Ardagh – Positioning to seize the initiative
All,
Please find our updated analysis here.
The appointment of advisors by the company is no surprise to us, but as it has come earlier than expected, liquidity must be an even bigger issue than expected. Ardagh Group (ARGID) seeks to seize the initiative rather than buy time and hope the market improves. ARGID has to be struggling to raise the cash (from internal and external resources) to refinance the $700m April 25 SSN before it becomes current. We have not seen any presentations given to creditors yet, but we did not want to wait before giving our initial thoughts.
Investment Rationale:
- We are shorting a further 2% of NAV in the $800m 5% SUNs at Ardagh group at 57c/$.
- The catalyst for the next leg down will be the proposal from ARGID, which will solidify the losses on the SUNs. The SUNs are still trading above their intrinsic value of 41c/€.
- The SSNs are covered by the value of the Glass business. The SSNs are trading at around 85c/€, so a long position would have an upside of 5 points (to 7% YTM), but the downside is 5-10 points. We see opportunities to pick the SSNs up lower, so we will stay on the sidelines for now.
- We see the 2025 bonds trading down from 93c/€ 85c/€ in line with the rest of the SSNs. The upside of a short here is 9 points, but the downside if ARGID sought to refinance is 7 points.
- The ARD PIK Toggles are holding their value purely in the hope they can block more of any proceeds leaking to shareholders. The recovery we expect is <20c/€, so we will continue to avoid these bonds. We expect the notes to toggle to PIK.
- The dividend of AMP value up to shareholders will be accelerated. Once the debt stack is dealt with there is no point in pretending anymore.
- The AMP SUNS have a change of control provision, and if extracting the value of the AMP stake requires the sale of the stake, there would be an investor put at 101. However, if the AMP shares were moved to ARD Holdings, there would be an argument as to whether a change of control had occurred. The Change of Control language in the MAP bonds has a carve-out for Initial Investors, which include Yeoman Capital, Paul Coulson and five other Ardagh investors.
Ardagh’s hand has been forced:
- The only logical reason to appoint advisors is if Ardagh is uncertain that it can access sufficient borrowings under the ABL to bridge the gap between cash on hand and the $700m April 25 maturity. Management had said it intended to deal with this bond before it became current, but this is unlikely now.
- The rationale for repaying the 25s was to buy time for ARGID to deal with the rest of the debt stack. With engagement now beginning with creditors, the impact on the rest of the debt stack of the April 25 bond becoming current disappears. The 25s should trade in line with the rest of the SSNs.
- On our analysis, the SSNs are covered by the value of the Glass business, and ARGID will have to ensure they are left no worse off in any agreement in order to bind them to any agreement with the SUNs.
- The SUNs are the fulcrum security and will bear the brunt of the pain from any debt restructuring. We are short the unsecured part of the ARGID capital structure, and we see more pain to come here.
Ardagh is not likely to pull a rabbit out of the hat:
- We are not ruling out the shareholders (led by Paul Coulson), surprising us all and letting the heart rule the head over injecting cash. However, we can’t see it happening.
- A potential source of liquidity would have been getting the shareholders to inject part, or all, of the Metal Packaging shares into the structure to reduce leverage and get an amend and extend deal done. We have been sceptical of this happening and are more so now. The proceeds from a successful sale of Trivium could be offered to help make an Amend and Extend deal work. However, the benefit would flow to the SSNs to persuade them to participate.
- The discussions will be against the background of EBITDA not yet reaching the trough (Q224). Selling an $850m EBITDA + $200m in dividends against an LTM EBITDA number of <$600m is a stretch. Restructuring now does not give us confidence that the management believes it can meet its guidance.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055