Orpea - Clarity still lacking

All,

Please find our updated model here.

Following the suspension of the shares and bonds last week, the Company delivered a statement, acknowledging that they are likely to pursue a debt-for-equity swap to reduce Orpea SA's debt burden. We have given a broad valuation of the business and its real estate, but the downward operational trend in performance calls into question our base case free cash flow, and with that suggests we are still optimistic when arithmetically we arrive at c.36% recovery. We don’t think a Sauvegarde process is well suited to solving Orpea’s problems and unless a common ground can be found during Conciliation restructuring could take well into FY24.

Sauvegarde is inadequate, look through to RJ:

- Orpea’s problem is not one of lack of liquidity in the main, but essentially one of over-leverage. A route via Sauvegarde, where unsecured creditors are termed out, offers very little upside to the Company. The interest bill payable by Orpea is not excessive and with a relatively low portion of the capital structure unsecured, the secured debt would also need to compromise. In addition, it is unclear under Sauvegarde how Schuldscheindarlehen would be treated. This could leave Sauvegarde with an extensive 18-month process with uncertainty over the outcome. During that process, and for the first 2yrs following its conclusion, creditors would earn no interest.

- The alternative, Redressement Judiciare (RJ) is also not very palatable. However, under RJ the Schuldscheine may be treated as pari passu with the other unsecured creditors - notably the bonds. What can the Company offer bondholders to avoid RJ?

Treatment of Schuldsheine:

- As of June 22, Orpea had €1,767m of outstanding Schuldschein debt. This is classified as both “other borrowings and debt” and as unsecured debt in various segments of Orpea’s disclosures. They are subject to financial covenants, namely R1 and R2.

- Although not secured, we are of the view that the Schuldshein loans are extremely difficult to cram down under a debt-for-equity proposal, and may be excluded from any proposal. This is based on our understanding that under German Law, the Schuldshein debt can’t be restructured involuntarily. Since the introduction of Germany’s StaRUG, which contains a new mechanism to restructure Schuldscheine, it may be possible to have a restructuring of Schulcscheindarlehen under Sauvegarde recognised in German courts. However, we doubt that the company is looking to pursue such an unproven opportunity. This raises the risk that in the forthcoming plan only the bonds are supposed to equitise.

Waterfall:

- The Structurally Senior Creditors may have to agree to certain waivers but are unlikely to be impaired in this round.

- The Senior Secured Creditors at Oprea SA will vote in one or two classes due to their collateral (shares in CEECSH and Clinea) and will rank senior on the vast majority of the business.

- Unsecured creditors, including Schuldscheine, private placements, bonds and unsecured bank debt, should rank pari-passu in any RJ. However, as indicated above, there could be difficulties, particularly when attempting to restructure the Schuldscheine. Also, bank debt is typically organised in a different class to bonds in Sauvegarde. This raises the risk that, should Sauvegarde be successful, unsecured creditors would not rank pari-passu with one another.

French Control:

- Because the fresh cash required likely exceeds available lines under the New Facilities (not all syndicated yet), it is likely that a friendly French investor (BPI France?) would make an equity injection which would simultaneously control one of France's largest elderly care businesses remains in French control.

- This raises the concern of further dilution of unsecured holders once equitisation has occurred.

Valuations:

- There are two legs to any valuation of Orpea - the real estate value and the underlying business.

- The Company stated that they have c.€7bn in real estate value post the likely write-down in the December accounts. Note that the purpose-built nature of Orpea’s properties reduces the alternative use valuation, further complicating realisation and ultimately valuations.

- There is limited operational data available to value the OpCo business, but even with broadly favourable assumptions, we struggle to achieve any significant value to the business. Our assumptions generate a DCF valuation of c. €450m

What’s next?

- Q3 revenue will be announced on the 8th of November after market close. Subsequently, on 15th November, Orpea’s transformation plan by the new management team will be presented.

- In the meantime, bondholders are asked to organise, with The Company has appointed Rothschild & Co and Perilla Weinberg Partners as financial advisers and White & Case and Bredin Prat as legal advisors. The appointed conciliator, Maître Hélène Bourbouloux, invites financial creditors to contact her at orpea@aetherfs.com

Investment Considerations:

- Any investment into the bonds here would have to be small, given the opacity and the wide gamut of outcomes. Buying the bonds in the high 20s is a Bet on a lenient plan on November 15th. This may well pay off, but we think it equally likely that management will pursue a more draconian approach. In that case our sceptical fundamental outlook could see us lose most of the investment or have us trapped for the long term.

- We are therefore very much intrigued, but bar further insight are remaining on the sidelines. We like good businesses with bad balance sheets. Orpea certainly has a bad balance sheet, but barre heavy government intervention to raise rates in the space in general, it is not a good enough business.

Here to discuss,

Tomás

E: tmannion@sarria.co.uk
T: +44 (0) 203 7447009