KCA Deutag - optimistic 5yr plan but base case upside remains for the pre-restructured bonds

All,

Please find our updated analysis on KCA Deutag here.

We are taking a 5% long position in the KCA Deutag  pre-restructuring bonds, which will convert into 2.5% position in the new Senior Secured Notes and 2.5% position in the restructured equity post re-org. We are valuing the new SSN's at par, and despite the low level of interest coverage (1.5x in FY22-24 in our base case), we believe this to be adequate given the low level of leverage.   On the equity, based on our DCF models of the Land Drilling and Offshore businesses, at 50% face of pre-re-org bonds, the equity is fair value.  There is upside to our base case scenario and the Company case values the pre-restructured equity at 20% premium to current levels.  

Prior to Covid-19 and the oil price decline, KCA Deutag required a debt restructuring due to tightening covenants into 2020 and beyond.  The Company has already enjoyed two equity cures plus some questionable EBITDA adjustments to comply with leverage covenants for 2019.  Prior to the cleansing document, we were reluctant to be long KCA Deutag due to our concern that certain equity players are closely connected to end customers and value might not filter down appropriately.  We do not know if the previous equity holders have acquired positions in the debt instruments that are going to be equitised.\

Liquidity was adequate for the Company and despite build up of inventory for the delivery of three rigs in late 2020, the restructuring does not require any new capital.

There is a call on Q2 numbers to be held on Thursday 10th at 2pm.

Happy to discuss any queries.

Tomas