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Credit update: Sazka
Our scenario: Default and then takeover!
The situation concerning the Czech lottery operator Sazka is coming to a dramatic head! On 16 December 2010, Sazka informed its bond creditors that it will only be able to partially service the 9% EUR 215 mn amortising bond maturing in 2021 as of 12 January 2011 and that it wants to restructure its debt. In response, S&P lowered its rating of CCC+, which it just gave on 15 March 2010, to CC. In our analysis of Sazka on 20 July 2010, we already pointed out the lottery operator’s problems. Back then, we commented on the situation as follows:
“The structure for servicing the bond seems odd to us. In our opinion, it runs in a circle that benefits first and foremost Oszo (this organisation is wholly owned by Sazka’s owners)... As far as we can tell, Sazka itself functions primarily as a guarantor and cash cow in this network... The poor financial figures speak for themselves. In autumn 2009, Ceska Sporitelna refinanced two lines of credit that, according to the newspaper ‘Hospodarske Noviny’, the company would otherwise not have been able to service. J&T Finance Group already rescued Sazka from going into default before... The high level of non-transparency, the publication of just an annual report, unprofessional investor relations communications and apparent animosities with the rating agencies make it impossible for us to evaluate the credit risk... Nevertheless, we believe that it makes sense not to invest in a company whose risk is virtually impossible to measure.”
A large portion of Sazka’s bank debt will come due this week and next week! Some CZK 900 mn of those debt were purchased from the banks by a Czech real estate investor who, according to media reports, announced that he would allow Sazka to go into default in January 2011 unless the company settles its arrears.
Yesterday, on 22 December 2010, Penta Investments declared that it wants to take over Sazka. Its aim is to purchase a 100% stake in the company. Penta Investments is an Eastern European private equity investor and majority shareholder of the Czech betting firm Fortuna (IPO in October 2010).
The political factor: Sazka is wholly owned by nine “civic associations”, which are political organisations active in the field of athletics and culture. One of the chairpersons announced that he is against takeover negotiations with Penta Investments.
Our scenario: We anticipate that Sazka will go into default. The announced restructuring of its debt will only work with extremely high haircuts. Although all bank debt is subordinated to the 9% bond coming due in 2021 and the “Green Island” civic association is a co-debtor, the recovery rate of the bond following a default should be around 0%.
The bond has a change of control clause. This means that in the case of a majority takeover, 100% of the nominal value must be repaid in full to the bond creditors on the next interest payment date. The next two interest payment dates are 12 January and 12 July 2011. Even though Penta Investments has now announced that it wants to purchase Sazka, in our opinion it would make more sense for Penta Investments to wait until after Sazka has defaulted because Penta would then be in a better position to negotiate with the existing owners and would be able to purchase Sazka at a much cheaper price. The change of control clause would then not have an impact. The bond is not very liquid and is currently listed at a bid price of around 50%, so much too high.
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