Codere - Why So Slow
All,
With general consensus that Codere are likely to run out of cash by end of July / early August, the current delay in raising the c.€100m in fresh capital is of concern to current bondholders. The likelihood that Codere are unable to raise this money (in a current environment where liquidity plentiful) shows the wide-spread scepticism to the continued survival of the Company.
Codere have bond maturities in October 2021 (16 months time) and any seniority given to new money could be revoked if Codere enters restructuring within a 2yr timeframe. Therefore, bondholders likely need to extend maturity as a condition to raising any capital. This then begs the question of why the Company hasn’t engaged fully with bondholders and their advisers. Bondholders have assembled and are likely to be in a position to inject the additional capital but at what cost to their existing holdings? The Company was over leveraged before Coronavirus and certainly does not have the incremental debt capacity now. It is unlikely able to meet cash payment of the interest, so bondholders will be expected to extend maturity and accept PIK element to the interest payment.
What is motivating the equity and board to stall negotiations with the bondholders?
- One argument has been sheer incompetence and unwillingness to confront the urgency of the situation. Clearly that’s nonsense. Sampedro has been here before. He wears a good poker face, but knows exactly what to do.
- The company have been in the process of selling the LATAM business, but in the current environment and distressed scenario, it is unlikely to receive fair value. Naturally the situation is fluid and South American time tables play a role too.
- If the company receive the liquidity away from bondholders, the Ad-hoc group could postpone their pain and pass a simple waiver almost on their own. Also, Codere won’t have to concede to likely bondholder demands - perhaps for a fortified commitment to selling the LatAm business and the automatic application of all proceeds to the bonds, or to advance their structural position so as to significantly reduce the equity’s negotiating power arising from any recurring insolvency threat.
- In conjunction with the above, shareholders are incentivised to reduce bondholders’ options. If presenting bondholders with a plan only in the last minute, acceptance of that plan will be their only option to prevent insolvency. Perhaps, under time pressure, the Company will achieve a bond haircut and new money injection without major dilution to the current shareholders.
Apart from Covid-19 and the closure of halls etc, the operating environment had deteriorated for Codere, especially in Spain. It should be noted that at the beginning of March, the law changed in relation to gambling advertising in Spain, and the Minister of Consumer Affairs in Spain had earmarked a federal overhaul of land based gambling laws.
We should know more by the end of the month, but we remain negative on the name, and even prior to Covid-19 have been were doubtful of the longterm success of the Company.
Any questions please do not hesitate to give Tomas call.
Wolfgang