(Debtwire) Casino creditors await IBR results as estimated recovery values provide possible uplift

13 June 2023 | 15:41 BST

Casino independent business review (IBR) results from advisory firm Accuracy have been expected this week with review work then to be completed by professional services firm PwC, according to three sources familiar with the situation. A Paris creditor meeting has also been scheduled this Thursday (15 June), the three sources added. Bondholder recovery values also offer sizeable upside versus current prices though uncertainty remains according to two deep-dive analysts and three buysiders, with a fourth buysider concerned.

The first part of the IBR has been worked on by Accuracy before PwC spends a potential few more weeks reviewing their findings, according to the three sources.

The IBR results will be crucial in terms of providing access for stakeholders to further operational information and enabling an assessment of liquidity needs before being better positioned to calculate recovery analysis and waterfall models according to the first source familiar. The company needs to preserve liquidity to enable any future restructuring to occur, he added.

There remain two Casino senior unsecured note bondholder groups, as reported. The first large group of Casino senior unsecured bondholders including EMTN noteholders as well as noteholders with positions in the New-York law governed EUR 400m 6.625% senior unsecured 2026s and EUR 525m senior unsecured 2027s have formed and are advised by financial adviser Perella Weinberg Partners and law firm Willkie Farr & Gallagher. One fund active in this group’s discussions is fund Carronade Capital which boasts ex-Aurelius Capital and Elliott Management employees amongst its staff. This group was initially formed with 2026 and 2027 noteholders but also included EMTN cross-holders and then expanded to include more EMTN noteholders as well. A second significant group of EMTN noteholders (bonds issued when Casino was investment grade with a hence weaker covenant package) asked financial advisor DC Advisory and legal counsel Ashurst to hold an investor call on 19 May, open to all EMTN noteholders, as reported.

The EMTN-focused second group has grown in size in recent weeks and holds in excess of 25% of the aggregate EMTN notes outstanding, while it is in touch with a potential c15% plus more of EMTN noteholders according to the three sources familiar.

Additionally, there is also a group of over 65% of subsidiary Quatrim’s EUR 552.7m 5.875% senior secured 2024 bondholders being advised by financial advisors Moelis and Ondra Partners with Simpson Thacher & Bartlett as legal advisors according to the first, second and a fourth source familiar. The Quatrim notes are backed by the real estate assets of Immobiliere Groupe Casino (IGC) which were valued at EUR 1.026bn, according to management on the November 2019 roadshow, as reported.

France-based retailer Casino had appointed Weil, Gotshal & Manges and Gibson Dunn & Crutcher as legal advisers, as reported. The company has also mandated French law firm Bredin Prat and hired Rothschild and Lazard as financial advisors. On the lender side, the RCF holders had retained Freshfields Bruckhaus Deringer as legal counsel and Houlihan Lokey as financial adviser. The TLB holders had retained Latham & Watkins as legal adviser while PJT will act as financial adviser for the group.

There remain possible restructuring options for creditors to consider now that the potential merger with the France-based garden centre, pet care and food group Teract entity is off the table, as reported.

One option for creditors is to team-up with Czech businessman Dan Kretinsky who proposes a debt buyback plan of EUR 3.6bn unsecured and perpetual bonds issued by the French retailer at a discount but would spare losses of over EUR 4bn of secured lenders and noteholders, according to a press report. The report noted that the deal includes a EUR 1.1bn Kretinsky-led capital increase, to which minority shareholders such as Fimalac, among others, will also contribute.

A second option for creditors is to work with the plan of French businessmen Xavier Niel, Matthieu Pigasse, and Moez-Alexandre Zouari plan to invest in Casino through investment vehicle 3F according to another press report. The Reuters report, citing people with knowledge of the matter, stated that 3F will invest EUR 300m initially with the aim of raising over EUR 1bn by involving Casino's creditors through a potential share sale.

A third option for creditors is to wait and see, while a fourth option would be for creditors to contribute new money and have an alternative proposal.

“I think the key workstream is putting Kretinsky and 3F in competition. We will see if they remain on separate tracks or come together to negotiate the best deal for creditors,” the third source familiar said. “If it comes to a place, where the lenders do the deal themselves, and both Kretinsky and 3F have exited the discussions, that would mean that the company has tanked on performance.”

There remains a risk for senior unsecured creditors of a Cross Class Cram Down where any dissenting class of creditors can be crammed down or reorganized in a restructuring plan if certain conditions are met.

One dangerous precedent for French restructuring cases is the ongoing restructuring negotiations of French care home Orpea. The Support Club, comprised of investors with combined AUM of over USD 62bn and holding EUR 497m of Orpea’s unsecured claims, announced yesterday (12 June) that it urges other creditors to vote against the proposed restructuring and stealth nationalization of France’s largest health care provider on 16 June, as reported.

The third source familiar argued Casino need the support of one class that can enforce a Cross Class Cram Down. He noted it could be a class of unsecured notes willing to vote against the other classes and one needs only one class, with two thirds of holders within it.

“One could take the view that senior unsecured notes (SUNs) need to be segregated from EMTNs. If they reach a deal with senior unsecured notes, they could enforce on the others. That would be one option. Whether EMTNs and senior unsecured notes are one class is not clear,” the third source familiar said. “Then you could have litigation from EMTNs or SUNs that are being crammed down like you had with The Support Club in Orpea.”

The second source familiar agreed and accepted one strategy could be to split EMTNs and other unsecured notes as it is easier to get a majority and use that to Cross Class Cram Down. He noted the conciliator has such latitude to create classes he wants and creditors won’t have much of a say.

One buysider argued it is a bad precedent if one needs French funds to negotiate with [French state-owned bank] Caisse des Depots et Consignations (CDC). He added that French companies need foreign investors, particularly unsecured funds, to raise capital from.

A second buysider noted that a Cross Class Cram Down could work in the Orpea restructuring as there is already support from a large group of unsecured creditors.

Casino Royale recovery

Casino’s Ca/CC/C rated EUR 525m senior unsecured 2027s are indicated at 18.5-mid with a 65.5% yield to worst on Markit. Quatrim’s Caa2/CCC/CCC+ rated EUR 552.7m 5.875% senior secured 2024s are indicated at 85.5-mid with a 35.5% yield to worst. Casino’s EUR 1.425bn Euribor+ 400bps August 2025 cov-lite term loan B is indicated at 75-mid.

Casino bond prices could have significant upside from current levels given expected recovery values in any restructuring according to independent deep-dive research firm Everest Research, who published a deep-dive memo on the name on Friday (9 June).

Everest first examines the Kretinsky plan to raise new equity in return for a haircut on the Casino senior unsecured notes and, in this scenario without a simultaneous Teract merger, Everest model the returns as not so attractive to Kretinsky, particularly compared to the previous possibility of the EP Global plan being implemented in conjunction with a merger of Casino France Retail and Teract's retail operations. Everest estimate SUN recovery is 40 cents while the TLB and Quatrim senior secured notes (SSNs) recover par under this scenario.

Greater SUN recoveries are expected under the 3F plan. Everest model the 3F plan together with SUNs being restructured to equity and a contribution of EUR 750m of new money from SUNs holders in the form of second lien PIK toggle notes. Recovery for SUNs under the 3F plan is 70 cents and 100% for the TLB and Quatrim SSNs.

“The scenario of doing nothing immediately and eventually restructuring SUNs to equity leads to a recovery of 70 cents and 100% on the TLB and SSNs under our base case projections. Our bull case assumes 725 new stores being opened in 2024 (in addition to 1,000 in 2023) and a stabilization of hypermarket sales trends by FY24, as well as SUNs being restructured into equity and EUR 750m new money,” Everest noted. “Our bull case projections achieve 123% recovery for SUNs (through the bull case value of post-restructuring equity) with the TLB and Quatrim SSNs recovering 100%.”

Everest added that another scenario is a break-up led by peer Carrefour which involves dealing with all the holding companies above Casino. Everest assume all Casino debt is exchanged into Carrefour senior unsecured notes and with significant store disposals for competition reasons but the internal rate of return is highly attractive for Carrefour. Everest noted that in this scenario the TLB and Quatrim SSNs recover par while the Casino SUNs recover at least 75%. 

“It is dangerous to derive recovery from a valuation of the assets. This is a difficult situation and bondholder recovery will depend less on the fundamental value of the going concern and more on the constellation and number of suitors,” independent special situations firm Sarria, who last week hosted a Casino webinar, said. “All we know is that value will be transferred to the fresh cash.”

Sarria told Debtwire that if one goes back to the Teract plan, there was the EUR 500m valuation on a 15% stake, which reinforces the view that Casino French Retail should be worth around EUR 3bn in a going concern. But a further EUR 500m-EUR 600m of fresh cash is needed to bring operations up to the mark.  

“The opaqueness of the numbers surrounding working capital and the drawdown of the RCF make the TLB and other debt hard to value now,” Sarria said. “Whatever their final proposals, Kretinsky, 3F and any other suitor will need the approval of secured creditors for their plans, or worse - their joint plan. There is a lot of fear after the Orpea proposal was not commercially appropriate and people can’t trust the French authorities to value Casino at market price.”

Casino liquidity remains stretched with the company noting in its 1Q23 results release that it had around EUR 2.3bn available liquidity including EUR 286m cash and around EUR 2.1bn in unconfirmed undrawn credit lines. However, it was disclosed that the average drawdown of its RCF during the quarter was EUR 1.65bn with a maximum drawdown of EUR 1.95bn. Casino heavily draws the facilities each quarter before making sure the credit facilities are left virtually undrawn by quarter-end when covenants are also tested, as reported.

“The IBR could reveal a large fresh new money need. This is non-investible until all the bad news is out and there is still priming risk,” a third buysider said. “The RCF is heavily drawn so any new money will need to be super senior and could prime secured lenders. Equity only comes when debt is written off and August will be a seasonal drag on liquidity.”

Casino was 4.1x net levered at FY22 excluding leases according to Debtwire analyst calculations (see analyst capital structure below).

Casino, Accuracy, Ashurst, Carronade Capital, DC Advisory, Moelis, Ondra Partners, Perella, PwC, Simpson Thacher & Bartlett and Willkie Farr & Gallagher declined to comment.

by Adam Samoon and Claude Risner with capital structure by Priyanka Kotadia