Ardagh Group – Bowing to the inevitable
All,
Please find our updated analysis here.
Ardagh Group (ARGID) has finally accepted that its capital structure is unsustainable. The SSNs and SUNs have different plans for the company, but we expect the SSN plan, which is more painful for the SUNs, to prevail. We think the valuations for the SUNs are about right (better than our initial thoughts (58c/$). The SSN package should be worth 88c/$ out of the box, but we see the bonds recovering par, and that is the most likely destination for our capital if we invest. The timing of the restructuring is unclear, but we expect it will be after 13th June, as the Apollo facility is callable at 102 from then.
Investment Rationale:
- We retain a 2% short on the $800m SUNs. We expect them to fall into the low 40's. We recently reduced our positions on the ARGID/AMPBEV debt stacks as the bonds had fallen closer to our assessment of fair value. This week Ardagh Group (glass packaging) announced its restructuring proposal and as we anticipated the bulk of the pain will be borne by the SUNs.
- We are not changing our positions yet, but if the restructuring plays out as we currently envisage, the ARGID SSN’s at 85c/$ would offer 15 points of upside over 12 months, with five of downside. We expect a lot more volatility in the NewBidCo SSNs and would expect liquidity to be scarce.
- The NewBidCo Pref Bs offered to the SUNs will be a lot more volatile as there is no control over the AMP asset and liquidity will be scarce. If a market develops for ARGID equity there will be an upside, but this is not likely to emerge for at least a year.
- The optionality in the PIK’s has gone, about all we can say is that the $57m in Pref Bs paid to the holders will be part of a larger Pref B tranche and will have more chance of liquidity developing.
The SUNS will bear much of the pain in this restructuring:
- SSNs: Assuming the new bonds Yield 15% => a recovery of 88% as soon as the restructuring is completed. Of the $2.5bn in SSNs at the ARGID level, $1.9bn (78%) will be exchanged into $1.9bn of new SSNs (5NC2). The remaining ARGID SSNs will be exchanged into $550m (5NC2) of SSNs at the vehicle that holds the AMP equity stake (NewBidCo) and Preference equity stakes. There is no haircut proposed.
- SUNs: Assuming the Pref B’s price to yield 20% => a recovery of 56% for the SUNs, once the restructuring is completed. The Pref B and the equity stakes are unlikely to have liquidity either. The $2.3bn SUNs at the ARGID level will be equitized; in return, holders will get 100% of the equity in ARGID + $771m in preference equity in NewBidCo + 20% of the Equity in NewBidCo. The ARGID equity will also benefit from the proceeds of the sale of Trivium, where ARGID has a 42% share. We expect that the sale has been delayed as bidders know that ARRGID needs the cash and have priced their bids accordingly.
- The Holdco PIKs will be virtually wiped out and get $57m in Pref B shares for their $1.7bn in notes.
- ARGID will issue a new super senior $1.2bn bond with $400m of the proceeds to provide cash for ARGID. The other $800m will be used to repay the InterCompany loan from NewBidCo and in turn to repay the $800m in notes held by Apollo which have security over the AMP stake (these notes also share in the same collateral as the SSNs). The Apollo notes have a 102 call from June 2025.
- The counter proposal from the SUN holders tilts the balance away from the SSNs, but we cannot see why the SSNs would vote for it.
The deal will probably succeed:
- The SSNs and SUNs will be separate classes in any restructuring and the most likely jurisdiction will be the US, as a significant proportion of the assets are there.
- There are also plants all over the EU/UK, so establishing COMI in European jurisdictions would be possible if necessary
- In a US process, If SUN holders vote against the restructuring, they could be crammed down.
- We expect the SUN holders will reluctantly support the SSN plan. The SUNs may aim for more but not get it.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055