Antolin - Thoughts on covenants and what if...? - Positioning

All,

Please find our only slightly updated analysis here.

We have been critical of Antolin for a while. But as covenants, creditors and rating agencies are set to define the next months for the auto supplier, we think that a breach (and a waiver) will be coming in the summer, followed by a certain downgrade from S&P and probably from Moody’s too - the latter may still want to fire a warning shot first. On our calculations, at least, Antolin should breach its net leverage covenant by some margin. Meanwhile, the tariff terror will be ongoing.

Investment Considerations:

- We are taking a shorting the expensive 2030s for 2% of NAV at 82c/€ with a view to closing out in early June - after Q1 reporting and before a then visibly inevitable covenant breach and its likely waiver. S&P might also downgrade the bonds in the meantime. Moreover, unless management can hit our somewhat constructive forecasts, liquidity could become tight very quickly, which would probably drop both bonds down to 60c/€ as the low profitability would not allow for much debt carrying capacity. Management are selling non-core assets to fund the turnaround plan, but two years in, we can only identify approx. 1% margin uplift. The bonds, however, trade a touch wide to go short here on a thesis that could take four months to play out.

- We are expecting a covenant waiver between Q2 and Q324, but judging by their last employed language, at least S&P should be downgrading the bonds anyway.

- On the other side of that downgrade and once we gain conviction (H125?) that the company can continue to fund its operations and turnaround, the bonds would become attractive.

Q4 Net Financial Debt / Ebitda:

- The covenant is set at 3.5x these days and is anchored in the Senior Credit Facilities, which includes the RCF. The company has already guided that the Dec. 24 level will be around 3.2x.

- We have no problem modelling the 3.2x EBITDA leverage, considering recent disposals and the usual Q4 inflow of WC.

- Even though the sale of the 45% stake in the Ototrim JV has a -0.2x negative impact, the overall impact of the divestitures is positive.

- So there won't have been a breach in Q4 and the renewal of the renewal of the factoring facility suggested as much back then.

Q1 Net Financial Debt / Ebitda:

- We are forecasting a WC outflow in Q1, which is the principal reason behind our forecast of a tight 3.4x NFD/EBITDA print. We imagine this can be managed and do not anticipate a breach quite as soon as this.

- If the company affords itself the breach, then we imagine management already have the waiver in hand.

Q2 and Q3 Net Financial Debt / Ebitda:

- This is where we see no way around the breach. On today’s trajectory, the business should be breaching the covenant and by some margin. We arrive at multiples of 3.7x and 3.8x respectively.

What if?

- What if the covenant is breached? We have not heard of the RCF travelling already and we’d think it too early for that, only because of the covenant breach.

- Antolin have been producing (ever so slightly) better margins recently, so why make a great fuss now?

- The Senior Credit Facilities look like they are merely pari passu with the remainder of the debt and so their desire to squeeze some advantage out of the situation must be great. However, the docs permit only €25m of liens, so unless the RCF wishes to enter great structural negotiations, there is little they can do.

- So most likely we will see the banks issuing a waiver for a few quarters.

Rating:

- Both, Moody’s and S&P were weary of the tight covenant headroom in their last assessments.

- Moody’s last affirmed their B3 rating in July 2024, while S&P only dropped its outlook to negative on its B- rating in December. We think Moody’s might therefore be next to review the case.

- Reading the language of their respective statements (S&P mentioned Covenants 8x in their statement) we think S&P would downgrade the bonds to CCC+, even if the company received a waiver. Moody’s seemed less focussed on covenants, but their review is longer ago.

Thought: Any further scrutiny of Antolin might finally spark a read-across to Adler Pelzer.

Looking forward to discussing this name with you.

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk