Walk like an Egyptian

A month ago, I had an interesting discussion with someone involved in the subordinated debt of WIND Hellas. This is a situation I have followed very closely all year, though I was only interested in the senior parts of the capital structure, for reasons which are now obvious, principally because I have always expected the outcome we have recently seen.

As I explained to them, my thesis was pretty straightforward. The company's capital structure was over-leveraged, and the EBITDA multiple of the company through the senior debt alone was in some cases at a premium to European incumbents, despite having a critical liquidity crisis, compromised competitive position, and Greek macro risk. The implication was that the subordinated debt had little if any value, and Mr. Sawiris' EUR500m equity check had unquestionably sunk to the bottom of the Aegean. The only way to salvage any equity value would be to align interests with the senior lenders and push out the guys in the middle - the subordinated debt holders. No room for concessions or niceties.

Their response was that they couldn't understand why Mr. Sawiris would risk his reputation and access to capital markets through a UK pre-pack insolvency which wiped out EUR960m and $275m of subordinated debt. Surely he wouldn't be able to come back to the markets any time soon. I told them I wasn't convinced that he was worried about either reputation or access.

Sure enough, less than a month since the filing, sister company Wind Telecomunicazioni S.p.A. comes to market with a EUR500m bond offering to refinance its second lien debt and 2015 maturities. Not only is it serious money at EUR500m, it is also reportedly structured as a PIK note for the first four years. We haven't seen any PIK issues since things started to go south, and many of the outstanding PIK deals from the Good Old Days have been treated like red-headed stepchildren over the past year. So, having just crushed a boatload of subordinated debt in November, we're now looking at a large, deeply subordinated debt issue which is effectively free money for the first four years. Far from being locked out of the markets, if Mr. Sawiris gets this one away, then I am prepared to officially elevate him to rock legend status. You may not agree with his tactics, but he certainly gets an A+ for audacity.

Surely investors angered by the WIND Hellas outcome would be inclined to boycott, but I hear price talk of a 12% coupon, and the market is so relentlessly thirsty for yield that I'm pretty confident that when the books close it will either be up-sized or very oversubscribed. I don't know the Egyptian gesture equating to the two-fingered salute, but this will probably do nicely.

Also posted on eurotelcoblog.blogspot.com