Codere - restructuring completed - what does the future hold?
All,
Please find our updated analysis here.
Q4 was supposed to be the pivotal moment for Codere: Having completed the restructuring in November and restrictions been lifted in various jurisdictions. However, the next wave of Covid 19 has postponed the rebound in operations. The restructuring has not meaningfully reduced leverage. We remain cautious on the prospects of a return to pre-Covid EBITDA levels as customer habits change and gaming taxes rise.
More Restrictions:
- Pre the Omicron wave of covid infections, Codere was operating under some restrictions on opening hours and density of players. Codere’s European operations are inevitably going to experience further restrictions as governments continue to impose controls as they attempt to curb the transmission. This will postpone any recovery in operations into FY22.
- We don’t envisage any cash concerns for Codere. Pre Omicron, the business had expected to end the year with €110-120m of cash. Codere has received significant support from trade creditors and governments (taxes). The additional cash raised in the restructuring was expected to reduce non-financial creditors in Q4, but we expect Codere’s trade creditors and governments will extend payment terms if required as the business moves into FY22.
- However, this latest wave will reinforce customer habits and investors have to be conscious that it will be a difficult challenge to return the business to pre-Covid levels.
Online Business:
- Codere has listed their online division via a SPAC takeover and now owns a c.65% stake in the newly listed entity. Albeit the business has significant growth opportunities, at the current time the business is not generating any positive cashflow and the online market is extremely competitive.
- Although Codere fully consolidates 100% of the online division, c.35% is in public hands and there is no prospect of dividends soon.
Capital Structure:
- Asset coverage is likely to be sufficient for the debt stack at Codere. However, we remain cautious on the name due to the lack of positive free cashflow even under a scenario of returning to pre-Covid levels.
- The restructuring has left an odd capital structure, with 2.3x FY19 Pre Covid EBITDA senior debt (Super Senior Secured Notes SSSN) and a small 0.7x of leverage in Senior Secured Notes. Junior to the Unsecured are a further 0.8x of PIK notes, to which the equity is attached.
- The SSSNs should be attractive with high cash coupon and call protection, but we remain cautious on the prospects of EBITDA growth and deleveraging. There are many potential potholes (higher taxes, changing consumer habits, more restrictions) to cause EBITDA to undershoot market expectations. Additionally, if restrictions are longer than expected, further liquidity may be required.
- The Senior Secured Notes are a peculiar instrument given its relatively small size (c.€200m) and low cash coupon (2% and >10% PIK element), and probably lack of liquidity, we won’t be taking a position.
Shareholders motivation:
- This is the third restructuring of Codere and investor fatigue has set in. Bondholders, via the equitisation of their Senior Secured Notes, control 95% of the equity.
- However, the bondholders are not natural holders of the equity and are likely to seek a quick exit once operations stabilise post-Covid. This exit focus is likely to lead to restraints on cash CAPEX and pursuing growth opportunities, which will hamper attempts to grow EBITDA. The exit strategy is likely to involve selling the European business separately to the LATAM operations.
Investment Considerations:
- Ultimately, any analysis of Codere is based on assessing firstly when, and secondly, to what extend, EBITDA recovers in a post-Covid world. Although the timing is important, we are optimistic that Codere would continue to receive “soft” support from its trade creditors including governments in extending creditors days etc., and therefore don’t envisage a liquidity issue for Codere.
- Even with a quick resolution to Covid, we strongly believe the long term outlook for physical gaming companies is negative, as customer habits change and gaming taxes rise. We don’t see a path for Codere to achieve pre-Covid EBITDA levels, and therefore we can’t take a long position in any of the securities.
Happy to discuss.
Tomás
T: +44 20 3744 7009
M:+44 7786 705 806