Europcar - The Game Theory post RCF trades
All,
Please refer to our unchanged analysis here.
Current lay of the land:
- The RCF has substantially traded into HF hands at substantial valuations of 91c/E.
- According to FY2019 accounts the corporate RCF was mostly drawn at entities other than ECMG. EC Holding perhaps. This could mean that within ECMG the bonds are substantially alone (safe for the CS facility and some minor borrowings).
- A group of pure RCF holders has organised, as have over 2/3 of bondholders, the largest of which are coming close to a blocking minority in the RCF - hence presumably some of the very high prices we have been seeing there.
- Waivers needed for the Ad-Hoc proceedings to start are due tomorrow and should be forthcoming.
The perimeter of proceedings:
- The company is likely to open Ad-Hoc proceedings on ECMG, ECI, EC Holdings and EC Participations - i.e. begin negotiations on a wide basis and simultaneously with a plan to narrow down the perimeter involved in any final solution.
- Indications so far suggest that ECFinance will not be part of the discussions / remains untouched, given its involvement in a Sauvegarde would trigger covenants within the fleet financing that would open a much larger can of worms.
What the RCF could do if aggressive:
- If aggressive, the RCF could offer to enforce on its share pledges in ECI and the French, Italian, German and Spanish Europcar Opcos. That would clip off the hold bonds altogether and result in a E1.7bn deleveraging of the holdcos.
- The RCF’s problems with this approach are:
1) the high price paid for the paper
2) the blocking position held by bondholders
3) its an aggressive option for management to put forward.
4) a default at ECMG will require a waiver at EC Finance in which the bondholder group proclaims it is strong.
5) on its own this mechanism does not afford the RCF ownership of Europcar’s operations in other countries, nor Goldcar. Given the opacity of the company and that we are still looking forward to an independent report on the business (-plan) from 8-Advisors it is unlikely that the RCF’s position is so far predicated on such an aggressive scenario.
What the bondholders are offering:
- The bondholders themselves are offering full equitisation (of E1bn) along with fresh cash. We understand that the company seems to be looking for E300-400m of new money. In what form that money is supposed to come in has not yet been determined. It could be used as equity, but it may also serve as a tool to tactically pay down the RCF in certain entities - at ECMG in particular). Switching the process from Ad-Hoc to Conciliation would allow new cash injection to that end ahead of the Sauvegarde proceedings.
- If agreed with the RCF and Shareholders, a deal with bondholders could confine Sauvegarde proceedings to largely ECMG only.
- The bondholders’ problems with this approach are:
1) it requires a consensual deal with the RCF. The RCF needs to be extended or replaced, but can practically not be termed out. Not only is it spread across entities, but any such term-out would have to be mirrored across its guarantors, therefore requiring insolvency proceedings also in Italy, Germany and Spain. Unless the RCF is extended (not likely at current terms) the bondholders’ best option is to make a post reorg Europcar sufficiently attractive to raise a new RCF.
2) it requires an EGM and 2/3 of present shareholders to vote in favour of equitisation. Sauvegarde does not have a cram-down mechanism for shareholders (may come next year). Until then shareholders will have to agree to being diluted. CGM and other precedent cases show residual holdings of 5-10% for incumbent shareholders - before fresh cash. But the process remains risky. Since the Macron Law there is a possible, but untested squeeze-out mechanism in place that - once an EGM has failed to approve an equitisation of a company that would otherwise enter Redressement (where shareholders typically receive zero - hence typically their agreement to above discussed dilution) - forces first an asset sale of the company followed by a vote held by a third and independent party. Clearly nobody wants to go this far.
Common Ground:
- The balance of power lies with the RCF, but on the high entry prices we have seen, there may also be less willingness to fully equitise. So if they can’t live without each other, what if the RCF and bondholders agree to work together? A deal could result in a complex Chinese menu, but could benefit from the RCF’s share pledge in ECI to facilitate the D/E swap.
- In the short term we suspect further pressure on bond prices if the pure RCF holders make their case more forcefully before the unusually complex negotiations begin to unfold.
Wolfgang
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Wolfgang Felix
E: wfelix@sarria.co.uk
T: +44 203 744 7003