Mutiny in the Bond Market as Billionaires Pick a Debt Fight
It was only late last summer when telecoms billionaire Patrick Drahi was relying on the personal touch to soothe the frazzled nerves of his investors. As debt prices in his company Altice France came under pressure, he and his lieutenants were reassuring creditors that they’d be looked after.
One prominent former owner of Altice’s junk bonds, who asked to remain anonymous discussing private commercial matters, says he was told Drahi would do “whatever it takes” to make good on his commitments — echoing the words of his near namesake Mario Draghi at the height of the euro crisis.
Today, any notion that Altice France and its creditors are in it together is history. The company is about to enter a bruising round of talks with angry debtholders, who’ve been informed that they’ll have to take a haircut on valuations as it attempts to slash some €10 billion ($10.9 billion) of borrowing.
Drahi is probably the most extreme case of a European tycoon who built up an avid following of high-yield investors in the cheap-money era, and is giving them cause for regret — as he struggles to cope with stubbornly higher rates and a mountain of debt. But he’s far from alone. Irish packaging billionaire Paul Coulson has also engaged in roughhouse tactics with creditors.
Italian mogul Andrea Pignataro’s fintech company is doing better, but its quiet borrowing of billions of dollars from a private credit firm blindsided holders of its public debt. British gas-station magnates the Issa brothers had to refinance £3.2 billion ($4.1 billion) of debt for UK grocery chain Asda at punishing rates, though they managed to limit the harm to investors.
Europe was fertile ground for ambitious tycoons over the past decade as its central bank’s negative rates and corporate bond purchases pushed yield-starved investors into snapping up debt in riskier enterprises that offered some kind of return. The continent has a history, too, of venerating billionaire founders — and a few made up a big enough slice of its junk-bond market that asset managers sometimes had little choice but to buy.
Now, many are saying never again. More than a dozen money managers have told Bloomberg that recent anti-creditor moves by Drahi and others mean they’re loath to invest in another company controlled by dominant individuals.
Europe’s faith in billionaire business builders has been seriously shaken.
As Altice France started moving money out of creditors’ reach and threatening to make them swallow losses, “it became quasi un-investable,” says Ben Pakenham, head of European high yield and global loans at Abrdn. “We exited immediately, both Altice France and Altice International. Ultimately Drahi has shown his cards. We’re not particularly keen to be lending to him again.”
Others are waiting to see what happens next before passing final judgment, arguing that such standoffs are inevitable in the high-risk, high-reward world of junk debt. Creditors can have short memories when it comes to flocking back to people who’ve lost them cash in the past.
“Maybe you apply an asterisk to a billionaire-backed company, but I wouldn’t go so far as to say it’s a black mark,” says Chris Ellis, high-yield portfolio manager at AXA. “The only thing that could change that is if Drahi imposes a haircut without putting in any equity himself.”
It’s not just Drahi in the spotlight. Coulson’s Ardagh Group has also been piled high with increasingly pricey credit. While debt prices at Pignataro’s ION have held up well after Bloomberg reported it has $3 billion of additional private loans, its interest bill rose because most of its borrowings have a floating rate. Bloomberg LP, parent company of Bloomberg News, competes with ION in providing financial software and data.
Most of the ire is being aimed at owners who’ve taken off the gloves when refinancing. In a desperate tussle for profitable deals when interest rates were negative, high-yield buyers often let borrowers strip away legal protections that would have safeguarded their interests. Companies are now routinely using those looser terms against their lenders as they try to stay afloat.
Some creditors are doubly furious that tycoons are threatening to make debtholders take the pain of their borrowing binges after paying themselves handsomely via dividends over the years, and funding opulent lifestyles. Art lover Drahi owns work by Picasso and other masters, and bought the auction house Sotheby’s for $3.7 billion in 2019 as a prize asset.
“Debt-financed M&A has for sure helped create a few very wealthy individuals” since the European high-yield market “opened shop in the late 90s,” says Simon Matthews, senior portfolio manager at Neuberger Berman. “Asking the secured lenders who helped get you there for handouts is not a great look.”
Nor is the state of some tycoon-dominated businesses. Altice owns France’s second-largest telecoms company and its risk of default has risen, according to Moody’s Ratings. Coulson’s Ardagh will have negative free cash flow this year, Fitch Ratings forecast in May. Asda, the UK grocer in which Mohsin Issa still owns a stake, is losing market share and its interest costs have spiraled. TDR Capital is set to control Asda after buying Zuber Issa’s holding.
Spokespeople for Altice, Ardagh, ION and the Issas declined to comment.
