JPMorgan deals winning hand to secure refinancing for Casino

From left: Daniel Rudnicki Schlumberger, Eva Boutillier, Marco Prono

Embattled French retailer Casino Guichard-Perrachon may have turned a corner with an unusual $3.8bn bond, loan and revolving credit package. JPMorgan was a joint global coordinator on the transaction, as well as sole physical bookrunner on the high-yield bond issue.

Traditional retailing is under pressure everywhere, and nowhere more so than in France. Here, market heavyweights such as Auchan, Carrefour and Casino have been suffering from a prolonged price war and growing competition from online retailers such as Amazon.

With more than 120 years of history, Casino's business embraces food and non-food sales through traditional and e-commerce channels. It is mainly active in France and Latin America, generating more than €36bn in sales in the 12 months to June 2019, with 57% of that coming from France.

A negative halo

The company is controlled by Rallye, the vehicle of Jean-Charles Naouri, Casino's chairman and CEO. Rallye owns slightly more than 50% of the shares and 63% of the voting rights. With its complex holding company structure burdened by layers of debt, Rallye entered a 'plan de sauvegarde', a form of bankruptcy protection, in May 2019.

This had no direct consequence for Casino itself, though it suffered a negative halo effect which it certainly did not need. As it has struggled in the marketplace, Casino's share price has more than halved since its peak in 2014, and the stock has been a favoured target of short sellers.

In April 2019, Moody’s and Standard & Poor's downgraded Casino’s credit rating from Ba1/BB to Ba3/BB-, respectively, both maintaining a 'negative' outlook. By June 2019 the company had net debt of €4.7bn, down from €5.4bn a year earlier. The French share of that was €2.9bn (down from €4bn), which the company has promised will be reduced to below €1.5bn by the end of 2020.

Asset sales have been an important part of the debt reduction programme. By mid-2019, the company had 'signed' €2.1bn of a €2.5bn disposal plan, it said. Earlier in 2020 it was reported to be in advanced talks to sell its Leader Price discount chain to German rival Aldi for €750m.

Facing a crunch

Nonetheless, in the first few months of 2019 it was clear that Casino was headed for a liquidity crunch unless some other action was taken. Four separate tranches of liquidity, in the form of revolving credit facilities (RCFs), were due to expire by mid-2022, and the company was looking at nearly €2.8bn in bond maturities by the same date. Redemptions of €675m were due in August 2019, followed by €497m in 2020, €850m in 2021 and €750m in 2022.

"Casino had a real problem, which we managed to solve with creative thinking," says Daniel Rudnicki Schlumberger, JPMorgan's co-head of leveraged finance origination for Europe, the Middle East and Africa (EMEA). "Its bonds were not trading well, and lenders were reluctant to extend, because that would mean going beyond the first debt maturity."

Any extension of the RCFs depended on raising new debt in the form of term loans and bonds. Issuing yet more bonds while the outstanding securities were underperforming would be a challenge. It was a stand-off, where nobody wanted to be the first to move and give other parties a free ride.

"If one party took more risk, the balance was affected," says Mr Schlumberger. "So we looked at how we could structure a holistic refinancing involving all stakeholders, one that would extend the revolver maturities and raise new long-term finance at the same time."

A sauvegarde situation

When Rallye went into 'sauvegarde' it only made the situation more pressing. "Once Rallye was in 'sauvegarde', all its debt was frozen and no one knew what would happen at the Casino level," says Eva Boutillier, executive director, acquisitions and leveraged finance, EMEA, at JPMorgan. "It wasn't clear if Casino's liquidity profile would be supported."

Then there was the looming question of bond redemptions. "Would the company have enough liquidity to run its operations and repay its bonds?" says Marco Prono, executive director, loan and high-yield capital markets, EMEA, at JPMorgan. "The asset sale programme meant that it should all be fine, but what would be the timing of the receipts?"

An opportunity to solve Casino's problem lay in the documentation of its existing bonds. Some, though not all, of its outstanding securities were issued in the happy days when it still had an investment grade rating. As such, they were generally free of covenants, including any that protected the position of existing lenders in the repayment queue.

Even those issued after its fall from grace had loopholes, which, with some skilful manoeuvring, allowed layering or 'priming' – raising debt that outranked existing bonds. New bonds secured against assets would have senior status and would therefore be easier to issue at an acceptable price.

"The existing EMTN (euro medium-term note programme) had a carve-out whereby a subsidiary, which was not defined as a material subsidiary, could pledge assets for bond finance," says Mr Prono.

How would the existing bondholders feel about being forced down the credit ranking? Not too bad, apparently. "We had to make sure that the new debt could co-exist with the existing bonds in the EMTN," says Mr Schlumberger. "But the feedback was very good, because the use of proceeds from the new debt was largely to repay existing debt. While Casino was priming existing debt, it was also being given time to finish its asset sale programme."

Even the unsecured creditors were supportive of the plan, adds Ms Boutillier. By reducing total reliance on asset sales to repay the short-dated maturities, the new bonds derisked the credit, which was to their benefit.

Ready to go

By late October 2019, the plan was ready to go. With BNP Paribas, Credit Suisse and JPMorgan as joint global coordinators, it began with the launch of what became a €1bn 4.25-year term loan B. This was upsized from an initial €750m, based on demand, and priced at Libor plus 5.5% with an original issue discount of 99.

At the same time, a new RCF of €2bn was raised, subject to final documentation, maturing in October 2023. Pricing was not made public but was "inside the 5.5%" of the term loan, the bankers say. The collateral package for both the term loan and the RCF consisted of share pledges of operating subsidiaries in France and a lien on retail operations.  

The high-yield bond was launched a week later and priced the same day as the term loan B. The five-year bond transaction was issued out of a new entity, with more than €1bn in French real estate, stores and parking lots as collateral. The size of the deal was limited by the amount of collateral, valued at €1bn, to a maximum of €800m.

"The real estate collateral limitation meant we couldn't raise more than €800m, but we raised the full amount," says Mr Prono. "It was priced at par with a coupon of 5.875%, either in line with or more expensive than the outstanding bonds." Demand was strong, with orders of "several billion" euros, he adds.

A flying start

Indeed, demand has got 2020 off to a racing start for the leveraged finance market in general. "The market began the year with a roar," says Mr Schlumberger. "The levels of issuance in January were higher than for the entire first quarter of 2019."

There is very strong demand from investors, whose needs cannot be satisfied by the current crop of mergers and acquisitions [M&As], according to Mr Schlumberger, who adds: "And they can't put their money to work in new companies because not enough new money is being raised."

On the other side of the equation, borrowers are seizing the opportunity as the price of leverage debt continues to fall. "In 2018, leveraged finance was more about M&A, but now we are starting to see more refinancing," says Mr Schlumberger.

Conditions, he reckons, remain supportive for the market. "Investors have money to invest, and the economy seems to be recovering," he says. "It is quite possible that geopolitical events could turn the tide later this year, but I believe that would only be a short-term downturn."