Transcom - Calling Altor
All,
Please find our updated analysis post Q1 results, here.
We have focused our attention on the options available to the Company, the sponsors, Altor and bondholders regarding the refinancing of its December 2026 bonds. Our working thesis is that the Company could not do a straightforward refinancing, and either additional equity, partial debt write-off, or both, is required. We have modelled the refinancing maths for Transcom and expect that the Company and bondholders will soon get organised to negotiate a favourable refinancing for all parties.
Investment Rationale:
- We are maintaining our 4% long position, acquired at an average price of 68.5% (initial 2% in late September at 66%, and an additional 2% in late November at 71%). This is below our normal 6% position size, which reflects our caution on the name. The business is not likely to be able to do a straight refinancing, and we would expect an Amend & Extend, coupled with a partial paydown.
- Our investment is not based on an assumption of a par recovery. Although EV likely exceeds net debt, the debt capacity appears to be in the range of 80–85%. Buying the bonds at current levels reflects our base case valuation, with potential upside stemming from favourable sponsor actions supporting a refinancing.
- Our projections propose a 10% cash paydown, 10% debt write-off for a 20% equity stake following a €20m cash injection from Altor, the sponsor. Under this scenario, fair value, subject to the coupon on the restated bond, would be c.90%, 10 points of upside from here.
- A €50m injection would be required to prevent any debt write-off. €50m would be excessive for Altor given their initial equity injection.
- No equity injection, would leave fair value c. 80%, again subject to the coupon on a reinstated bond.
- The capital structure features limited debt ranking senior to the bonds, which should help mitigate downside risk. While the threat of AI substitution persists, the business appears resilient to this challenge in the near term.
- Downside risk arises from either an uncommitted or aggressive sponsor approach, coupled with weak operating results. In such a scenario, the bonds could decline into the 60s. We believe sponsor behaviour represents the greater risk, as operational performance is expected to remain stable in the short to medium term.
Recent Results:
- Operationally, the business remains stable; however, there are limited signs of the growth necessary to support deleveraging. Leverage is currently around 4.0x, and when combined with an interest coverage ratio (ICR) of approximately 1.0x, this presents significant challenges for straightforward refinancing.
- Management has indicated the potential use of excess cash for bolt-on acquisitions. While this remains a possibility, we view the likelihood as low unless it is executed in tandem with refinancing and supported by an equity injection.
- Q1 results themselves were relatively boring, with revenue broadly flat, stable EBITDA margins, resulting in positive cash flow after interest for the quarter. IFRS 16 Leverage ticked up to 4.2x due to higher lease liabilities from new lease arrangements in Egypt and India and extensions of existing leases.
- On the call, management confirmed that the sponsor has not taken any equity since they acquired Transcom
Equity Injection:
- The company has not grown into its capital structure, and the 6.0x EV/EBITDA multiple Altor acquired the business seems difficult to justify. Listed peers are trading at c.4.5–5.0x, all of which are larger in scale. Therefore, to assist with a refinancing, Altor will need to invest fresh equity.
- Our base case envisages bondholders having to take a partial write-off. It remains possible that no write-off would happen with an equity injection, but the extended bonds are unlikely to trade near par in such a scenario.
- But we do remain confident that Altor will participate in the restructuring. The owners currently value their investment at €52m, broadly in line with our DCF valuation.
- We see debt capacity at c. €300m, which is c.80% of the outstanding bonds. As previously mentioned, there is limited debt ahead of the bonds. Additionally, we don’t envisage a cash requirement, leaving cash on the balance sheet, plus fresh equity to be used to make a partial debt repayment.
- Our initial view is that bondholders would need to take a 10% haircut and receive a partial 10% write-off, reinstating €300m of bonds. This would leave the business 3.7x leveraged, with a 1.5x ICR at a 10% refinancing rate. The 10% coupon should ensure the reinstated bonds trade close to par. We assign minimal value to any equity that bondholders may receive in the restructuring.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk