Pfleiderer - Our thoughts on the A&E
Dear All,
Please find our unchanged analysis here.
Having digested the A&E proposal from Pfleiderer and its shareholder - Strategic Value Partners, creditors are asked to extend SVP’s equity option for 3 years in return for the injection of €75m equity into the business. Creditors' recoveries are still subject to the recovery of the underlying market but instead of a difficult refinancing in FY25/26, this deal gives greater time for the market to recover.
Investment Rationale
We maintain our position in the senior secured notes, voting in favour of the transaction, and collecting the 1% early fee payment. The deadline to receive the early bid consent fee is 30th July 2024. The deal removes the near-term risks and allows the Company the necessary time to benefit from its strong market position in what should be a recovering market.
We see downside of approx. ten points which implies a yield of 15% - 20% or a creation multiple of 6x on any delay in recovery in the sector.
Please see the summary of the proposal and our thoughts on it:
-Equity injection of €75 million by Strategic Value Partners: This is a strong sign of support from the sponsor and creates a stronger liquidity buffer with pro forma cash on the balance at €113 million and liquidity at €178 million. This will also finance the value creation plan of the company leading to free cash flow generation in the medium term.
-Maturity extension of the RCF, SSNs and FRNs by three years to 2029: Gives the company & sponsor time to implement a value creation plan (VCP) that delivers EBITDA growth till 2029 into adjacent products & channels and drives cost efficiencies. (see our view on Business Plan below)
-Economics for bondholders: Include the early bird consent fee of 1%, a 400 bps PIK margin uplift on the fixed rate notes and 75 bps PIK margin uplift on the floating rate notes, exit fees of 1% to incentivise a refinancing from 15th April 2027 (the margin uplift and exit fees are added to the call schedule in the FRN structure). The new yield on the notes of 9.4% (which include the new economics) reflect the comparable pricing for stressed credits in both the public and private credit markets. Hence as the company meets its business plan objectives and the macro recovery improves going forward, there will be scope for yield compression and an appreciation in the price of the notes in the secondary markets.
- Deleveraging: Post the transaction, net leverage will decline from 4.8x to 4.4x on an adjusted EBITDA basis.
- Tightening of covenants: including limitations on debt incurrence, restricted payments and asset sale covenants which is a positive for bondholders.
- Implementation risk: We think it is low to medium as they have approval from 60% of the bondholders and need an incremental 15% of the bonds to vote in favour of the proposal to use a UK scheme of arrangement.
Review of updated Business Plan
-Timing of market recovery: The company expects a volume recovery in 2025 for the EWP segment by 6% and by 2% for Silekol (driven by specialty products). This is consistent in line with the communication from the company in Q1 2024.
-Pricing power: The company refers to pricing pass-through which is in line with the feedback they gave in the Q1 2024 call.
-Revenues expected to grow from €991 million to €1.28 billion in the medium term with EBITDA troughing from €105 million to €195 million in medium term
-Free Cash Flow (excluding growth capex) is expected to grow from €35 million in 2024 to €140 million in the medium term.
-Capex & Cost Cuts: In line with the value creation plan, the company is guiding to capex of €90 million in 2024 and €60 million in the medium term (which is twice Sarria’s maintenance capex assumptions of €30 million +). The company is also assuming cost cuts of €100 million over the period of the Business Plan (2024 to 2030) implying that the sponsor is running the business for growth and improving the equity story till 2030.
Valuation & Recovery Analysis
As observed above, if the company meets the objectives in the business plan (base case), we will get par recovery. In a downside scenario where EBITDA is between €105 million (2024 estimate) and €145 million (below the medium-term EBITDA estimate), we see ten points of downside (as discussed earlier).
In conclusion, the proposal appears to be fair to bondholders as they are given fair and at market economics in return for providing a medium-term maturity runway that bridges to a market recovery and a refinancing at lower pricing (especially if the rating agencies upgrade them) down the line.
Happy to discuss,
Saahil
T: +44 203 192 0200
www.sarria.co.uk