But in a worst case scenario, which we have to be kind of always looking out for, what do we think recoveries might look like.
That's a tricky fun because what normally well, these are never normal circumstances. What can happen in these disorderly situations is that the amount of secured that the people that maybe was reported was last reported might be higher, the valuations that they get for the properties might be lower than was last reported, and so as an unsecured bondholder, which all these people would be, you end up in a worse position than maybe you were bargaining for based
on the last reported figures. And that is the primary concern, right that you know, all those that rank ahead of you might do much better, or might be there might be greater amounts ahead of you, and there might be less security left for you to claim.
That was a fascinating story for Sweden, and you know, there's tons of really interesting things going on that we'll be watching very closely. But when you sort of zoom out a bit, how much is this a Sweden and or credit specific SBB story and to what extent could it become a bigger issue for credit markets.
I think that you really hit on what the concern is, which is that this may not be SBB specific and that when or if the SBB situation is resolved, there might be concerns about whoever the next weekest link is. I mean, if we look at how some of the other issuers have performed year today, not just in Sweden, and I'm talking about the performance of their bonds. It tells you that the concerns are definitely not restricted to
just that Nordic country. I was looking at some of the year to day performance figures today and looking at the likes of time Staden, the around town perps and so on. They haven't done very well year to date. So I think what the market is telling us is that they are concerned about real estate more broadly than just SBB. Of course SPB is it seems to be in the eye of the storm at the moment, but there are definitely broader concerns.
So there could be some contagion if SPP goes down.
In a sense. Yes. The other thing I guess I should say is in the last few weeks we have had statements from the Swedish FSAs stating that leverage is too high in the commercial real estate sector, which I guess will make lenders more cautious towards that sector, which is not positive for the other entities in Sweden that
are operating in real estate. So the regulators already sounding out their concerns, or was already sounding out their concerns even before the probe was launched against SBB today that.
It is something also that resonates beyond just Sweden, of course. Yes, okay, so I'm the one on this podcast that I saw the dumb questions and I have one, just very simple one about real estate generally. You've got all these companies that have, for example, office buildings that you know, no one wants to use anymore because they're not going back
to work. Why can't they just be repurposed? Because you know, cities have a lack of housing, they have a lack of schools, they have a lack of all sorts of other infrastructure. Why can't they just be repurposed.
The simple answer is that it's not that easy, and it's all it's never that straightforward. So first let's just consider what's going on in parts of the office space. It is true, of course, many people prefer working from home for at least a portion of the week now, and so the demand for offices is not as strong as it was maybe prior to the pandemic. But when you have people still coming in for part of the week, you still do need to maintain some office space, but
you need to be flexible around it. And in some cases the issuers are not organized in a way that allows for such flexible working, so it's almost like an all or nothing approach. The second issue for the issuers is the quality of the building. So we're finding that if the doings are basically greener, and we are privileged here to have a building that has like one of
the highest green ratings if you like. But with greener buildings there is great demand, but it takes a lot of time and finances to meet those standards, and it's not always easy for the issuers to make those investments. And in terms of repurposing them into flats or whatever else,
the location of the offices may not be ideal. You need permissions to do that, you need funding to repurpose them as well, So it's not as straightforward as I guess it might seem, and it can take a lot of time to do as well, and that time that maybe some of the lead issuers probably don't have in abundance.
Thank you very much, Tollu al Mutu of Bloomberg Intelligence. Read all of her great analysis on the Bloomberg Terminal. Do check it out and hope to see back on the show soon.
Tollu, thank you so much. James, hope to be back on the show soon.
Thanks and thanks again to Erni Gartier Perez from Bloomberg News. Get all her great distressed debt and football scoops on the Bloomberg Terminal and at Bloomberg dot Com. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge