(Bloomberg) -- 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.
Not So Super
Charismatic entrepreneurs who supercharge their bets with leverage aren’t uniquely European. John Malone, known in the US as the “cable cowboy,” has long used a similar blueprint to build a telecoms and TV empire which has managed, so far, to avoid the traps that snared his one-time protege Drahi.
And the junk-bond playbook of borrowing big to splurge on deals was first invented in 1980s New York, by Drexel Burnham Lambert’s Michael Milken, an innovation that catapulted a bunch of relatively unknown US financiers — including Carl Icahn, Ronald Perelman and Nelson Peltz — onto the global stage.
But in recent years tycoon owners have been prominent in Europe’s high-yield debt markets, often with bad outcomes. Jean-Charles Naouri built a retail powerhouse in France with a lot of leverage, before losing it in a restructuring last year. Others stumbled under too much debt: Ilija Batljan, founder of ailing Swedish property giant SBB, was ousted as boss of his own creation.
“Founder businesses have a history of having problems because they don’t know when to stop,” says Catherine Braganza, high-yield portfolio manager at Insight Investment Management. “History is littered with examples, there were a lot of distressed and restructured names in the German small cap space as well. They discover they’re not invincible.”
And while freshly burned lenders say they’ll no longer blithely follow where tycoons lead, history suggests otherwise. Cevdet Caner saw one property empire bite the dust more than a decade ago before helping build another that borrowed billions. That endeavor isn’t going well.
A problem for investors is that many European companies controlled by dominant single shareholders have become so bloated with borrowing that it’s been almost impossible to avoid them in a shrinking universe of high-yield debt. Europe’s junk bond market has deflated since late 2021, as businesses refinance and search for cheaper borrowing elsewhere.
Drahi racked up $60 billion of debt by acquiring one of France’s biggest phone companies and then expanding in Portugal, Israel and the US. The Issa brothers borrowed billions as they went from owning a gas station in Blackburn to buying forecourts across the globe and Britain’s third-largest grocer. Coulson made Ardagh a packaging leader with the aid of more than €10 billion of debt.
These debts are held so widely that creditors often have no one else to sell to. So they face either the Pyrrhic victory of selling at a loss, or holding their noses and hoping there’s some value left after a restructuring. Rate cuts may lower interest bills but they might not be soon enough — or deep enough.
PE Lessons
Private equity firms such as Blackstone Inc. and KKR & Co. tend to be the most common users of high-yield markets, which they tap to load their companies with debt in just the same way as billionaire-owned firms. With stubbornly higher rates, the buyout industry has been going through its own agonies of late as portfolio businesses stagger under ballooning interest costs.
But some creditors who spoke to Bloomberg for this story say PE firms can have more of an incentive to play nicely than an individual whose fortune is derived from a single asset, or collection of assets. Outfits like KKR often play hardball with lenders, but they’re on a tighter leash because they’ll need those same creditors for the next deal, the same people say.
“When you’re investing in a business with an entrepreneur or family it’s significantly more difficult,” Jakob von Kalckreuth, portfolio manager at UBS Asset Management, told a panel at a recent industry conference in Barcelona. “We’re very cognizant of the risks of lending money to people who own a single asset that they’ll defend at all costs. There’s been a couple of other situations where had we had been supporting KKR or Blackstone the outcome would be completely different.”
Drahi and Coulson certainly haven’t held back in some recent moves. Ardagh has inked an agreement with investment titan Apollo Global Management Inc. to refinance its short-term borrowing and effectively reduce the amount junior creditors holding $2 billion of debt will get back.
Meanwhile, Altice France caused an earthquake in Europe’s credit markets by warning holders of its €24 billion of debt to brace for pain. As investors have taken fright, all of that borrowing is now priced at distressed levels.
Some powerful creditors strongly oppose any restructuring that favors Drahi’s equity, although others appear more willing to take a loss and move on, people with knowledge of the matter have told Bloomberg.
“I don’t think his behavior is any different to more aggressive PE sponsors,” says Ellis at Axa, adding that his opinion would sour if Drahi tries to dodge sharing the cost. “We rank above him in the capital structure, and that shouldn’t happen. If it were to happen, we’d be worried others would follow.”
Even hedge fund heavyweights such as Millennium Management have been caught up in the turmoil, having to liquidate Altice wagers, while star credit trader Hamza Lemssouguer’s Arini lost money in March after similar bets.
Charm School
As well as being swept up by the tide of cheap money and the hunt for yield, many investors were charmed by the men at the helm of these companies. A few have delivered. French billionaire Xavier Niel, for one, has built a large European telecoms business and still has the support of markets.
“A lot of the time on these deals the investment case is the person behind it as much as the company,” says Abrdn’s Pakenham. He and his peers lent heavily to United Group, an east European media and telecoms group led by Serbian tycoon Dragan Solak, which has slashed debt without upsetting backers. “They used asset sales to de-lever,” Pakenham adds. “He could have done the same thing as Drahi did. But he didn’t.”
Reeling from tycoons’ heavy-handedness, investors pine for the protective covenants that vanished from debt deals in the easy-money era. But legal terms are getting even worse for them, as the vast sums of money sloshing around credit markets and a paucity of deals hands power to the bond issuers.
And with higher interest costs still wreaking havoc on borrowers, creditors can expect more battles over who pays the toll. Investors are trying to fight back with clauses that restrict companies’ ability to move assets beyond their reach, so-called “J Crew blockers,” but it’s hard to say how effective they will be.
“There has been a lot of noise for large capital structures in this space,” says Raphael Thuin, head of capital markets strategies at Tikehau Capital. “And it leaves you with the feeling that when things get dicey, bondholders often get the short straw.”
--With assistance from Irene Garcia Perez.
(Updates with J Crew blocker details in penultimate paragraph.)
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