Boparan - Thoughts on the refinancing

All,

Please refer to our unchanged analysis of Boparan here.

We already exited our very successful position on the 27th, but few surprises this morning. Here are our thoughts on Q4, p.f. leverage, covenants and outlook:

Transaction: Boparan are using over £240m of cash to reduce gross leverage by paying down the RCF and the Cavaghan Grey facility, as well as to reduce the size of the newly issued bonds by £75m to £475m. The new 4.5-year RCF will have an equity curable £75m minimum EBITDA covenant and can be extended from £80m to £90m at the company’s option. Structurally there is no change to the previous RCF and bonds.

Leverage: Post-transaction, the company will be 5.5x leveraged gross and 4.5x leveraged on a net basis on £134.8m of p.f. LTM EBITDA. We agree with the p.f. adjustments in general, given the closure of the Pennine facility, 53 weeks and asset sales. These levels do not include the pensions liability, which is negotiated to have increasing service demand over the next years.

Q420:Q4 Sales were 5% higher than we had assumed, but the real beat was achieved in the gross margin, even though the delta in purchases from related parties did not widen from the previous £30m drop as per the 9-month statement. Boparan was scheduled to achieve a 16% margin, but we had been cautious and anticipated that only from next quarter onwards. Given the company’s small low margin overall, a small %age change makes a big difference. The same £10m of increased GM is then reflected in the £44m of EBITDA vs our £34m. The result is not unlike what the company had guided. We had just been a little more cautious.

Outlook:- We have no doubt that the £150m of pursued EBTIDA will be achieved. However, historically EBITDA margins have never lasted long at these elevated levels. That said, much of the improvement over the last years has been achieved by peeling back cost layers from the Pennine’s facility and the sale of non-core businesses. Still, as the company may go through acquisitions again following the refinancing, we would expect margins to drop again as they have always done post refinancing. - As stated above, the pension liability will require increased servicing from £20m p.a. now to £25m and eventually well over £30m. - Finally, given the large repayment of debt, bondholders have little leverage to demand much tightening of the terms - in particular with respect to the significant affiliate transactions. Bondholders’ negotiating position remains weak in any future restructuring scenario, as far off as it may seem now.

The new bonds are not really for us at this time. We remain on the sidelines.

Wolfgang
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E: wfelix@sarria.co.uk
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www.sarria.co.uk