Atalian – Strategic Manoeuvres
All,
Please see our updated analysis here.
Atalian’s upcoming strategic plan needs to address several issues; 1) how to refinance both the 2024/2025 bonds, 2) whether the refinance operation can be split, and 3) how to generate enough free cash flow to cover coupon >1.5x. Atalian’s pitch to investors will focus on improving profitability in France and the US, leading to a deleveraging of the business; the impressive Q223 figures will need to be backed up by guidance that the upward trend in margins is continuing. The plan will doubtless have some stellar cost-cutting targets, but investors will need convincing of how, when, and the cost. We are sceptical of the feasibility of plans to repay the 2024s and refinance the 2025 outside of intentions for a coercive stance by Atalian towards the 2025 holders. Atalian expects to complete its refinance operation by the end of February. The strategic plan will be published in October (date not yet confirmed). For there to be equity, Atalian needs time for margins to recover, which will require creditors to hold off.
Bonds are not covered right now:
- Our DCF calculation shows a €190m gap between net debt and EV, on an undiscounted basis, which equates to a value of 88c/€ vs. the current trading price of 70c/€ for 2025 bonds. Given the asset-light nature of the industry and the uncertainty around how the debt stack will be refinanced, the additional discount (to 70c/€ is justified). We have used the data available and factored in continued growth in France and the US. The implied EBITDA multiple in our DCF is 5.2x, well beneath the 10x+ achieved for the UK and Ireland business. The gap reflects the high multiples paid in an industry with historically weak cash flow generation. If we used the multiple paid in the recent UK and Ireland sale, there would be equity of €500m at Atalian. That would be a sellable proposition, but we are not convinced creditors believe the UK and Ireland deal can be replicated.
Investment Considerations
- Our thesis is that refinance will be achieved through an amend and extend. We are sceptical that a separate refinance of the 2025s works, however, the 2024 bonds are now trading 5 points above the 2025s, whereas until recently the cash prices have been close. The company has stated its preference as being to repay the 2024s first.
- Repaying the 2024s and refinancing the 2025s would be aggressive and a very bullish statement about Atalian’s expectation for margins in France and performance in the US. Tough but doable. There is some upside in the 2024s as they could be called at par, on their own or will be pari-passu with the 2025s in a refinancing.
- Atalian will need to show continued progress in obtaining pass-throughs in France and the recovery of the US business.
- If the performance in Q2 is sustainable, a refinance is feasible, albeit expensive.
Not all the refinancing options are palatable:
1) Amend and extend the whole debt stack.
- An amend and extend operation gives everybody something. The bonds get a part repayment, the equity remains in place, and Atalian has some cash left.
- The value of the package is 93c or nearly 20 points above current trading levels. A seven-point discount may be too much to accept for investors, but Atalian would have the cash to finesse the package, to bring the value to par. Bonds get 30% of the principal back, with the remaining debt exchanged into a new 5-year bond with a 7.5% coupon. We assume the bond would trade around 10% => 63c of value.
- New 5-year notes would be secured, with Atalian unable to add significant debt (unless subordinated).
2) Repay the 2024s, refinance the 2025s:
- If the significant improvement in operations from Q2 continues, splitting the financing of the 2024 and 2025 bonds is feasible. However, it will leave some angry bondholders and persuading them into a new refinancing will be difficult without coercion.
- Atalian’s timetable for refinance would leave it repaying the 2024 bonds at par and then almost immediately trying to deal with angry holders of the 2025 notes. There will also be investors with cross-holdings in the 2024s who will resist the move.
- The carrot: Debt would be €620m =>headline leverage of c4.5x. The debt figure excludes factoring, but we always include factoring and adjusted for that; Leverage is 6.1x. Using 2025 estimated EBITDA of €160m, total leverage (including factoring debt) falls to 5.3x.
- At a coupon of 7.5%, FCF/Interest would be 1x in 2024. Management needs to weave a story about growth and margin improvement to persuade the market into the new notes. If Atalian can continue to recover in the US and France, we estimate 2024 EBITDA at €140m (including cost-cutting benefits). Atalian has rarely been able to cover interest from free cash flow, so why will the future be different?
- The stick: Repaying the 2024s would consume most of Atalian’s cash. A threat of enforced extension via a Sauvegarde process might be enough to herd recalcitrant bondholders into a refinance. The bonds also have a net secured leverage covenant (excluding factoring of 1.75x). Atalian could layer the bondholders with €245m of senior secured debt, significantly weakening their position in the capital stack.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055