Rallye faces new front in rift with short sellers

Bloomberg

Rallye SA, the indebted parent of French retailer Casino Guichard-Perrachon SA, may soon face a new front in its battle against short sellers.
Distressed debt funds betting against the company have been buying up a Rallye bond due in January 2022 that may enable them to force a default, according to people familiar with the matter. That’s because the bond includes a clause stating that if the company’s net worth falls below a certain level, the investors can call in the debt if a majority agree, said the peo-
ple, asking not to be identified because it’s private.
The company is in the midst of a row about how it calculates its accounts, with some hedge funds arguing its methodology flatters the firm’s net value. A lawyer representing a group of short sellers has sent two letters to France’s auditing regulator, outlining the discrepancy. Casino and Rallye filed a criminal complaint with French prosecutors last week alleging that short sellers are spreading false information to drive down their share prices. If the regulator finds merit in the short sellers’ arguments, the company may have to restate its adjusted net worth below a level that breaches a covenant on the 110 million-euro ($125 million) bond.
“This financial term would not be met if Rallye held its Casino investment in the books at less than 51 euros per share, based on the parent’s 2017 accounts and its shareholding at that time,” CreditSights analysts Simon Atkinson and Maryum Ali wrote in a note to clients earlier this month.
A Rallye spokesman said the company has enough cash to fund all its debt and “refutes any speculation that suggests otherwise.” Under French accounting rules, there is no mark to market on Rallye’s holding of Casino shares, according to the spokesman. “The value of these shares is based on the historical price at which the stock was acquired. The methodology for assessing this valuation is audited each year and has not changed,” he said.
French accounting standards have allowed Rallye to carry Casino shares on its balance sheet at a materially higher level than market price for years but that’s only permitted if the criteria for calculation are determined in advance. Short sellers say the company violated the rules by tweaking the criteria over time to inflate the value
of the shares. The company says it has conformed to the same standards since 1992.