Graanul - Apollo's options
All,
Please find our updated analysis on Graanul here.
We wrote extensively on Graanul before the numbers, and therefore this update is more focused on the options available to Apollo, the sponsor, concerning a new restructured balance sheet.
Investment Considerations:
- We are not taking a position in Graanul’s outstanding bonds. A refinancing of Graanul’s bonds is severely hampered by the lack of contracted sales beyond FY27, due to the regulatory uncertainty and the overall changing dynamics in the wood pellet market.
- The uncertainty creates an opportunity for the sponsor, and the two scenarios we outline result in c.85% debt recovery from the overall package.
- The bonds need to fall further before we are interested, and we would see an opportunity in the mid-70s.
Apollo’s Options:
- Given the considerable uncertainty surrounding profitability beyond FY2026, there is a strategic window for Apollo, the equity sponsor, to negotiate with bondholders for a maturity extension. More critically, this environment may support the implementation of a debt-for-equity swap, enabling Apollo to retain a controlling stake in the restructured entity.
- The business is expected to be cash generative through FY2025 and FY2026, supporting a partial cash repayment of the Senior Notes. Additionally, the existing debt documentation provides substantial headroom for the issuance of super senior debt. Our analysis assumes a capacity of approximately €200 million for such super senior instruments.
- Our assumptions are based on the December 2025 balance sheet, with debt capacity estimates based on FY2027 projections. We have excluded the anticipated FY2027 working capital inflow from our debt capacity assessment, considering it likely to be a one-off event.
Straight Recapitalisation:
- Under a straight recapitalization approach:
- The Company raises a €100 million Super Senior Facility.
- Combined with €100 million of existing cash, this facilitates a 32% paydown of existing debt.
- Based on FY2027 projections, debt capacity is estimated at approximately €380 million, necessitating a 25% debt write-down.
- In return, bondholders would receive 30% of the restructured equity, estimated to be worth approximately 7% of the enterprise value, resulting in a total package value of 82%.
- However, this would leave the company with leverage of approximately 5.0x by FY2027, which could be considered elevated given prevailing market uncertainties. It's worth noting that FY2027 EBITDA is forecast to be c. 30% lower than in FY2024.
Impact of Acquisition:
- An alternative strategy involves deploying the new facility to fund an acquisition:
- Assuming a €200 million New Facility, the acquisition would be completed at an implied entry multiple of 6.2x, one turn below our DCF valuation of Graanul.
- In this case, the debt paydown would be funded entirely from existing cash, resulting in a 16% repayment.
- The acquired EBITDA would expand debt capacity to approximately €600 million.
- Despite the higher capacity, the required debt write-down remains similar at c. 23%.
- The total recovery to bondholders under this structure would be approximately 85%, though leverage would be elevated at 5.5x
Summary:
- Both the recapitalisation and acquisition scenarios deliver a recovery package to bondholders of c. 85%. This is based on our current DCF of 7.2x, but given the uncertainty in the market, this remains highly speculative. The ultimate value to investors is dependent on where Graanul are able to contract beyond FY27 which is likely to remain unknown through a FY25 process.
- In either case, Apollo's position transitions from out-of-the-money to an estimated €100 million in-the-money. This upside could still be realised even if the new capital is provided by a third party, assuming the super senior debt carries an all-in cost of c.10%.
- Expected cash generation of c. €100 million in FY2026 could fund €40–60 million of debt repayment after interest, further de-risking the super senior tranche.
-A 25% debt haircut may be perceived as excessive relative to the proposed 30% equity stake. Apollo may need to offer additional consideration to secure creditor approval.
Q1 results:
- The Q1 numbers are in line with our view. The financials are the secondary focus for Graanul, and all eyes will be on the Company’s plan to secure off-take agreements beyond FY26, which is required before any refinancing is attempted.
- The results show pellet volume was 10% lower than the previous year (and vs. our model), with production volume also lower than our model. These differences result in a flat EBITDA for the year, lower than our expectations. Cash flow is stronger, due to the seasonality of working capital. We will update our model for the actual numbers, but will maintain our view that it will remain impossible to refinance without equity injection.
- The Company has rescheduled its conference call for Friday, 30th at 1 pm UK time.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk