Ardagh – Paying a handsome price.
All,
Please find our slightly updated analysis here.
Little has changed in our core thesis after the recent results and financing actions at the Ardgah Group. However, the timetable is forming up to action by the end of the summer. We still expect that an Amend and Extend (A&E) operation is coming and that the brunt of the pain will be borne by the SUNs, with the SSNs whole. We had expected the A&E to be funded from the proceeds of a sale of Trivium, which would have hindered extracting a fair value. The ABL drawing increases liquidity and gives ARGID breathing space on the Trivium sale. The Apollo loan has bought ARGID time at a handsome price, but the issue of leverage is still there. The cost of the Apollo loan, and the security package required indicates how deep hole unsecured creditors are in. The new TL from Apollo precludes further cash coupons on the PIK toggles, which now only have option value.
Investment Rationale.
- We continue to hold positions in the Ardagh Group Debt stack
- Long 3% NAV in the AMPBEV $500m 2029 SUNs @77c/$ currently trading at 77c/$
- Short 3% NAV in the ARGID $800m 2027 SUNs @69c/$ currently trading at 55c/$
- Short 2% NAV in the ARGID $800m 2027 SUNs @57c/$ currently trading at 55c/$
- We expect the AMPBEV bonds to tighten as the glass business improves (first in the Americas and then in Europe).
- Ardagh’s stake in AMPBEV secures the Apollo loans. The AMP SUNS have a change of control provision, so a sale would trigger an investor put at 101. The Change of Control language in the AMPBEV bonds has a carve-out for Initial Investors, which include Yeoman Capital, Paul Coulson and five other Ardagh investors.
- The Metal Packaging business will see headline leverage fall from 5.5x to 5.2x by December 2024 and 5.0x by December 2025.
- The upside in the trade is 8 points of capital plus 1.5 in coupon over the next six months. An expected return of 12% (26% annualised)
- The catalyst for the next leg down for the ARGID SUNs will be the proposal from ARGID, which will solidify the losses. The SUNs are still trading above their fair value of 41c/€.
- The ARDFIN PIK toggles have some optionality, and the $250m secondary TL from Apollo will boost hopes of a buyer for cheap PIKs now that they will no longer receive cash coupons. We are still keeping clear of instruments that increasingly have little more than hope value
ABL draw is preparing the ground for a restructuring:
- We had been sceptical that ARGID had access to the ABL and thought this may be part of the reason behind the Apollo TL. The additional liquidity $274m liquidity will give Ardagh some more cash to try and bring the SSNs on board and possibly to provide some incentive to the SUNs. It will also help with discussions regarding the Trivium stake sale.
- On the investor call, management said it was expecting movement on the SSNs soon (we expect the SUNs will also need to be dealt with). No timetable was given.
- ARGID (restricted group) drew $274m under its ($369m ABL facility). The cost of this debt has been given at c6%. Drawing of an RCF or liquidity line is normal where a restructuring is imminent. Cash on balance sheet cash in the Restricted group was $540m at the quarter end. The Trivium sale proceeds would increase this to >$900m
- We are assuming that the remaining ABL line to the Restricted Group is unavailable and that the $90m overfunding in the Apollo TL is secured to pay TL interest.
If Trivium was sold, the proceeds will remain in the Restricted Group:
- We estimate the value of the Trivium equity stake at $380m. The proceeds from the sale of Trivium would fund any A&E operation by ARGID. Management would not update on any potential sale.
- Management has confirmed that the Trivium stake is part of the Restricted group.
- On an LTM basis, the share of Trivium's profit has been $53m (with $24m in 24Q1).
The Apollo TL is an expensive stop-gap:
-The non-amortising Apollo TL is for five years and will share security with the SSNs in addition to the charge on the AMP equity.
- The initial TL from Apollo is sized at $790m, and has a 9% coupon; AIHC is the borrower and will on-lend the proceeds to Ardagh Group (AG). AG will repay the $700m 5.25% 2025 SSNs and issue new SSNs to AIHC to repay $700m of the proceeds loan. The new SSNs will have the same security as the existing SSNs issued by ARGID. AIHC will use the coupon to service the Apollo TL.
- The $90m TL not covered by the new SSNs will remain outstanding (although ARGID declined to comment). We expect most of the $90m will be an interest reserve to pay the $70m annual interest in year one. This cash may be subject to a specific charge, but ARGID would not confirm.
- The interest cost of the new loan is $70m vs $37m for the previous bonds. Given security (over the AMP shares) and the same security as the existing SSNs, this indicates how expensive refinancing the rest of ARGIDs SSNs (let alone the SUNs) will be. The interest cost for the new $700m SSNs is $63m vs $37m for the old SSNs.
- The Apollo TL has no LTV clause, removing the risk from fluctuations in the AMP share price. The current LTV is <40% for the TL and c50% if the additional loan for PIK/SUN purchases is drawn).
- ARGID management confirmed that the TL does not impede AMP dividends moving from AIHC to AG. However, the exact mechanism was not made clear on the call. If there were problems paying the interest on the loan, it is likely Apollo could be able to trap cash.
- The borrower is AIHC, and the TL is secured on AIHC’s 75% holding of AMP Shares plus the $260m 9% Preference shares.
- The $790m will be on-lent to Ardagh Group (AG); it was not confirmed that this has happened yet on the call.
- AG will repay the $700m 5.25% April-2025 notes and issue new SSNs under similar terms and conditions to AIHC. The new notes will need to pay sufficient coupons to service the loan.
- AIHC will be able to pass on dividends from AMP to ARGID under the terms of the loan, but ARGID was unclear on exactly how the documentation would work.
Full-year guidance was affirmed, Q1 was as weak as expected:
- Q1 revenue performance beat our model, driven by a better-than-forecast North American performance. That said, Glass volumes continue to fall (-11% in North America, -1% in Europe and Africa), but this is against a strong 23Q1. EBITDA was behind our forecast ($104m vs $125m) on higher SG&A
- ARGID boosted cash at the Restricted Group to $540m with a $274m drawing under its ABL. Drawing the RCF ahead of restructuring is a time-honoured approach for companies. On the call, management reiterated the intention to deal with the SSNs imminently. We expect that some form of Amend and Extend operation is on the way, which will deal with the SUNs as well.
- ARGID expects H2 to be stronger and reiterated its guidance for FY 2024
- EBITDA $750m $780m (Sarria forecast $654m)
- Operating Cash Flow $550m (Sarria $415m)
- Capex -$340m (Sarria $375m)
- Net Interest -$340m
- Dividends from AMP) $220m
- Net Cash Flow $90m
- We forecast the improvement in 2024 and 2025 to be shallower than management.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055