Rating: B2/B+
Type: Fixed rate notes, senior secured
Amount: £350m
Maturity: 1 September 2018
Issue/re-offer price: par
Coupon: 8.875%
Rating: Caa2/CCC+
Type: Fixed rate notes, senior unsecured
Amount: £275m
Maturity: 1 June 2019
Issue/re-offer price: 97.468
Coupon: 11.5%
Launched: Monday 23 May
Payment date: 27 May
Joint books: Credit Suisse, Barclays, Goldman Sachs, Morgan Stanley, Deutsche Bank, HSBC
Bookrunners’ comment:
The deal was priced and allocated late on Monday evening. The senior secured note was £350m with a coupon of 8-7/8 and it priced at par. That is a seven year, non-call three and the rating is B2/B+.
On the unsecured notes, they had a face value of £275m and they were issued at a discount of 97.468, and that had a coupon of 11.5%. That equates to a yield of 12%. That is an eight year non-call four tranche rated Caa2/CCC+.
The loan facility alongside this transaction was very successful. The senior secured part of the transaction has also been well covered. And the unsecured priced slightly wider. Finding a price on that has been a little bit more difficult but the bookrunning group got the deal done.
It was a difficult company, in the sense that it has come through a restructuring but it is a turnaround story in the sense that the company has fallen behind competitors in the online gaming space and they have a strategy of how they are going to grow that business.
So you have to believe that story if you want to get comfortable with the company’s future prospects. Also, gambling is related to the UK consumer. And going into Friday and Monday, the market felt a bit heavy, with all the news about European peripherals.
It was not an easy deal, it’s one you need to spend a lot of time on, and coming towards the end of its pricing when markets get a bit jittery, a little bit risky, so you had all these factors together and that’s probably why pricing has come a little bit wider than talk.
But all in all, the company is happy. They’ve got a deal which secures their capital
structure.
It was a credit where you had to do work and believe the turnaround. But that combined with a market that felt a bit jittery is probably why you got pricing outside of talk, which hasn’t happened for a while.
Market appraisal:
"... we are not comfortable with the credit because we are not comfortable with the leverage. In comparison, Ladbrokes is substantially less levered and has a much better history. It trades around 7% and it is less than two times levered and Gala is five times levered. There is also very little equity cushion at Gala. Ladbrokes’ evaluation is better. Ladbrokes and William Hill have a better, stabilised online business.
The management came across well at the breakfast and the one-on-one meeting. Just the business is in a pretty bad situation. In the last three years Ebitda has gone down by 20%. And there are no signs of stabilisation."
"... it wasn’t restructured enough. That is clear. Usually, in a restructuring, what you’d like to do is take it back to a position of comfort. If you’re going to restructure, it is usually best to slightly overdo it and put the business in a position to grow comfortably. But they didn’t do it in this case. So we find the credit is still somewhat over-levered.
The sector has some good features but bingo has been horrid. This is partly due to poor management — partly explained by a lack of capex availability — but very much due to the smoking ban, which has fundamentally changed that business. The business is on a nicely improving profile but takes more than half of the earnings from its peak.
The Coral business is stable but again it has probably been underinvested in. They have absolutely underinvested in the internet side of the business.
I remember when they bought Coral, Coral was the leader of the three main gambling businesses in the internet but they have really lost the plot on that. One of the key objectives is to revamp that and get it going again. And they are not advertising it because they have a poor offering at the moment.
It’s a mixed portfolio of some quite good things and some quite weak ones.
If you’ve got your optimistic hat on, the weak things offer potential for significant improvement. There are things they can do about it. Especially on the gambling side, you wouldn’t say it’s a weak business. And on the bingo side you can say, it has been a structurally weak business but they’ve found a new base. The business has changed and it is not going back to the pre-smoking ban days. But we should know where it is now.
The bottom line is that it still has a prodigious amount of leverage on it. And the particular difficulty is that it is likely to be more in trouble in six months’ time, not less, because it is not quite at the bottom of Ebitda yet.
The coming year’s earnings are going to be lower than last year’s earnings, we know that, unless something dramatic happens in the next six months. And that’s not just me saying that. The management will say that if you press them enough.
Offsetting that, the company came across well and there are some things that they can do by running the business better, which can improve the earnings quite materially. It’s quite a difficult one. But this idea of coming in junior, and coming in subordinated to the banks, and paying out cash which the banks then walk away from, in a credit that wasn’t restructured enough, is quite a difficult one to get your head round.
The senior secured note is fair enough, because it’s pari passu — stepping into the bank’s shoes in that particular situation. But when you’re coming in on a junior situation, when you’re subordinated to the banks, you’re essentially paying out a dividend to the banks, cash to the banks, and repaying them.
In something that is probably closer to six times leverage and some of these listed businesses are actually six time Ebitda, so you are in a fairly equity-like position there. You need to believe that management can improve this business and grow it because otherwise you are in a properly junior position if there are any difficulties in this business or if there are any hiccups."
"... I don’t understand how people can buy this. We didn’t go for it. The company is over-levered. If a company can’t generate money now, they will probably always struggle. The terms on the deal were horrendous."
"... Gala was mis-structured and mispriced from the start. The unsecured tranche is pretty much akin to equity and 312.5bp between the secured and unsecured tranches is a big differential. Everybody knew it was a weak book.
They probably should have switched more of the secured and unsecured into the secured loans. The loans had a limit of £850m. However, they had to get back to the lenders anyway to get consent to change the structure. So you wonder, why did you not ask for approval to do more on the loan side, if the loan deal was going so well?
It was a tough deal. The market environment wasn’t too great but it wasn’t all that bad. There was a lot of noise."
"... I’m struggling to find out who really bought it. I’m guessing there probably were some fast money guys in there which is why it traded straight off because they were dumping bonds as soon as they got them."
"... a lot of traditional long-only guys would have probably have stayed out of it."
"... the unsecured tranche was always going to be hard to get done, which is why they reduced the deal size. I also wonder whether they have some on their books still."