HSE 24 – Something for everyone.
All,
Please find our updated analysis here.
HSE 24 has executed its restructuring quickly and well ahead of our schedule. In return, there has been no debt-equity swap, and Providence/ICG will stay in charge. So far, the suppliers are on board, so no fresh cash has been required to fund reduced Payables. The flip side is that the debt levels have not been reduced, and we do not see much equity value beyond the debt and the participation note. By trying to create something for everyone, we think too little debt has been written off this time.
Investment Rationale:
- We are maintaining our 5% long position; our initial 2% holding was bought at 40c/€, and the current price is 51c/€. Our valuation of the bonds is now 69c/€. The upside is 16 points, and the downside is 7 (back to where the SSNs traded before the restructuring announcement).
- The plan has been approved by the English courts and is expected to be completed by the end of June.
- We expect bondholders will eventually control the company.
- Providence /ICG are both incentivised to manage supplier relationships via both equity upside and cash payments.
- We are sceptical about the equity value above the outstanding SSNs
- We expect the package to trade at around 45c/€ out of the box, but we forecast a recovery of 69% after two years.
Fair value for the bonds is 69c/€:
- Discounting an 85% recovery by two years (20% per annum), we assess fair value for the bonds at 69c/€.
- The Recap doesn't reduce debt; instead, it creates a Senior-piece, a Sub-piece and "preferred" equity. We are sceptical about the value of the equity given the level of debt.
- €630m of bonds will be replaced by €532m of SSNs and SUNs, plus a €98m (participation note equating to up to 37%) of the equity. In the restructuring, the equity is valued at €265m by the company. Our valuation of the Equity is around €74m, which implies a €27m recovery on the €98m participation note.
- The SSN debt retirement via cash sweep is only 15%, and within two years, we expect bondholders will end up taking full control of the company.
I look forward to discussing this with you all
Regards,
Aengus
T: +44 203 744 7055