(Repeats story published on July 3 for additional subscribers)
* Olympic Entertainment shifts assets away from creditors
* More European firms may follow in COVID-19 fallout
-analysts
* INSIGHT-The devil's in the detail for junk
debt:
By Yoruk Bahceli
AMSTERDAM, July 3 (Reuters) - A sleight of hand by the owner
of an Estonian gaming company is alarming investors worried that
tactics used by private equity firms in the United States to
shift assets away from creditors are coming to Europe.
Olympic Entertainment, owned by private equity firm
Novalpina Capital, told bondholders on June 18 it had moved some
assets - all its online operations and a Lithuanian business -
into an entity not bound by its credit agreements, according to
an email seen by Reuters.
The company, which operates the Olympic Casino brand,
distributed shares in the separate entity to a parent company
controlled by Novalpina, the email said, effectively paying the
London-based firm a dividend.
Olympic Entertainment, which had 114 casinos at the end of
2018 in Estonia, Latvia, Lithuania, Slovakia, Italy and Malta,
did not respond to requests for comment.
Olympic's asset shift means holders of a 200 million euro
bond maturing in 2023 would no longer be able to make a claim
against the assets were the company to go bankrupt, according to
bondholders questioning the move and lawyers.
Lawyers said the transfer, which was legal according to the
bond's terms, was the first such move in Europe's debt markets.
It is, however, all too familiar to investors in U.S.
companies.
In 2017, retailer J.Crew shocked debt markets by using
assets it had moved out of the reach of creditors, despite them
being pledged as collateral, to raise more debt.
Such a move has been referred to since as "pulling a
J.Crew", and has been copied by others in the United States,
including retailer Neiman Marcus, which moved its online
business MyTheresa out of the reach of bondholders in 2018.
J. Crew and Neiman Marcus both filed for bankruptcy in May
after shutting stores during coronavirus lockdowns.
Lawyers and credit analysts said they expected more European
firms hit by the COVID-19 pandemic to exploit weak debt terms,
or covenants, to shift assets away from creditors and use them
to raise more cash.
'SLIGHTLY NEFARIOUS'
Companies have been able to make such transfers thanks to
looser terms on debt agreements in recent years as yield-hungry
investors accept less protection in a quest for higher returns.
Covenants on European high-yield bonds have became more than
twice as permissive over the past decade, according to financial
intelligence provider Reorg Research, and central banks have
warned the deterioration in lending standards.
But the asset stripping tactic has so far been a U.S.
phenomenon, with Europe's legal landscape considered more
protective for bond investors.
"The U.S. has a reputation for being very debtor friendly
when it comes to the legal framework, whereas European
jurisdictions are more creditor friendly," said Caitlin Carey, a
senior analyst at Covenant Review, which analyses the terms of
debt issues.
Olympic Entertainment's bondholders, who have hired law firm
Kirkland & Ellis, have written to the company's board asking it
to restore the assets, questioning whether they were transferred
at a fair valuation, according to a letter seen by Reuters.
A lower valuation makes it easier for the asset transfer to
comply with the bond's terms, lawyers said.
"It appears that the transaction constituted a fraudulent
transfer designed to benefit the sponsors and that this is the
reason for it being carried out without notice and without any
proper market testing process," said the letter sent by the law
firm on behalf of the bondholders.
The bonds are bid at about 79 cents, down
from 84 before the transfer and 100.5 at the end of February,
according to MarketAxess data.
With revenue of 40 million euros ($45 million), Olympic
Entertainment is a small business but analysts say its move will
analysed by other European companies tempted to do the same as
they grapple with the economic slowdown caused by COVID-19.
"It could be the first of many to come. As far as we are
aware there has been no company in Europe that has used the
unrestricted subsidiaries manoeuvre to do something slightly
nefarious," said Shweta Rao, senior director at Reorg.
"Companies and their owners might get emboldened and think,
you only need one person to start these things."
WORST DEAL EVER
Earlier this week, the terms of a 4 billion euro bond deal
to finance a private equity buyout of Thyssenkrupp Elevator was
amended to cut the ability of the consortium led by Advent and
Cinven to make similar transfers.
Credit research firm 9fin said the initial covenants were
the "worst of any deal we've ever reviewed". Covenant Review and
Reorg Research also said the original terms would have left bond
investors with scant protection.
But even with the changes, the bonds still allow some assets
to be moved away from creditors, they said.
Cinven, Advent and Thyssenkrupp Elevator declined to
comment.
Other large companies with European debt that can make
similar asset transfers based on their debt covenants include
Britain's theme park operator Merlin Entertainments and
chemicals company Ineos, Covenant Review said.
A spokesperson for Ineos said its covenants were standard
for a company of its size, rating and market standing, and its
financial policy had been communicated clearly to investors.
Merlin declined to comment.
U.S. companies making such asset transfers so far have
mostly used the tactic to push existing investors to agree to
debt restructuring, or risk substantial losses.
A source familiar with Olympic Entertainment told Reuters it
was likely to require new financing and the transferred assets
could be pledged as security to new lenders.
"As we come out of the COVID-19 crisis, I can see (asset
transfers) ... potentially being used a lot more in the market
as a way to provide liquidity to stressed companies where
refinancing is not possible," said Alex Kay, a partner at Hogan
Lovells law firm in London.
"Lawyers and bankers working on the issuer side will become
more creative around how you can get cash into these businesses
without creditor consent."
($1 = 0.8912 euros)
(Reporting by Yoruk Bahceli; Editing by Rachel Armstrong and
David Clarke)