Atalian - Choice or dilemma
All,
Please find our updated analysis here.
Atalian’s proposed Exchange Offer is coercive but is close enough to our DCF valuation for the additional recovery to be only worthwhile if you see a significant upside in the company projections, which we do not. We are unconvinced that Atalian will get to the 90% consent level required in the note documents, but we expect that the 67% level is achievable and a Conciliation + Accelerated Safeguard process to be the outcome. The company cannot move cash out of the way of bondholders, and with the 2024 bonds falling due in May, time is short.
Investment considerations:
- The 2025 bonds are trading at 80c/€ whereas we value the package at around 90c/€. There is 10 points of upside. If the deal falls away the 2025’s could be repaid at par with the 2024’s left outstanding. The downside comes from the possibility of Atalian entering a Safeguard process if the Exchange fails, which would see the bonds trade down significantly more, although we would expect them to recover.
- Our thesis is that the exchange consent reaches 67% but not 90%, so the company will proceed via an accelerated safeguard process.
- The 2025 bonds trade two points cheaper than the 2024 bonds. The price reflects the slightly lower 2025 value of the package in the exchange offer.
- The Exchange offer is worth c90c/€ for noteholders, whereas taking control of the business is worth approx. the same amount. The difference is not worth the hassle unless you believe there is a significant upside to the company’s projections. The downside for holdouts comes if the deal is approved. These bondholders would be forced into the exchange offer and lose a share of the €100m redemption.
- On our modelling, we see the 2024 – 2027 guidance as achievable and mostly use these figures in our updated model.
The Offer:
- The proposal would leave 100% of the equity in the hands of the Julien family, but a 9.5% stake in Atalian Propriete, currently directly held, will be injected into the Issuer.
- The proposed exchange is coercive.
- The package offered is worth 91c/€ for the 2024 bonds and 89c/€ for the 2025 (assuming 100% consent).
- In addition to cash, bondholders would get enhanced security and the benefit of a double luxco structure. So far, only 40% of bondholders have signed up, and we do not know how that splits between the three notes.
Game theory:
- Base Case: The 90% super-majority consent threshold under the docs is very high. So our thesis is that Atalian execute the restructuring with at least 67% consent via a Conciliation and Accelerated Safeguard process to cram down the holdouts. The bonds would be treated as a single class (as they are Pari Passu instruments). No new money is involved in this Exchange, and only the bondholders would be impacted (with other creditors unimpaired).
- The carrot: The plan allocates a hefty incentive to consenting creditors. Hold-outs risk being crammed down and missing out on a share of the €100m in redemptions offered to consenting bondholders. The upside from owning the equity looks limited for the foreseeable future and at current prices, the bonds are too expensive to buy and play hard. Also, the group of consented bonds currently has a blocking stake against any alternate deal.
- The Stick: Atalian are signalling that they will seek Conciliation only if consent exceeds the required 2/3. Implicit in that is the threat that if the consent solicitation fails, Atalian would pay down the 2024s. If it does so from the on-BS cash, then all the stars in the Milky Way would have to align to allow Atalian to refinance the 2025s in a year’s time. But what if Atalian raise a Sr. Sec. loan to pay down the 24s? The longer dated bonds would certainly not be happy to see themselves layered, but it would be a fait accompli this time next year and the rising Sr. Sec. leverage would present an increasing risk to the SUNs then. Franck Julien would have another chance to fight and so we think the threat credible. There is only €150m headroom in the Credit Facility carve-out in the bonds, so there is still a formidable block to Julien executing any deal.
- The 2024s: The bonds are therefore not created equal. If the consent fails, the 2024s should expect a significantly better treatment (par). However, there are significant cross-holdings.
- 40% of the bonds have agreed to a lock-up and we do not know the breakdown between the 2024 and 2025 bonds. The company and advisors are understandably silent on this. However, 40% is more than enough to block any alternative deal.
- For completion of the scenarios: The shareholders could inject further cash, but we think this is unlikely.
- For completion of the scenarios: The deal could go through with 90% consent and therefore merely require amendment of the docs. But the incentive of the non-x-holding 2024s likely make this a remote possibility. Also, not getting the equity will be of less concern to long-only accounts but may be unsatisfactory to distressed investors.
- For completion of the scenarios: A confrontational Safeguard process would likely leave the bondholders in control of the company as the value breaks deep inside the unsecured layer. Bondholders could therefore try and block the consent, but if Atalian do achieve a 67%+ consent level after all, hold-outs would lose out on the €100m carrot.
What the consent thresholds mean:
- 90% consent is a very high bar when you start from 40%. It is the cleanest option, hold-out bondholders could be crammed down under the terms of the bond documentation.
- If consent is between 67% and 90%, Atalian will need to use a Conciliation process, followed by an Accelerated Safeguard. Holdouts could be bound to the exchange offer via the Safeguard process. This consent level could enhance the return of those who consent as the €100m cash redemption would be spread over fewer bonds. A sweetener to 2025 bondholders could be made to equalise recovery levels.
- Below 67%, Atalian could still enter a conciliation followed by a Safeguard Proceeding, but unless another deal can be reached within Conciliation, the subsequent Sauvegarde would likely be confrontational, not “Accelerated” open up to other creditors, become costly and protracted and could very possibly cost Julien the control of the company. Our DCF calculations put a value of approx. 90c/€ on this option, comparable to the proposal made by the company, but with a significant initial fall in bond prices below the current c80c/€.
Further thoughts on the 2024 pay-down option:
- Atalian has (just) enough cash to repay the 2024 notes in full, leaving the 2025 notes to be refinanced separately. There will be cross-holdings in the bonds, and any refinancing/extension of the 2025 bonds would face significant creditor pushback. To make a partial redemption payment to bondholders as part of an Amend and Extend or a smaller bond, Atalian would need to access bank lines (senior to the bonds) or find a willing international hedge fund for extortionate (but fair) terms as that party would have to be prepared to face Sauvegarde (on a Super Sr. Sec. basis) as soon as one year later. Getting banks or institutions willing to lend should be challenging (but not impossible). But failure could end up with a Safeguard process that costs the Julien family control of the business. There is only €150m of headroom within the €400m Credit Facilities carve out (€250m in Receivables lines.)
Can’t hide the cash:
- Apart from a €60m absolute carve-out, there is no Restricted Payments headroom.
- Atalian cannot move the cash from the Restricted group to an unrestricted subsidiary. Assets in unrestricted subsidiaries are subject to a €35m cap.
- There is a carve-out for €400m in Credit Facilities, which includes Receivables Facilities. In September 2023, Atalian had €250m in receivables lines, leaving a maximum €150m in additional credit facilities.
- Atalian cannot realistically make an outsized bid for the 10% of Atalian Proprete held by the Julien family. Acquisitions are subject to a fair value certificate from a Bank or Disinterested Directors.
Valuation is close to the value of the Exchange package:
- Our DCF calculation for the business implies a similar 90c/€ valuation for the current debt as is implied by the offer, so the economic case for blocking and trying to get control of the business is marginal unless Atalian significantly outperforms its expectations.
- Our DCF valuation is on par with the 2024 recovery and only little above the 2025s. The prize is not worth the volatility that a failed exchange would cause.
- We see the projections provided by the company as attainable.
- We value the exchange offer at around 90c/€. There is little to encourage bondholders to take the company over.
- We have mainly used management projections as they are achievable in the current economic environment
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055