S&P: Codere default "virtual certainty" in new financing deal

22 July 2020

Credit ratings agency Standard and Poor’s has downgraded Spain, Italy and Latin America-facing operator Codere’s credit rating for the fifth time in just over nine months, indiciating default is a “virtual certainty”.

Last week (14 July), the operator agreed a new €250m (£227.4m/$285.1m) refinancing agreement with its existing bondholders. However, the ratings agency said that this refinancing was “tantamount to a selective default” and should it be accepted at Codere’s next shareholders’ meeting on 30 July and by a large enough percentage of creditors, it would determine the operator to be in default.

“In our view, the transaction will result in investors receiving less than originally promised on the original securities,” Standard and Poor’s said.

This, it said, was due to the fact that the agreement allowed Codere to pay its interest with bonds of its own, through a pay-in-kind process.

If the deal was not accepted, the ratings agency said Codere was likely to face a breach of covenant within three months, noting its “high level of debt and servicing costs” which it said made some form of debt restructuring “highly likely”.

Standard and Poor’s added that Codere estimates it requires up to €100m in additional funds to comfortably cover cash burn and leakage related to effects of the Covid-19 pandemic.

“We expect Codere's credit metrics will materially deteriorate in 2020 while the recovery for 2021 remains uncertain,” Standard and Poor’s added. “As governments have started to ease lockdowns, Codere has resumed its operations in Italy and Spain, seven halls in Mexico, and the Uruguayan racetrack.

"These operations represent less than half of Codere's business. Under our base case, we expect most of Codere's gaming stores to reopen by August-September 2020.

“However, we note that the reopening phase in Latin America remains developing and there could be a downside to our assumptions. There is also still uncertainty regarding restrictions to be followed in stores, customer behavior toward visiting gaming halls, and the risk of a potential second wave of the pandemic.”

This marks the fifth time that Codere had been downgraded in the past eight months, with the first occurring in October when it was switched from B to B-, shortly after Codere announced that financial inconsistencies could impact its full-year results.

Codere in February revealed a 5.9% year-on-year decline in revenue for 2019, after growth in European markets was offset by currency fluctuations hitting the contribution from its Argentinean business.

In May, it also reported that revenue fell 21.3% to €278.5m in the first quarter of 2020, while a combination of retail shutdowns resulting from novel coronavirus (Covid-19) and exchange rate fluctuations contributed to losses rising to €97.1m.