(Debtwire) CABB Jayhawk integration ends long wait for positive free cashflow but Acetyls dip clouds outlook
02 June 2020 | 16:29 BST
CABB's net leverage is still higher than in 2014 when it made its high yield market debut, cash generation is thin and its Acetyls segment is a drag on performance. But the German-headquartered agrochemicals company's integration of Permira-owned Jayhawk has boosted earnings while liquidity remains reasonable, according to a buysider and a deep-dive analyst, with a second buysider cautious.
1Q20 operating EBITDA grew 0.7% YoY to EUR 29.1m. This meant net leverage was flat sequentially at 5.7x (4.4x senior secured), which is close to the 5.8x marketed metrics during its September 2019 bond launch (which included adjustments) and 5.5x when it marketed its debut bond back in May 2014. Permira is the fourth owner of CABB since 2005 after acquiring the company from Bridgepoint in 2014 for around an 8x EV/EBITDA.
Cash generation is likely to be muted this year despite capex being not far above maintenance levels. CABB guided to EUR 55m capex (versus EUR 38m maintenance capex marketed at bond launch), faces EUR 41m interest and EUR 4.5m of cash taxes, which would suggest just EUR 10m of free cashflow (0.1x deleveraging per year) based on EUR 111m 1Q20 LTM operating EBITDA and assuming flat working capital.
The name has been a recovery story in recent years, bringing down leverage from elevated levels. 1Q19 net leverage for example was up at 6.5x (4.6x senior secured) when LTM operating EBITDA was EUR 89.2m, while leverage was up at 7.6x at 2Q18 when LTM operating EBITDA was down at EUR 74.7m. But half the roughly EUR 22m improvement in operating EBITDA since the first quarter last year was down to the contribution of the US chemicals business Jawhawk, which added EUR 11m LTM 2Q19 EBITDA when the recent bond was marketed.
“The business has never generated cash since they came to the high yield market back in 2014 and needs ongoing capex just to keep customers,” one of the buysiders said. “It is a never-ending story, they always say next year they will generate cash but it never happens. The subs are near 6x net levered and the company is dependent on the RCF, it’s concerning.”
CABB has spent heavily on capex for several years without generating top-line growth, winning new contracts and increasing its Custom Manufacturing capacity but losing part of its pharmaceutical business, according to a research report by independent deep-dive research firm Sarria. The group has strong contracts but they only last for a few years and usually end after the return on investment is fulfilled, leaving it dependent on contract renewals, which are usually but not always forthcoming, the report noted.
Despair of Acetyls
One concern is the weak performance of the Acetyls division, which suffered a 25% YoY drop in 1Q20 EBITDA to EUR 7.6m from EUR 10.2m in 1Q19, including Jayhawk. This was partly driven by falling caustic soda prices although they showed more resilience by quarter-end. CABB's Acetyls business was not impacted by the COVID lockdown, unlike competitors in India for example, management noted.
“The CABB business is resilient in this kind of COVID environment and there is revenue visibility on contracts. The end-markets are mostly in the relatively stable agrochemical sector, with the remainder of the exposure also very diversified,” Sarria noted. “1Q20 was resilient overall and the Acetyls business has long-term contracts with customers. Also, there is also an element of customer switching costs and Acetyls has decent revenue visibility on a 12 months horizon.”
Covenants on the recent bond issuance are permissive for an eventual disposal of the Acetyls business, similar to the 2014 issued bond documentation. A report from Xtract Research, a Debtwire sister service, noted that the Acetyls Business is given bespoke treatment as the latest covenants explicitly contemplate its disposal and use of proceeds to pay a dividend.
The sale of the Acetyls Business will not trigger a change of control put and the proceeds may be paid straight out as a dividend subject to a 4.75x consolidated net leverage ratio and 4.25x senior secured net leverage ratio. It was unclear what guarantees/collateral would be released (which would be automatic, without noteholders' consent being required) upon such disposal, Xtract added.
“The Acetyls sale is a possibility and the covenants have always been there since 2014. Custom Manufacturing and Acetyls are unrelated businesses so if the sponsor wants this as an option then it is there,” the first buysider said. “It is a possibility but at the moment it is tough to say what will happen.”
The Custom Manufacturing business, which accounts for three-quarters of group earnings, is performing well with 1Q20 EBITDA of EUR 22.1m up some 14% YoY including Jayhawk, while EBITDA margins improved to 24.5% from 21.7% a year back as a result of a recovery in US end-markets and a resumption of imports to China.
Custom Manufacturing, CABB’s largest side of the business, is performing well while the Acetyls part has been more volatile, the second buysider said. "The 4Q19 Acetyls performance was not so bad but it suffered in 1Q20 although the good Custom Manufacturing performance offset this."
CABB journey
CABB had EUR 103.2m of total liquidity at 1Q20, comprising EUR 48.7m cash on balance sheet as well as EUR 54.5m available of its EUR 80m credit facility, which has an additional EUR 20m accordion facility. The revolving credit facility has an 8.9x net leverage covenant, providing reasonable headroom.
The group also concluded a securitization program of receivables with a German bank in May with a EUR 30m commitment volume, management noted on the earnings call. This will mean an improvement in the cash position in 2Q20. CABB plans to pay back its revolver draw in 2020, management noted on the call.
CLICK HERE for an 1Q20 earnings call transcript.
"This name is still pretty levered and trades too tight. But then the market is strong so who cares what I think," the first buysider said.
CABB's EUR 315m 5.25% senior secured 2025s gained three points following the results on 25 May to 102.25-mid today (2 June) yielding 4.7%, according to Markit. The EUR 150m 9.5% senior unsecured 2026s improved 3.5 points to 98-mid yielding 9.9%.
Some more comfortable senior secured holders could move down the capital structure and play the subs even if this is a technical driven play and the EUR 150m issuance size is small, the second buysider said. CABB is one of the few chemicals players that has not been downgraded by ratings agencies and no action has been taken against it. "Even if Acetyls is down, they now include Jayhawk in LTM EBITDA so that receives a boost.”
CABB declined to comment. It will report 2Q20 results on 26 August.
by Adam Samoon