London, Aug 18 - Debt-ridden Belvedere's sudden move to seek protection from creditors has fanned worries other high-yield borrowers could also seek refuge behind legal rules favouring them in France.
A hefty drop in the drinks group's floating-rate notes (FRNs) after it sought what is known in France as a safeguard procedure deepened falls in prices of debt of other French companies, such as that of manufacturer Mechachrome.
"They (Mecachrome) have had their own piece of bad news, but the price to the downside has been overdone somewhat by what has happened to Belvedere," said a London-based fund manager.
"People are a bit nervous that Mecachrome becomes another Belvedere and you end up in another safeguard procedure."
Bonds in Mechachrome, which makes parts for the aerospace industry and Formula I racing, sank to about 50 from 80 percent of face value after it issued a profit warning and Standard & Poor's cut its credit rating to B.
The drop came after Belvedere's FRNs due 2013 at one point sank to about 25 percent of face value on the back of the safeguard procedure which it sought after breaking a bond covenant.
France's safeguard procedure, established in January 2006, gives troubled companies time to negotiate with creditors while keeping the business out of formal insolvency.
Market players said this can lead to a drawn-out and uncertain process bondholders want to avoid.
The Belvedere situation has revived memories of the restructuring of Eurotunnel, the operator of the undersea rail tunnel linking Britain and France, where shareholders -- normally last in the queue when a company is in trouble -- got some money back even ahead of the creditors.
ANGRY BONDHOLDERS
Belvedere's move into the safeguard procedure has angered bondholders, who are exposed to a company struggling with debt of 425 million euro ($634 million).
One investor in global high yield bonds, who asked not to be named, described the company's move as "careless", because the breach could easily have been avoided.
"Whether they have done the right thing longer term by putting the company into safeguard is debatable. The way they have handled it though is dreadful," he said.
The London-based fund manager told Reuters he had cut his holding in Belvedere notes to 1 from 6 percent of his 100 million euro fund.
LEGACY OF CODE
France's safeguard procedures are adding to growing creditor scepticism towards insolvency rules in France, which date back to the days of Napoleon I.
Rules enshrined in his Napoleonic Code regarded creditors as part of the cause of corporate failures, because they played a role in allowing companies to take on excessive risk, said Edward Eyerman, head of European leveraged finance at Fitch Ratings.
The system - echoing Chapter 11 provisions in the United States - means that management continues to run the business while giving the company time to come up with a deal, in stark contrast to what happens in other countries.
"The system that operates in Germany and Britain essentially means that the court takes over the company for the interest of the creditors," he said.
EUROTUNNEL DEJA VU
Fund managers agree that creditor protection in Britain in particular has historically been stronger than in France.
"To a certain extent, yes I would avoid certain types of French debt," said the second fund manager.
"But once you get to a certain size in France, you absolutely want the debt in French national champions that won't be allowed to fail by the establishment. But trying to work out where that cut-off is is certainly an issue."
International accountancy standards prioritise creditors over shareholders when a company goes bust and the firm has to repay its debts. In some cases, creditors trade their debt for an equity stake.
Companies in a safeguard situation can also try to raise new funds, though that may mean that high yield investors lose out.
"That typically comes in senior to existing creditors. A lot of high yield investors will see that as money coming in above them and will lower their potential recoveries," said Eyerman.