Maxeda - Of Fundamentals, Valuations, Recaps, A&E/LMEs and Dividends
All,
Please find our updated analysis of Maxeda here.
We’ve been long the name last year, while looking for a margin improvement that only came once we had given up. By itself, that improvement is not going to allow the company to carry all this debt into infinity, but the positive momentum has allowed the bonds to trade up with the general tide of recent weeks. Bond prices now hover somewhere halfway between fundamentals and a bet on shareholders (formerly 2LNs) to reinvest their 2021 dividend.
Investment Considerations:
- We are not taking another position in Maxeda at this time. The company should struggle to carry this level of debt again, and we are unsure if the former 2L investors (now shareholders) are willing to re-inject the dividend they took out following the pandemic. In a restructuring, we see the SSNs recover only 65c/€ in cash and new debt and another 15c/€ in equity, which should travel for free. So today's bond price looks like a half-way house between a bet on the shareholders and the downside case of restructuring. As we have no preference between those scenarios, we see no angle for ourselves at present.
Valuation:
- Comps such as Kingfisher and Hornbach trade around 5.3x EBITDA these days on an IFRS 16 basis. Translated to Pre-IFRS 16, this would mean 5.6x for Maxeda.
- However, there are two reasons why Maxeda should not trade at that valuation:
Maxeda does not generate the same EBITDA margin as these larger businesses do. This means that its rate of cash conversion is lower.
Investors need to find an exit strategy and even a PE firm would want to keep the strategic route open. So to keep the option accretive to the buyer, Maxeda needs to trade inside its bigger comps.
- We arrive at a valuation of 4.5x IAS 17 EBITDA.
Recapitalisation Scenario:
- We arrive at a borrowing capacity of only €280m, chiefly, because the business is currently sweating its assets. CapEx is at least €10m p.a. too low.
- Assuming a fresh cash element of €50m and ignoring restructuring costs at our peril, we arrive at a recovery of ca. 60c/€ in reinstated 7% coupon paper + 5c/€ in cash. The equity would cover another 15c/€ to bring the total to 80c/€, but we think that should travel for free, making up for the coupon, that should be adequate for the 2.8x leverage (1.5x IAS 17 FCF Interest Cover), but probably be on the low end for freshly restructured paper.
- We consider this the downside.
A&E:
- The company is owned by its former 2LN holders who took over the equity in 2017. After the company had done well in the pandemic, they took a €90m windfall dividend in 2021.
- We have nothing to back this up, but it could be that some of the shareholders would be willing to reinject this cash or even more to retain control.
- We are seeing it at Matalan and Pizza Express, but these are more recent D/E swaps. We are not sure of the shareholders’ intentions here.
- Shareholders injecting cash to pay down the bonds and keep the company clearly would create wonderful upside for the SSNs.
LME:
- There is no J.Crew clause, and the brand names probably carry some value, if far from all.
- Permitted investments are approx. €110m, which could be made into an unrestricted subsidiary for instance.
- The Future Guarantors covenant has a common hole in it. Future subsidiaries only need to guarantee the SSNs if they also guarantee the RCF. So if creditors can’t control the RCF, there is a danger this could be used to siphon value away.
- However, in the scheme of things, we don’t think the threat is all that credible. It would work if as a result bondholders would receive value not far off par. But as impaired as they would be under this scenario, they would threaten management with insolvency at the holdco and the buffoonery would be over very quickly.
So the glass is not quite half full yet, but it’s recently been seen filling. So Bonds trade about half way and that seems to be where they belong.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk