Europcar - Value Distribution between the RCF and the bonds
All,
While we are waiting for 8 Advisory, this is how we are thinking about the bonds:
On the size of the restructuring:
- With the bonds’ BV approx. 10x market cap, any equitisation will be extremely dilutive for the equity.
- The company requires fresh cash as well.
- Thus despite the uncertainty on outlook at this time, we are concluding that the company would be best advised to seek a large restructuring after all and be sure it has the capital means to survive almost any scenario next year.
- In a large restructuring the bonds need to be prepared to fully equitise or else the alternative of a Distressed Sale under the RCF docs becomes too attractive for management, which would also achieve full equitisation, but with less control.
Bond valuation:
- At current valuations, the bonds create the company at net E3.2bn or the corporate level at a net E700m, which is about 8x our 2021 corporate EBITDA projection if adjusting for a E200m cash outflow. So full bonds-only equitisation would achieve a new market cap of some E500m.
- Within the Net E700m, the bonds account for the bottom E450m of E1.15m of gross debt at market value. Or turns 5,6,7 and 8 of PF 2021 net corporate leverage. In other words, the bonds are 50% levered on a supportive case of the business.
- Europcar will bounce back. There will be a time when we have Coronavirus under control and tourism along with Europcar will spring back quickly. If anything the secular trend continues to be in favour of car rental.
If only bondholders equitise:
- Comparing bond BV with market cap, but also when going by precedent, a full equitisation should hand bondholders 90% of the equity or more - subject to shareholder approval. Shareholders will likely seek a chance to participate in the subsequent RI and to an extent so could possibly be the RCF.
- If the reports we are hearing are true that the company may be seeking as much as E400m in fresh cash, then that would result in E900m, at least 94% owned by bondholders and probably bondholder dominated fresh cash.
Management Motivation:
- We think a full bondholder equitisation would be quite significant deleveraging already.
- But the company will likely favour a solution that allows all those who want to equitise as much as possible.
- Management (making the decisions) will be aware of who their future shareholders are. So might want to avoid forcing RCF lenders into shareholder position if those only want to be taken out. So a conversion for the RCF may be more voluntary than coercive.
If the bonds and the RCF both equitise in full and leave the corporate almost debt free:
- By the same valuation, that would initially create market cap of E1.15bn, as the RCF would demand to convert with no discount. Bondholders would own some 38% of the business, the RCF 55% before injecting fresh cash.
- Compensation mechanism: Either side may want to be able to buy-out the other. In particular bondholders may look to pay down the smaller RCF at par in return for being awarded more shares or more likely achieve the same thing synthetically after conversion.
- Both sides might lose a little less value to shareholders because a deal including both groups could use the RCF’s security and distressed sale language to clip off ECMG altogether.
Positioning:
- But with the 8 Advisory reviews yet to arrive (we are not optimistic on its findings, given the significant uncertainty accountants cannot account for) we are concerned it may yet be too early to step into the bonds.
Please reach out,
Wolfgang
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2 Stephen Street
London W1T 1AN
E: wfelix@sarria.co.uk
T: +44 203 744 7003