Prime time: debt investors should learn lessons from Casino

A new eye-catching debt deal from French supermarket group Casino could provide clues to in-store problems in corporate credit markets.

The Saint-Étienne-based retailer on Thursday obtained 1.8 billion euros in financing in the form of bonds and high-yield loans, while concluding a new line of credit of 2 billion euros with its banks.

Just a few months ago, Casino seemed excluded from the capital markets, after its parent companies filed for bankruptcy in May. This makes the new financial package an important moment for the company, which has been sued by short sellers and is the subject of an investigation by the French market regulator on its financial information.

But the grocer had to employ a rare and aggressive technique to win over new lenders: Casino “baited” its existing bondholders.

In bond markets, the term “seed” describes the action of superimposing new debt before a company’s old lenders in the repayment hierarchy.

There are several ways to do this, such as borrowing from a newly created entity closer to the assets of the business. But the end result is always the same: It weakens the position of those who previously lent you money, pushing them closer to the back of the queue when a business goes bankrupt.

Given the anger that priming can arouse among these newly disadvantaged lenders, businesses tend to only do so when their backs are against the wall.

Casino, however, managed to do so because it is a “fallen angel” – a company that had a prime credit rating, but has since slipped into junk territory.

Most of its existing obligations were lifted by this fall, so they give the company the flexibility to a stronger business with little risk of default. And even after Casino lost its investment grade rating in early 2016, debt investors were willing – for a while, at least – to lend on roughly the same terms.

There has been a lot of concern lately about so-called “covenant-lite” loans, which are not subject to restrictions on future borrowing to protect existing lenders, but investment grade bonds tend to fall short. ‘have no covenant.

Casino’s existing bonds had superficial limits on how to start or increase senior debt. But the flaws were bigger than the hypermarkets for which the French grocer is famous. With clever structuring, Casino was able to issue debt on a new entity backed mainly by its real estate portfolio.

The incident is expected to shake the complacency of managers of quality bond funds.

They stocked up on triple B-rated debt, the lowest rung in the premium bond market. And in order to further increase their yields, they have generally relaxed the restrictions on holding double B bonds. These bonds may be the highest level of junk, but they are not known for their strong investor protections. .

If the economy worsens and companies have to resort to desperate measures, debt investors may find the prime time shift from an unusual event to a painfully frequent one.

Carol M. Barragan

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