TheChek News Flow

Hedge funds target quick profit from obscure corporate bond clause

Guy Hands’ Annington, Just Eat Takeaway and Tennet among borrowers under pressure from investors over asset sales

Hedge funds are trying to exploit a unique clause in the bond documentation of some of Europe’s safest companies, forcing borrowers to buy back debt at above-market prices following asset sales or corporate break-ups.

Companies including Guy Hands’ property firm Annington, Just Eat Takeaway and Dutch state-owned electricity grid operator Tennet have been targeted by creditors arguing that, by selling large chunks of their business or splitting into multiple entities, the companies have defaulted on their debt.

The argument hinges on a so-called cessation of business clause, which has become commonplace in documentation for safer investment-grade bonds in Europe in recent years. If triggered, this clause forces the borrower immediately to repay outstanding bonds at face value.

Betting that they will be able to force a company either to repay fully its debt at par value or to buy it back above the market price in order to appease bondholders, opportunistic investors are monitoring break-ups or spin-offs, and are piling into bonds trading at a discount.

Advisers have drawn up “shopping lists” of companies with the clause in their documents, said a person familiar with such deals.

Borrowers are starting to wake up to the potential danger posed by the clause, according to bankers advising on the deals.

“Issuers are now trying to work out whether this is something you need to take into account when you’re planning your disposal strategy,” said one restructuring adviser involved in a number of such disputes.

During the past few months, Hands’ Annington has been pursued by funds including DE Shaw, Sona Asset Management and Attestor, according to people familiar with the matter. They have been scooping up its bonds at prices as low as 76 pence on the pound following the firm’s long awaited £6bn sale of 36,000 military housing properties to the UK government.

The company used the proceeds of the sale to pay off a £400mn term loan, cancel a £100mn revolving credit facility and launch a tender offer to buy back £3.35bn of its outstanding bonds above the market price but below their face value.

Some holdout creditors, advised by law firm Milbank, rejected the offer, insisting that Annington had triggered a cessation of business clause and that they were due repayments at par.

Around £2bn of bonds were bought back through the tender offer. If holdout investors can prove that the company triggered the clause and the asset sale was “materially prejudicial” to bondholders, they could stand to make a roughly 30 per cent profit.

“Annington has taken legal advice and is firmly of the view that the MQE [Married Quarters Estate] sale does not constitute an event of default,” said Annington chief executive Ian Rylatt. “The tender offer was priced to give existing noteholders an attractive premium to the market value of the notes.”

DE Shaw, Sona Asset Management and Attestor declined to comment.

Sweden’s SKF, the world’s largest bearings manufacturer, asked bondholders this month to confirm that spinning off its automotive business “will not cause an event of default under the conditions of the notes”.

The trade was pioneered in 2023, when investors in the bonds of Belgian chemicals group Solvay called investment bankers at Houlihan Lokey, arguing that the splitting of its speciality polymers business from the rest of the company constituted an event of default.

While Solvay was attempting to split the debt between the two entities, its creditors and Houlihan pursued it for triggering a cessation of business. Solvay was forced to repay the bonds at par, rewarding investors who bought up the debt for prices lower than 90 cents on the euro.

These opportunities, which depend on the legal language used, have arisen due to a period of very low interest rates in Europe from 2019 to 2021, said Jeff Dorst, a managing director and liability management practice leader in Houlihan Lokey’s financial restructuring group, who has advised creditor groups in these situations.

“A number of securities issued in that timeframe have very low coupons, and thus trade below par in the current rate environment,” he said.

Creditors have also used the clause to pursue Dutch grid operator Tennet, after it announced it would sell its German business to the government in Berlin. The dispute is on hold after Germany pulled out of the deal.

Early last year, bondholders asked Swedish personal care products maker Essity to repay its debt at par following the sale of its 52 per cent stake in tissue maker Vinda. The bondholders have now taken the company to court after it refused their demands.

Just Eat has become a recent target of creditors advised by Milbank over its sale of Grubhub, while WHSmith has appeared on the radar of investors after the retailer confirmed it was in talks to sell its UK high street shops.

However, advisers monitoring these opportunities said the bonds might not trade low enough to make the margin worth while.

“The facts are a little bit different on each one, the holders are a little bit different, the documents are a little bit different,” said a restructuring lawyer familiar with the documentation. “So just because one goes one way, it doesn’t necessarily mean they all will.”

China’s Love Affair With Luxury Has Cooled

LVMH, Kering see double-digit declines in Asia, hurt by economic slowdown and irritation at high prices

SHANGHAI—Xie Weina used to buy luxury bags that cost $1,500 or more every couple of months. Last year, instead of bags, she spent about $2,800 on a gym membership and Pilates lessons.

“When people become rich, they feel that they need to use material things to fill themselves up to show that they are rich,” said Xie, 45. “But after reaching a certain level, they feel that they no longer need these things to show off.”

Luxury’s luster is fading in China. A sluggish economy, the austere political mood and the feeling among some consumers that pricey brands are passé have combined to end the boom that has propelled the industry in recent years.

Last year, China’s luxury market shrank by about a fifth from a year earlier, consulting firm Bain estimates. The industry leader, Louis Vuitton owner LVMH MC -1.61%decrease; red down pointing triangle, said its fourth-quarter sales in Asia excluding Japan—a figure that mainly consists of China sales—dropped 11% year-over-year. At Gucci owner Kering KER 0.04%increase; green up pointing triangle, the same China-centered sales figure was down 24%.

“The period of hyper-exponential growth will no longer be here. It’s going to be much more modulated,” said Bain partner Weiwei Xing.

Analysts have pressed LVMH and Kering executives on whether the declines are cyclical or reflect a more fundamental change among Chinese consumers. Both Kering’s François-Henri Pinault and LVMH’s Bernard Arnault said they believed China would take a while to improve but the market would eventually recover.

Inside China, some brands are closing stores or taking a while to open new ones. Gucci has closed at least two stores in regional cities. For months, a building in Beijing’s trendy Sanlitun neighborhood has been wrapped with the LV logo without opening. Next to it stands a building wrapped in a Dior logo and on the other side a Tiffany-wrapped building. Neither is open.

Foot traffic has dropped at shops, staff say. Store staff of some top-tier brands who previously brushed off inquiries are now reaching out on chat apps to promote the latest deals, said Xie, the former bag aficionado.

Companies aren’t giving up on China, which even in its diminished state remains one of their largest markets. In November, at an import fair in Shanghai, LVMH set up a big booth showcasing items from 14 brands, including a Louis Vuitton trunk with calligraphy-style work by a Chinese artist.

“Why do we choose to make this effort? It’s very simple. Because we love China,” said Marc-Antoine Jamet, LVMH’s general secretary.

Anthony Ledru, the chief executive of Tiffany, an LVMH brand, said in January that in China, “the average price is one of the highest in the world—higher than in the United States, for example, higher than in Japan, and higher than in Korea.”

In contrast to China, much of the world’s appetite for luxury remains stable. U.S. sales rose slightly last year at LVMH. In 2020, China accounted for a fifth of the global personal luxury goods market, but that dropped to an estimated 12% last year, Bain said.

Luxury brands are the latest Western businesses to suffer in China, alongside foreign carmakers, coffee chains and tech companies.

Some Chinese luxury fans are making buying trips to Japan, where the cheap yen has made certain items relative bargains. Those excursions are making up for part, but not all, of the setbacks in China, according to Bain.

Shares in Kering have fallen by about a third in the past year. LVMH shares fell by more than a third from peak to trough last year before recovering recently.

Major European luxury brands started to enter China three decades ago. For the emerging middle class and upper classes, bags, belts, shoes and suits were an object of longing and a way to show off newly acquired wealth.

The luxury journey of Xie, the 45-year-old consumer, started in 2008 at Beijing’s Shin Kong Place, a high-end mall. She had just received a year-end bonus of slightly more than $10,000 and, encouraged by a friend, decided to spend about $4,000 of it on a midsize Chanel CF handbag.

Xie called it a gift to herself after working hard for five years. “It was a testimony to my ability to make money,” she said.

Over the years, Xie, who works for a labor arbitration company in Beijing, spent tens of thousands of dollars on dozens of handbags. She went on to purchase a Hermès Lindy bag, a Chanel wallet on a chain and a Louis Vuitton NéoNoé bucket bag, among others.

Last year, Xie started focusing on fitness and now discusses lifestyle brands such as Lululemon and Arc’teryx with her friends.

She said luxury items were resonating with her less during China’s economic slowdown. In her eyes, the products offered by European brands increasingly look similar, while some Chinese brands such as handbag maker Songmont offer decent quality and design for less money.

Yang Liu, a 32-year-old working in healthcare, said she has bought bags such as Gucci’s Dionysus and Bulgari’s Serpenti but lost her appetite for luxury during the pandemic and as her income dropped. She now uses canvas tote bags.

“I have become more rational in recent years,” she said. “It’s mainly about cost-effectiveness.”

Around the globe, industry analysts say price increases have alienated some aspirational buyers. In the three years to 2022, the average price of high-brand luxury handbags in China rose more than 32%, according to data from Yaok Group, a Shanghai-based consulting firm.

Luxury brands are hoping for an influx of customers outside of the richest and most sophisticated Chinese cities, such as Beijing and Shanghai.

Richard Lin, an analyst at SPDB International, said China’s luxury market had been largely fueled by the expansion of the middle class over the past decade.

“If the economy continues to deteriorate, we don’t rule out the possibility that the size of China’s middle class may shrink,” he said.

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Is Musk helping Treasuries?

Elon Musk’s so-called Department of Government Efficiency, is “blowing up significant parts of the US government”, in the words of Paul Krugman. Oddly, however, this is passing with barely a mention from financial market analysts.

I paraphrase, but “don’t worry about it” was the line from Barclays a week ahead of Donald Trump’s January 20 inauguration.

“Doge likely faces legal, process and political obstacles,” the bank’s analysts wrote at the time. “Doge itself cannot cut government spending, rescind regulations, eliminate departments or agencies, or terminate federal employees. In our view, the change Doge can drive through executive action is likely less (and slower) than many investors anticipate.”

Others had argued Doge won’t be able to do much because of the Republicans’ slim majority in the House of Representatives and the likely legal pushback. But none of that is ageing super well. Tens of thousands of civil servants have already been fired or suspended. The guardrails are buckling here.

Given how important institutional resilience is to the foundation of US reserve assets, you would think investors would be more exercised about all this. Some nerves are creeping in, as I wrote last week, but that’s more about reserve managers seeking to protect their assets from an unpredictable president.

More broadly, though, investors appear to be assuming this is all fine? Maybe that’s the right call. Exorbitant privilege is a powerful force, after all. (Just ask former UK prime minister Liz Truss how markets respond when smaller countries circumvent checks, balances and traditions.) Maybe the hand-wringing over Doge represents sour grapes by those of a more liberal political persuasion who are still smarting from November’s election outcome.

But another possible explanation is that Doge could be actively helping drive demand for US government bonds, in turn sending a warm glow across other asset classes.

Peter Tchir at Academy Securities is focusing on the “headline after headline of waste that is being reduced”. He went on:

Even if a fraction of the headlines are accurate, the ability to cut spending seems high. That is without focusing their attention, yet, on some of the big-ticket items in the budget. Doge alone seems able to help with the goal of reducing the deficit.

So far, I think Doge has been helping support Treasuries. Doge provides some element of hope that bigger chunks of the deficit can be trimmed without major repercussions to the economy or markets, than previously thought. The excitement about what Doge can do to the bigger line items is real.

As Tchir says, Doge has made blunders. But he certainly appears to be right that markets are focusing on the cost cuts and not the US’s institutional resilience, for now at least. And as I’ve written before, the more the markets shrug this stuff off, the further President Donald Trump and his advisers may feel they can go. Stock and bond vigilantes remain supremely relaxed about Trump 2.0 and all it entails.

Struggling utility allowed to borrow from top-ranked creditors at ‘very, very high’ interest rate

Thames Water has been given the green light to undertake up to £3bn of high-cost borrowing in a bid to avoid insolvency, after London’s High Court signed off on a controversial creditor bailout.

The utility, already straining under £19.5bn of debt, had sought court approval to borrow up to £3bn from its top-ranking creditors. The company says that will give it breathing room to raise equity from new investors and renegotiate its debts.

Mr Justice Leech, who presided over a week-long High Court hearing earlier this month, approved the loan in a 178-page judgment on Tuesday. He said it met the necessary criteria under English corporate law and was not unfair to lower-ranking bondholders.

“This is good news for our customers, puts our business on a firmer financial footing and enables us to continue to invest in our network and deliver critical infrastructure upgrades for our customers and the environment,” said Thames Water’s chief executive Chris Weston.

Without the judge’s approval, Thames Water risked running out of cash on March 24, when £200mn of debt is due that the utility has no other way of repaying. Thames Water would then almost certainly have become the first water company to fall into the government’s special administration regime since utilities in England and Wales were privatised in 1989.

The rescue loan has proved controversial, however, as lenders including US hedge fund Elliott Management are charging a hefty 9.75 per cent interest rate, along with other fees and sweeteners.

In his judgment, Leech noted that the headline interest rate on the loan was “very, very high” and that the deal’s advisory fees “might be described as eye-watering”.

“Customers and residents who are struggling with their bills will be horrified at these costs,” he wrote.

The 6,500-square-foot unit reflects the brand’s reframed retail ambitions, with e-commerce in-house and as wholesale falls to 35 percent of the overall business.

PARIS – While others might use a flagship to put their stamp on an area, Ami Paris’ latest address is about fitting into the landscape.

“I liked the idea of being a neighborhood store, something that is rooted in the history of the area,” creative director and founder Alexandre Mattiussi told WWD ahead of the opening. “It’s close to a café, next to a restaurant, in a real neighborhood with schools and pharmacies and bakeries.”

The way the designer sees it, the store will be less a destination than a stop during a stroll in the Marais. “I love the idea that on Saturdays, people might grab a quick coffee at Le Progrès then check out Ami,” he said. “All of a sudden, we’re part of the real everyday life of someone who is strolling in the neighborhood.”

Still, the 6,500-square-foot unit located at 96 Rue de Turenne can’t be missed, taking pride of place in a corner building at the intersection of several busy shopping streets.

Located only a five-minute walk away from the first Ami shop on Boulevard Beaumarchais that opened in 2012, the brand’s largest store to date is as much about telegraphing the growth of the 13-year-old label as it is a reminder that it’s all about selling smart but unfussy clothing for real customers.

“I always had this desire to do retail, this idea of being at once a designer and a retailer — for me, it’s one and the same as I sell,” Mattiussi said.

For what he dubbed “Ami 2.0,” he enlisted Paris-based architectural practice Studio KO, which had worked on the first Ami Paris retail projects, in addition to Ami’s six-strong team of in-house architects.

On the ground floor, large bay windows let natural light stream in on both sides. Warm tones were emphasized, with sandy stone floors beneath with wood and leather seating.

Playing into the brand’s idea of picking across gendered divides, men’s and women’s pieces are mixed, with accessories on shelves across the spaces.

A monumental mirrored staircase, nodding to the one in the Rue d’Alger store, leads up to the first floor where larger-sized fitting rooms can be privatized.

Dotted throughout are works of art and important design pieces, ranging from a Charlotte Perriand bench from the 1960s and a 1950s Jean Prouvé daybed to works by American photographer Michael Bailey Gates.

New categories will come in, such as interior objects — no perfume on the horizon yet, Mattiussi said after an off-the-cuff remark in a recent documentary sparked speculation about an imminent launch — as well as new services, such as a concierge-style service for its “Ami For Ever” secondhand program.

Don’t expect a café, though. Mattiussi said this didn’t feel a fit here, despite the popularity of Ami cafés in China and Japan, where there’s a two- to four-hour wait at a four-month pop-up location in Tokyo’s Omotesando area.

Instead, he envisions the store as “a giant dressing room in which you pick your ideal wardrobe, with good music, a delicious scent, great staff and a great energy” that will also offer artistic events, book readings and other cultural events.

Not that it came easy.

Already earmarked as the French company’s largest retail investment to date, the two-year overhaul included merging three independent units on different levels and ended up costing “markedly more,” according to chief executive officer Nicolas Santi-Weil.

While he declined to name figures, he said the overspend was “by a reasonable measure” given the initial budget, stemming from skyrocketing materials costs and a few structural issues that turned up during early demolition phases.

For the CEO, the flagship embodies the potential of the brand at home and abroad. Ami’s third freestanding location in its home town is one of 76 stores worldwide, with another 700 points of sale in over 100 countries.

Although the company did not yet have the final figures for 2024, with its fiscal year ending Feb. 28, Santi-Weil said Ami was on track to do as well in 2023, when it passed the 300 million euro mark.

That’s despite having cut over 100 wholesale accounts, equivalent to some 25 million euros in sales, and dividing the number of pure players it works with by four, he added. As a result, wholesale shrank to a 35 percent share, while retail now sits around 45 percent and e-commerce, brought in-house last spring, leaped to 20 percent.

“We’re not stopping wholesale, but we are strongly developing our own retail to be in control of our own story,” said the CEO. In the pipeline are retail openings in Italy, Belgium, Thailand, Indonesia, Canada, and the U.S. but also in China, where Ami “will continue to open stores where it makes sense.”

While 2025 will be a year of consolidation, Santi-Weil viewed the prospect with serenity. Not only has a recently opened store in Miami exceeded its goal in the space of a month, but digital sales in the U.S. and Japan are seeing “very, very good growth.”

Womenswear has increased to a 15 percent share of the business, although Santi-Weil noted that some female customers shopped in the men’s section and would therefore make that continue to grow as well.

Accessories, which accounted for less than 5 percent two years ago, are at 10 percent and represent an “enormous” potential for growth, with double- and sometimes triple-digit increases in some territories.

And there’s another asset in Ami’s deck. Recently skyrocketing luxury prices have few direct competitors in the brand’s price range, which goes from 130 euros for caps up to 2,500 euros for outerwear. For Santi-Weil, that’s “a pharaonic vacuum that we need to be smart about and handle well.”

But for all that, he’s keen to highlight that Ami’s growth isn’t just measured in financial terms. The brand recently signed on as a sponsor of the ANDAM Prize and is gearing up for the fourth edition of the Ami x IFM Entrepreneurship Prize. Meanwhile, Mattiussi is on the fashion jury of the 2025 edition of the International Festival of Fashion, Photography and Accessories — Hyères.

“The goal of this store is having a project that matches the ambitions we have for the brand,” the CEO said. “But there’s also a message to the world that Paris is where it happens.”