Rallye Debt Swaps Flash Warning Light After Casino Shares Plunge
(Bloomberg) -- A new sign of stress has emerged for creditors to Rallye SA, the indebted parent of French retailer Casino Guichard-Perrachon SA.
Credit-default swaps insuring Rallye’s debt for one year surpassed five-year contracts this month for the first time since CMA began tracking the data in 2009. Protecting Rallye’s bonds for 12 months now costs 896 basis points more than for five years, CMA data show.
Longer-term debt insurance is typically more expensive than shorter-term protection, and an inversion of the swap curve signals investor concern there’s an imminent risk of default.
Rallye’s one-year swaps surged to the equivalent of 2,982 basis points on Wednesday, signaling a 35 percent probability of default, according to CMA.
Creditors and analysts are concerned that Rallye will struggle to cover debt maturities and refinance obligations because most of its credit lines require it to pledge Casino shares to draw down. Casino’s shares have fallen to a 22-year low of 32 euros, pushing the value of its parent’s assets below its obligations.
Rallye’s 1.7 billion euros ($2 billion) of available credit lines include 330 million euros that don’t have a pledge over Casino’s shares, Chief Executive Officer Franck Hattab said on Thursday. He declined to comment on the swaps curve.
Rallye plans to repay debt maturing at least through the end of 2019 using existing credit lines and issuing new bonds, he said in June. It must repay as much as 675 million euros of bonds in October, along with 300 million euros of bonds and 50 million euros of bank loans due next year, according to its latest earnings report.
“Although we deem liquidity at Casino and Rallye satisfactory to service debt commitments, we see mounting uncertainty with regard to Rallye’s prospects of refinancing upcoming maturities,” Tanvi Arora, a senior credit analyst at Lucror Analytics in Singapore, wrote in a note to clients on Thursday. Lucror revised its assessment of Rallye’s debt to high risk.
Swaps on Rallye soared on Wednesday, and were little changed on Thursday, after Sanford C. Bernstein analyst Bruno Monteyne lowered his target for Casino’s shares to 26 euros. Anthony Giret, a credit analyst at Spread Research in Lyon, estimates that if the share price falls below 27 euros, Rallye’s access to credit lines will be restricted and it could be unable to meet all of its debt obligations next year.
“The share decline challenges Rallye’s liquidity due to the requirement to pledge collateral,” Giret said. “There are threshold effects which will make the situation increasingly difficult for Rallye.”
2018-08-09 11:09:36.673 GMT
By Katie Linsell