Haya - The long, the short and the shrinking

All,

Please find our initiation on Haya here.

As with several High Yield companies, LTM EBITDA levels are not representative of the underlying business. But with uncertainty over three portfolios, including the key Sareb contract, a return to pre-Covid period can’t be the basis of valuation. Despite the business' strong cash generation credentials, the risk of contract losses will be the main driver of price over the next couple of months.

Consolidation:

- The Spanish NPL market has been in decline since 2016 and with the majority of bank assets already divested by domestic banks, the pool of new unserviced assets is rapidly declining. Therefore the segment is ripe for consolidation. Incumbent service providers have an inherent advantage in any contract renewal process further emphasises the need to consolidate for service providers to maintain AUMs and fee income.

-Swimming against the tide: Overall this is a case of lending against a structurally shrinking asset, even if it manages to maintain the Sareb contract. The timing of the exit from such situation becomes very important and the uncertainty and weakness of negotiation position make an investment (long) unattractive.

Outlook:

-The business has ample liquidity and even in run-off mode it should produce operating cash flow. As the business trades into FY22, revenue and EBITDA will increase on the back of higher transaction volumes, but the levels of FY18 and FY19 appear unachievable without some additional contract wins.

Negotiating Position:

-Cerberus, the equity sponsor is in a relatively strong position due to the fact they are the owner of c.22% of the Assets Haya are currently servicing. Bondholders will have to give up significant value to Cerberus to ensure they maintain these contracts with Haya, implying Cerberus the equity holder may receive value even if bondholders have to take a haircut.

Investment Considerations:

-We are not taking a position at the moment as we don’t see any update on the Sareb contract in the upcoming Q2 (or Q3 results).

-We feel the bonds are over-valued at current prices and the trigger that could send the bonds falling is the upcoming Sareb contract renegotiation, which should theoretically conclude before year-end. The business hinges on maintaining existing contracts and winning new contracts to maintain AUMs. Even with contract renewals, the Company will have to deal with market size decline, reducing AUMs and the peculiar case of the equity sponsor also a significant customer.

We will continue to monitor the name over the upcoming reporting season.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk