Lenders in Europe were left horrified by Altice France’s change in stance this week, after the borrower told lenders it will look for “the participation of the debt market” to bring leverage down.
After steep falls in secondary prices across the debt stack, and with prices softer again today, they are attempting to make sense of the French telco’s investor call and are casting around for a better idea of what form the anticipated discounted transactions might take across senior and junior debt.
The company made clear it is looking for “one overall solution” to accelerate deleveraging to inside 4x, and said it would not rule out options that force a debt impairment on creditors.
With the possibility of coercive action on the table, lenders are nervous of what haircuts they might be asked to take across the secured and unsecured layers of the capital structure. While they wait for a proposal, they variously describe the company’s stance as “extremely aggressive” and “a strong-arm approach”.
“The trust is broken,” said a senior French banker, a comment that also reflects buysiders’ views.
Before the call, the broad expectation had been that the borrower would use proceeds from asset disposals to gradually reduce leverage through buybacks. In August, Drahi described selling assets and using the cash for debt buybacks as an “equity contribution”.
Altice has since agreed to sell assets including its media business and a stake in its data centres business, but having designated these as unrestricted subsidiaries, the proceeds are out of lenders’ reach ahead of its manoeuvres on the debt stack. Questions remain as to how proceeds from a sale of XpFibre would be applied, and whether that would differ between loans and bonds.
“Everyone thought they were doing the right thing and all would be ok, but people are now learning the hard way that covenants are too loose and can be aggressively used,” said a buysider.
The lack of clarity and the ensuing fall in secondary prices could work in the company’s favour for a discounted buyback, lenders point out. It’s “extremely well staged”, said a second buysider, adding that the next move is “foggy”, and the company is keeping its options open.
While they wait to hear what the company proposes, managers are weighing scenarios around where value breaks across the senior and sub debt, how the company will tackle both its shortest-dated debt and its most expensive debt, whether there could be any role for private debt firms, and how cash might be moved across from other silos in the Altice group. Preventing a scenario in which RCF and factoring lines are impacted is also key.
Playing into lenders’ assessment of their own options, as they attempt to understand the mindset of billionaire owner Patrick Drahi, is the backdrop of the French mandataire restructuring framework. It’s historically unfriendly to lenders but – say investors – surely Drahi would want to avoid a full restructuring with the risk that might entail of a change of control, and would aim for a swifter and more efficient process.
“I don’t think we’ll get the worst-case scenario with Altice,” said a third buysider, adding that given its size, a default would “kill” the market.
A problem shared
One aspect of this week’s news that has taken lenders aback is the company’s apparent willingness to pursue a more aggressive approach, even if it damages its reputation as a borrower.
If Altice France were to reduce debt by ~€10bn to bring about its targeted deleveraging, the overall complex across France, International, and USA would still have billions of loans and bonds outstanding and would in theory need access to the capital markets in the long term.
“We in Europe had always known aggressive outcomes were possible but thought, wrongly, that no one would be super-aggressive as ultimately we are a more collegiate market,” said a fourth buysider, adding that everyone will get their fingers burnt – “and some a lot more than their fingers”.
Currently, 94% of European CLOs own Altice France paper and 82% own Altice International, according to Fitch’s CLO tracker. Moreover, the Fitch data show the average CLO exposure to Altice France is 1.23%, the largest of any borrower. Average exposure to Altice International adds another 1.01%.
At that scale, most of Europe’s loan investor base would take a heavy blow if the borrower’s actions were to lead to a downgrade to Triple C – especially given CLOs’ buckets for this paper – or to the application of a selective default rating as typically seen in distressed exchanges
Even without that, the mark-to-market pain has been severe this week, with the euro TLB falling to around 80 yesterday (March 21), and seen lower again today. And with so much of the investor base already positioned in Altice, there are limited buyers aside from any activist funds that are bidding to build a position and deciding to load up on the various tranches of TLB paper.
“Everyone is stuffed to the gills,” said a fifth fund manager. “It’s got nowhere to go, so it’s been gapping lower and lower.”
As reported, a group of funds including Arini and Attestor Capital with cross-holdings worth more than €1.55bn in secured and unsecured bonds earlier this week appointed advisors. The group, sources said, had already organised over a month ago.
Ramifications
Although it’s very early days, lenders are also thinking about wider ramifications. One of these is whether Altice will lead to a more intense focus on governance risks as part of ESG assessments, especially where control is held by one or a small number of individuals. It’s a factor that has already swayed some managers to lighten up or sell out of this credit.
“PE owners in some ways are incentivised to act differently. In some way they are more like employees of a company, whereas he [Drahi] is the owner,” the first buysider said.
And then there’s documentation. Permissive docs are enabling Altice’s choices on how it uses sales proceeds, as well as adding complexity between asset classes. Around the docs, lenders have “no one to blame but ourselves”, said a sixth fund manager.
“The bigger-picture story is how unprepared European investors are for a difficult restructuring process, said a seventh manager. “The US is more used to weaker docs and companies forcing through creditor-unfriendly policies, those that protect the equity and favour certain creditors over others. Europe is going to get its first proper taste of this and it will be interesting how this unfolds.”
“We need to see how the situation develops and what they do, but if Altice uses the docs in an aggressive way, investors will need to reconsider what they will accept and what they won’t,” said an eighth manager, noting that private equity sponsors have been more mindful of long-term relationships with lenders.
A ninth agrees that there ought to be a shake-up on docs in light of this situation, but, she says, “when you’ve got a CLO to fill…”.
Ruth McGavin
Managing Editor
LevFin Insights
