HSE24 - Not hanging about - Positioning
All,
Please find our unchanged analysis here.
The pace at which HSE 24 went from hoping for the best to agreeing a deal with its creditors has been a pleasant surprise. Pressure on supplier finance lines has nudged the company in the right direction. Providence and management will retain the common equity, but the bondholders will have an instrument giving them participation in the equity (albeit without control). We will update our model over the coming weeks, but Q4 trading was broadly in line with our expectations.
Investment Recommendations:
- We have a 6% long position in the SSNs. Our initial investment was 2% at 40c/€ followed by taking a further 4% at 53c/€. We value the bonds at around 64c/€, so we still see an upside from the current 54c/€ price.
- We expect the restructuring to be completed by the end of Q2 and the package to be worth 60c/€ within 12 months mainly through the SSNs/PIKs trading tighter and small uplifts in the equity and cash sweep.
- We are holding our position at 6% NAV to benefit from that further gain which would give us a blended return of 32% plus coupon.
- We would expect most of the additional 10 points to come from the new SSNs/PIKs tightening. The CVR (equity) will take longer to generate value above the €31m value we have assigned to it at the outset.
The package is worth 51c/€ out of the box:
- The proposal indicates that the SSNs and PIKs will not be separately tradeable. We value them at 44.6c/€ as a package with the expected €9m cash sweep bringing overall value to 46c/€.
- We value the CVR at €31m, but given our DCF for the company is c€400m, there is an upside here if the company performs.
- The proposal has the support of 78% of SSN holders, so we do not see a counteroffer.
- The creditors will also benefit from a continuing sweep of excess cash, which will accelerate the repayment of the SSN.
- We expect that the timing of the deal with creditors was dictated by the potential loss of supplier finance facilities in May. Providence and management will receive cash incentives to ensure the line is renewed. If not HSE 24 still has sufficient cash to continue operating.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055