Orpea - cutting the cake
All,
Please find our updated model here.
We have spent several hours building a calculator to arrive at a post-restructuring balance sheet for Orpea and the implications for unsecured bondholders of the impending write-down of their holdings. There still remains confusion over what exactly is going to be presented to investors next Tuesday as part of the transformation plan from the Company’s management, especially as discussions chaired by Maître Hélène Bourbouloux have not taken place with unsecured holders.
Recapitalisation
- Included in our analysis, is a recapitalisation table, where we can toggle the % haircut unsecured holders (all unsecured holders are treated pari-passu) and receive a portion of equity depending on the level of write-down.
- Additionally, we see a requirement of c. €1.3bn to meet upcoming Capital Expenditure that is already committed to. It is important to note, we view this CAPEX as not creating additional Asset Value but securing the reported EV of the Company. This CAPEX is funded via the drawdown of the remaining Facilities arranged under the previous Conciliation Process (A1-A4 Loans) and cash on balance sheet.
- The other main assumption is the €2bn new money requirement. We are assuming this is 1/3rd funded via the balance of the B Loan facility with new equity raising the balance.
Practicalities:
- In order to encourage take-up of the new equity, there has to be a sufficient equity discount to where the unsecured creditors convert their debt. The higher the level of conversion the lower the discount, as the post-conversion balance sheet is less leveraged.
- A 100% conversion, in our model, leads to a 33% discount to the conversion price.
- Under this scenario, new money would receive 42% of the recapitalised group.
- On the flip side, our model will work with 41% haircut. Although at this level, the unsecured would receive virtually no equity for their written-down debt. We don’t think this scenario is realistic as the LTV (debt:EV) ratio would exceed 80%. A post-restructured balance sheet is likely to be, at a maximum, 65% LTV. This would mean the minimum haircut is 65%.
Recoveries:
- Recoveries would come in two segments: reinstated debt and equity value. We assume reinstated debt would trade at par (although at high LTV this would be unrealistic). Equity value is determined by assuming an EV of €6.9bn or a 2.5bn from current Book Value. Not surprisingly, the higher the asset write-down, the lower the recovery.
- However, not surprisingly, the recovery values are similar across regardless of level of write-down, when LTV levels are reasonable (under 65%).
Investment Considerations:
- We remain cautious on taking a position in Orpea unsecured at the current time. We acknowledge, based on our base case €2.5bn asset write-down, bond recovery is c.50%, significantly higher than current levels.
- However, there are two main elements to our caution, Firstly, the underlying performance is worse than we have expected and the recent quarterly revenue numbers do not appear to be sufficient to compensate for the likely increase in costs. Therefore, EBITDA performance has continued to deteriorate faster than we had anticipated.
- Second reason is a question of timing. Many investors believe that Tuesday’s transformation plan will present a fait de accompli, but we question if that is in the Company’s interest. What is in the COmpany’s interest is an acceptance by unsecured creditors (and shareholders) that significant haircuts are required. This position will be reinforced by presenting only operational data on Tuesday and commencing discussions with bondholders post this presentation. As we noted above, no meeting has taken place between the Company and its unsecured creditors.
Happy to discuss.
Tomás
+44 (0) 203 744 7009