Takko - What if?
All,
Germany just decided to extend the lockdown to April 18th. Moreover, measures are likely to tighten again in many areas of Germany. “Incidentally”, the opening of shops was tied to the “incidence rate” being below 100. As of last week, however, that rate has risen again above the threshold and stands at 107.3 as of today - tendency rising.
Will it really matter?
On the one hand, we would argue that given how much the CoCom and Apax are already committed for, plugging another few weeks of losses should be possible. On the other, we are concerned that this may not be the last extension. Looking back to the Spanish Flue, the third wave may not have been as high but lasted considerably longer than the first and second. Also, post-Easter it will become increasingly difficult to move the remaining winter and spring collections.
Room to manoeuvre:
The recently agreed deal exhausts the Super Sr. basket and leaves only E15m available p.p. to the bonds. If more were needed, Apax could possibly subordinate its share of the E30m private placement, which we understand to be halved, i.e. E15m, thus making way for another injection of E30m. However, we are not sure if Apax have more cash earmarked to support the retailer, given its absence for long periods last year, the extensive support it has provided in the past and the small size of its commitment this time around. So it could be a matter of straws and camelbacks.
What’s the upside?
We may have dated information, but we are still seeing the bonds bid at 88.5c/E. With the deal announced only a week ago, what is the upside to these bonds in the next weeks? At 95c/E the bonds would trade as tight as 7.5% YTM. On the downside, however, an ultimate restructuring would almost certainly require a hefty write-off. At that point, the equity should be an attractive proposition. But bonds should trade down significantly into that uncertainty.
Positioning:
We are still seeing bids of 88.25 in the market. We assume that for this extension the agreed deal plus remaining headrooms will remain sufficient. However, should the lock-down see a further extension, the stock should become increasingly hard to move and even if Takko would remain solvent for a few months, the company could face a struggle this time next year at the latest and possibly well before.
We are therefore taking a 5% of NAV short position in the bonds.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003