Codere: lack of urgency and clarity increasing risk of write-downs

All,

Recent speculation in the Spanish press plus the announcement of AGM in July points to the urgent need for a solution.  However, having spoken to several advisers involved in different aspects of a potential deal, we have not come to a definitive conclusion. 

Several of the bondholders are awaiting engagement from the Company and appear happy to allow €100-110m of super senior facility to be raised, as permitted by the bond documentation.  This would allow the Company to be solvent for the coming 12 months and allow the re-opening of halls etc in Latin America.  However, this “solution” does not take into account the upcoming maturity dates on the two bonds and without an extension and/or some debt write-off this option appears to be only a temporary measure.  If a temporary measure is what is required, it does call into question the need for as much as €100m of capital in the first place.  

The second option that is being discussed is a larger €120-150m of cash injection, the form of which is unclear.  The bond documentation only allows for c.€100-110m of super senior debt, but given the current capital structure, an equity injection alone appears unrealistic.  To be viable in at least the medium term, the bonds would have to take a haircut and swap a significant portion of their holdings for equity.  Committing to a debt/equity swap at this time however would be early and most parties seem eager to first see what the long-term damage on the business will actually be. Anyhow, today's invitation for the AGM seems to pave that way, even if its only a back-up option.

Our judgement is clouded on the name as we were negative on the name prior to Covid-19, but strongly feel bondholders need to brace themselves for partial write-down, at least in the medium term.  The Company needs cash urgently, and with the bonds left outstanding in full, cash paying or PIK, it is as unrealistic to expect the cash to be injected in any format except super senior as it is to expect the company to carry that debt for long. 

Happy to discuss further.