Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to have with us Erin Hudson, who covers distress debt for Bloomberg News in New York. How are you, Erin?
I'm great, Thanks for having you, James.
We're also delighted to see Aidan Cheslyn, who looks at telecoms and media for Bloomberg Intelligence in London. We'll be coming right back to Aiden a little bit later in the show, so do stay with us. But first, Erin Hudson with Bloomberg News, you've been looking at carvaner which rose to fame by selling cars from vending machines during the pandemic, then almost went bust. Now they seem to be on.
The up again.
The stock is up more than eight hundred percent so far this year, and they seem to be sorting out some of their debt issues. But what's the latest on car Erin?
Yes, the big news on Carvana is that they announced a debt restructuring alongside their earnings last week, and they so they reduced their debt by about one point two billion,
and they're doing a new equity raise. Garcia, the family Ernie Garcia, is participating in that, and it's it's an exciting development, I guess in the story of Carvana, because creditors and the company were going back and forth or there were different maneuvers that the company was taking and that creditors were taking in recent months to try and address the company's massive debt load. So this was you know, a big, a big announcement because they reached an agreement
and they did it with creditors signing on too. They had all signed onto a cooperation agreement and that agreement held throughout this processes. So in the distress that world there was, you know, there's kind of a question of how powerful cooperation agreements can be and what is their use and this was sort of a case where it proved they can be very useful.
Okay, so let me just stop you there. They wrote down about billion dollars one point two billion dollars in debt, which is great. They presumably they cut their interest expands, they turned out maturities, did they? I mean, what are the specifics of this restructuring.
Yeah, those are the other points extended maturities, defered some interest payments, and tightened tightened some covenants. And so the idea is that this restructuring has sort of given the company more leeway to improve its business, improve performance and kind of turn itself around. There is still capacity to issue some new debt, I believe as well. So they the company still has a lot of options and you know, creditors are kind of on board for that ride.
And when we look at the creditors, who who is it? We're talking about who the who are the key people involved here?
Well, some of the key people that we know are involved are Apollo Ares and Pimco. Those are some of them, but of course they're there. There are a lot more. There's it's a huge capital structure. Those are some of the key players. And I think just the fact that those are some of the key players that we're sort of known in the market. You know, cooperation is not always historically thought of when some market systems think of
those those those those firms. So again, I think there was just a question of how effective will this cooperation agreement really be? You know, is there really a track record for all of these different all these different and funds, you know, cooperating. So I think this was sort of an answer, and you know, people have described it to me as a significant development in the distress debt marketplace.
So let me just stop me there, because you talk a lot about cooperation lenders. In this particular case, Cardana, they did work together in lots of ways to try and find the best outcome. But you know, in this new era of restructuring where we're seeing a lot more of what's been called creditor on creditor violence, how and why did the bond holders coordinate on this particular situation.
Well, I think that is sort of a question that we want to answer, more like when people choose to cooperate versus not. In this case, it seems like, I guess all the interests were aligned. It's sort of what we understand. There was no one who had sort of hugely different different a different interest, which can sometimes happen in companies where there's secured debt unsecured debt. Maybe there's some other instruments as well, there's different holdings where people
might have sort of slightly different goals and motivations. In this case, it seemed, as far as we know, like everyone was aligned. So that might help explain part of it.
But you know, I don't know if there's a formula at this point, but for sure, this is a big moment that people will look at and you know, sort of a show that creditors can unify and kind of all get on the same page, which I think some people in the market are viewing as a really positive, sort of optimistic sign that maybe we're turning a corner on the whole creditor on creditor violence theme and narrative that's really dominated the distress debt marketplace for the last couple of years.
But so this capital structure then is, in relative turns less complex. I mean, there wasn't all this upteering and drop down and all this stuff that's been going on in other situations.
Is that is that.
Why the creditors were more aligned and sort of more on the same side of the table.
Well, I should say that part of the reason the cooperative agreement was formed was because there was a fear that the company might try to kind of strike a deal with a major creditor and that that deal could
leave everyone else behind. So I think there was a lot of fear, and you know, I should sort of correct the record there, Like some of my colleagues have done a lot of reporting on that last year, and that was sort of the driver to band together because if somebody cut a side deal with the company, then you know, there want to be a deal for everybody. So I think they decided this would be a good moment to stand together.
Interesting, okay, So but the big question I guess for the company do they have a future? I mean, it seemed like definitely a good idea during the height of COVID, when no one really wanted to interact with other human beings using vending machines, using the Internet to buy and sell cars. Plus at that time, you know, used car prices were off the charts, so everyone wanted one. It was a massive demand story. What's the state of play now? Is carvan a business that we think will survive?
Well? Time will tell from sources that I've talked to, you know, I think that I think that, you know, it's a it's a compelling idea and everyone wants to see if they can turn their performance around. So that's what you know, everyone will be watching. And I think that was you know why this debt restructuring was possible. Is that it's giving them more time, and yeah, we'll see what happens.
Interest costs for that company they shot up there at one hundred eighty million dollars or something, you know, is that now under control just the interest expense.
Some of the interest payments were deferred. So I think it does give them. I don't think that's the same pain point as it was previously. There has been some relief there, and.
You mentioned that they do have potential access to raise more debt. I mean, have we resolved all the liquidity concerns around this company?
You know, I don't know if anyone thinks that all of the problems are fixed permanently. From analysts I've talked to, they're sort of viewing this as it gives the company a runway of a couple of years. It is possible that, you know, they kind of end up in a similar position down the road where these like big fundamental questions will will come back. So maybe in hindsight we will look back in a few years and think of this
as more of a band dad solution. But from source that I talk to now, I think the view is that this is, you know, it's sort of a second chance in a way, so I'm not sure we'll see.
They certainly have the brand name, but you know, selling cars online doesn't seem like it's you know, huge barriers to entry for competition, So I mean, I guess they're gonna they're going to come up against it again. But in terms of the broader takeaways thereon for credit markets, what are the lessons we're learning from this?
Obviously, just the lessons learned is that there there is quite an appetite for cooperation if the conditions are right, and it does seem I'm surprised by the number of people I talk to who sort of do really feel like this is a feel good type of moment. You know that that was surprising. So yeah, this, So we'll see what happens if this becomes something that happens a lot more more in various transactions, restruct strings or if you know, this this is really kind of an exceptional moment.
I'm not sure we can we can say for sure right now.
It's very rare you'd see, I mean, in distressed or anywhere in markets, a win win for everyone, and you know, there's no losers. I'm surprised that no one's complaining about this one.
But yeah, I will say that is from from people I've talked to that is really the takeaway. This is a win win And.
If you flip it to the issue of standpoint, I mean, this is simply a story of a company expands way too fast during the good times.
Of course, they had a huge surgeon business during the pandemic. You know, everything was really aligned for them, tailwinds behind them. So there's sort of this broader narrative about companies that did great during the pandemic and you know, were they able are they able to transition to like a post post pandemic type of world where some of those hill winds are not so strong, or now they're facing new
heads inflation, rising rates. So you know, I don't know if I can comment directly on Carvana, but for sure that's a that's a narrative that's out there. As you know, investors are looking at companies and their performance over time.
So before we talk to Aiden Chanslin Bloomberg Intelligence, what's the next big story to watch out for?
Here eron.
I mean, credit markets seem very bullish right now, even though we're seeing more distress, more bankruptcy. Do we expect it all to get better from here, or you're still going to be very very busy reporting on distress debt.
People tell me I'll be very very busy. So I expect there to be a lot more restructuring. Is a lot more, a lot more distress out there. This is why I'm hoping. But then again, there's there is a joke in this market that you know, every time people say that nothing happens. So so we'll see. But I do think there's a lot of there's going to be some interesting interesting cases on the horizon.
Great stuff. Erin Hudson from Bloomberg News, thanks so much for joining us.
Thank you so much. James read all of.
Erin's scoops on the Bloomberg terminal and of course at Bloomberg dot com. So, as I mentioned earlier, we're delighted to welcome back on the credit edge. Aidan Cheslin, who covers telecoms and media for Bloomberg Intelligence based in London. How's it going, Aidan?
Good?
James, how are you very well? Thanks?
And I know you cover a lot of different things, but I did want to focus on telecoms again. Last time we spoke, you mentioned the defensive nature of these firms. You know, the economies may be slowing, consumers maybe under attack from inflation and higher interest rates, but we always need our phones. Is that still the case or are there any cracks appearing in that narrative.
I think it has generally been the case. I think where we're seeing some distress in telecoms is really more in the high yield space, where you know, the new issuance markets there have been closed for some time, has been only very sporadic companies coming and having to pay to do so. And we're starting to get closer to refinancing walls twenty twenty five onwards with some of the names like Telecommetalian LTEs the most in focus.
So on Telecommetalia, I mean that's a good name. They are burning through a lot of cash, the ratings are under pressure. What's the plan to turn that company around?
Well, they're trying to sell the network. So the fixed line network in particular is of interest to KKR. Has been selected as the exclusive bidder at this stage, and by the end of September we're supposed to hear more about whether that's going ahead and what that might end.
Up looking like.
There's still a degree of uncertainty here, which is that the less preferred bidder that's been pushed to the side for now included CDP, one of the government's own investment vehicles. So there's a little bit of uncertainty is whether the government would allow Italy to lose control of this asset, and so there is some political risk to this deal completing still, So.
Just so we know the importance of this one aiden what's the scale? How important is this company in the European telecoms contexts?
The Italian incumbent, so the number one player in fixed line in particular in Italy. They have their problem has been for a long period of time now an elevated debt position, so net debt at the end of twenty twenty three was in the order of twenty five to thirty billion euros. This grid sale couldnet them around somewhere around two thirds of that figure, so it would make
a serious, serious inroad into the debt. The only problem is operating off the network obviously leaves you with just the service company, which would be a lot more susceptible to competition and to volatile learnings.
Can they still access the bond market and how expensive would it be.
They've done so twice this year.
The problem was that the costs keeps you racking up every time they do it. So they access the market in January with a six handle on the coupon, and then they came again much more recently with another bond, and the coupon on that one was almost eight percent. So the problem is the longer they go on burning cash increasing leverage, the longer this deal takes to materialize, the interest costs are just going.
Up and up and up.
They are also doing some liability management that they're buying back some bonds with tender offers and turning up maturities. How's that going for them?
Yeah, that was the focus of these recent new issues, so I think that's just them trying to extend these maturities as best they can.
They've still got a bit of a wall.
Twenty twenty five, they haven't really cured that problem, so there's still more to do.
So what's the next big thing to watch out for here, Aidan? Is there a date by which that sale needs to go through? Is there some kind of calendar of events that we're looking out for.
They've given exclusivity to KKR until the end of September, so that's kind of the deadline, although these deadlines have been rolled over before, but that's the deadline we have at the moment for a deal actually coming about. I think what bondholders are really looking for is a bit more clarity on the future capital structure.
At the moment.
They were unable to answer on the last analyst call whether debt would be separated with the network into the new KKI unit, or whether they'd have to retain the debt and use the cash proceeds to to start tendering for some of that debt. And if they did that, well, we still don't know exactly which ones would be tended and which ones wouldn't, So there's a huge amount of uncertainty for bondholders even if the deal does go through.
In our view, it's very unlikely that whether you end up in a network business with KKR, which would probably have a high degree of leverage, or whether you end up in a service company with a comparatively low amount of leverage. We don't see either of those eventualities leading to an investment grade rating. You may have some improvement over the current position, but not much, and the real tail risk here is that if a deal doesn't occur,
then the company is in big trouble. It has a huge amount of debt, rapidly rising interest costs, a big funding need in a very competitive market. And our thesis has been that if you don't get this this deal, you could end up with credit spreads trading more in line with something like an LTS whether the marketer has started to price in and more just stress valuation in anticipation of those maturities in twenty twenty five.
Okay, so we'll be watching your research very closely on that one. Before we go that, we did want to also ask you about sell Next, which is a Spanish tower operator. Why is that one on your radarid?
Yeah, a bit more of a positive story on this one.
Last year, they massively changed their corporate strategy, which for the last few years has been an absolute acquisition on but they've rained that in. They want to get the S and P rating up from plus to trip will be minus. They actually reported results this week which seemed to fit or still seem to be trending in the right direction for an upgrade. We think sometime next year.
The one thing that could bring that forward would be if they were to sell or partner on some of their assets and bring an external investment and get leverage down a little bit quicker. But they're on track to a free cash flow break even in twenty twenty four. The capex starts to tail away in twenty twenty five, and I think that's probably the trigger for SMP to raise them to triple B minus the credit spreads for them.
They still trade wide of their investment grade piers, so the closest comparison is American Tower, which trades tighter than them in Euros, when normally we would expect European companies tend to trade tighter than the Yankee issuer is in Euros. So it seems like there's a reasonable amount of room for Cell and X spreads potentially upperformers and when that upgrade comes through.
How much are we talking about here?
So celln X has a pretty significant eurocurve. Their leverage has been coming down from around seven times fully adjusted the way the rating agencies do it, and I think that's going to come down to around five to five and a half times in the medium to so it's a fairly fairly significant reduction in leverage, and the rating agencies as well. It's worth remembering have become a lot
more tolerant of leverage at tower companies. Recently, there was an S ANDP report that basically said all of the tower companies have been given an extra half a turn of leverage tolerance within their credit ratings. I think as the business model has kind of shown itself to be quite resilient through the various recent shocks.
So are there any particular parts of a curve for sell Next you particularly like or you're interested in, you know, that you think might move more than others.
Yeah, I think when you look at that comparison that I was talking about to American Tower, it becomes more pronounced.
At the longer end.
Cell Next, as a high old issue, has a bit of a steeper curve. So around the sort of seven to nine year kind of maturity points in Euros looks to be where there's most relative value against the US comparative.
Interesting, So cell Next going up potentially and Telecom Italia going down.
That's it.
Thanks very much, Aidan Cheslin of Bloomberg Intelligence. You can read all of his great analysis on the Bloomberg terminal. Do check it out, and I hope to see you back on the show soon.
Aiden.
Thanks James, and thanks.
Again to Erin Hudson from Bloomberg News. Read all of her great credit scoops on the 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.