(Debtwire) Selecta bondholder ID process underway as preferred equity outcome dictates future ownership

12 Aug 2024 15:10 BST

by Adam Samoon with capital structure by Priyanka Kotadia and Manasi Kapre

Selecta's credit story has a ropey history with further deleveraging and earnings growth in 2H24 required to refinance upcoming 2026 maturities. The Swiss-headquartered vending service provider's first lien and second lien bonds are likely covered given the business' EV/EBITDA multiple, but outstanding preferred equity instruments can turn into common equity if not redeemed in 2026 and may impact upcoming ownership, according to two buysiders and an analyst tracking the company.

The company has begun a bondholder ID process as 2026 maturities approach, according to one of the buysiders and the analyst. Selecta faces upcoming debt maturities including EUR 1.085bn of first lien and second lien notes due to mature in 2026.

Selecta reported 2Q24 results last Wednesday (7 August) with adjusted EBITDA dropping 4.8% YoY to EUR 60.1m. Management, led by CEO Christian Schmitz and CFO Nicole Charriere remained upbeat on the 2Q24 earnings call with the CEO highlighting Foodtech growth opportunities. The CFO also pointed to the company’s robust liquidity position given only EUR 25m of minimum cash is required to run the business, while also guiding towards top-line growth in 2H24.

Selecta had a subdued start to 2024 with 1H24 revenues lower by 4.2% YoY though adjusted EBITDA margins of 19.5% were up 60bps as 1H24 adjusted EBITDA of EUR 115m was down 1% YoY. The company was left with EUR 108.9m of liquidity headroom at 2Q24, including EUR 36.3m cash (plus EUR 5.9m cash in points of sale) and EUR 72.6m available of its EUR 150m RCF (74.3m drawn and EUR 3.1m used for bank guarantees).

“They’ve taken out machines and cut overhead costs. They always had EBITDA growth YoY, but this quarter EBITDA was down. They have done a good job right-sizing the business, but need to return to sales growth,” the first buysider said. “Management said that there would be a return to growth in 2H24, and if management guidance is correct, there should be organic growth in 2H24 and good operating leverage to grow EBITDA. This is a show-me story in 2H24, but so far management has a credible track record.”

The analyst said the business is developing very much the way they forecast, except they were a little disappointed that Selecta is still cutting private machines. But the analyst noted that should be phasing out now, and the earnings adjustments should reduce accordingly.

Selecta reported 5.5x net leverage based on an LTM 2Q24 post-IFRS 16 adjusted EBITDA of EUR 245.6m, and adjusted leverage of 6.6x if stripping out earnings add-backs and working off the LTM 2Q24 post-IFRS 16 reported EBITDA of EUR 202.8m (see chart below).

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Source: Selecta 2Q24 investor presentation

The business still needs to grow to generate more meaningful cashflows. The company had FY23 post-IFRS 16 reported EBITDA of EUR 207m (excluding earnings add-backs) and faced EUR 73.5m of capex, EUR 63m of interest, EUR 39.3m in leases and EUR 3.6m of cash taxes which would imply EUR 27.6m of free cashflow ahead of working capital swings (and one-off items), with an upside should earnings improve. 

Selecta had a EUR 53.2m working capital outflow in FY23 versus a EUR 8.4m outflow in FY22 and a EUR 65.3m outflow in FY21 according to Debtwire sister service Credit Rubric data.

There remain positive prospects for junior parts of the Selecta capital structure given recent market developments. Italy-based vending machine peer IVS’ share price has climbed around 29% year-to-date, leaving a roughly EUR 651m market capitalisation as of Friday (9 August). IVS had net debt of EUR 421m at FY23 which implies an enterprise value of EUR 1.072bn. With LTM FY23 adjusted EBITDA of EUR 116.2m, this implies an EV/EBITDA multiple of around 9.2x for IVS, suggesting peer Selecta could command a significant enterprise value if sold by KKR.

Selecta’s Caa1/CCC+ rated EUR 715m 8% first lien 2026s are steady since the results and indicated today at 97.125-mid yielding 10.0% to worst on IHS Markit, while its Caa3/CCC- rated EUR 304m 9.25% (10% PIK) second lien 2026s have moved one point higher since the results and are indicated at 87-mid yielding 17.6% to worst on Markit. Selecta Group Finco S.A. entity also has 12% PIK interest Class A preference shares indicated around five points down at 41.625-mid on Markit.

“The first liens are covered, and we’ve been discussing ways in which KKR can take care of the capital structure that even the preferred equity may like. There are ways the capital structure can be dealt with that are attractive to all sides,” the analyst said. “The upcoming Goldman Sachs conference seems well-timed for Selecta, who should be able to show the positive performance from the Euros and the Olympics.”

The first buysider argued that the second liens are covered from an enterprise value perspective, but the question is whether they are able to be refinanced. The buysider added that in a scenario where [shareholder] KKR was struggling to sell the business, then the preferred equity holders may take over, and there could be a solution with KKR, adding that if the preferred equity wanted to control the business, then they would need to sort the second lien and there are cross holdings.

KKR and questions on their preference

In 2020, Selecta undertook a capital restructuring through which new first lien and second lien senior secured notes were issued by Selecta Group B.V., as well as Class A and Class B preference shares issued by Selecta Group FinCo S.A. As part of the scheme, the scheme creditors were entitled to receive issuance of first lien and second lien senior secured notes and preference shares in exchange for debt instruments previously issued by Selecta Group B.V, the company’s FY23 financial report noted.

The Class A and Class B preference shares both mature in 2026 and will need to be addressed as part of any refinancing. Selecta disclosed in an 8 September 2020 noteholder presentation that new preference shares at the HoldCo level are structured to relieve the OpCo as part of its debt burden and will be at the level where shareholder KKR invested its new money.

As part of the recapitalisation, senior secured noteholders were given Class A preference shares that were senior to shareholder equity. KKR was given Class B preference shares that were pari passu with the economic rights of the senior secured noteholder preference shares. The 8 September 2020 noteholder presentation noted that EUR 241m of Class A and EUR 175m of Class B preference shares would initially be issued with both having a dividend rate of 1200bps PIK.

Preference shares can convert into 100% ordinary shares (common equity) following a request by 30% of holders of the Class A preference shares if the preference shares are not redeemed on a redemption event (including maturity, insolvency, liquidation, bankruptcy, Change of Control as defined in first lien, a first lien or second lien acceleration and breach of reserved matters) according to the 8 September 2020 noteholder presentation. This would mean the Class A preference shares would become ordinary voting shares, while the KKR preference shares would be non-voting ordinary shares.

There has previously been some investor speculation that if there is no sale process and a straight refinancing, there could then be some form of exchange offer for the preferred equity. Any such offer could be similar to Ideal Standard's transaction support agreement which had the backing of some investors. The Belgian bathroom fittings manufacturer's potential redemption of exchanged notes at a 72 cent per 100 cash price with an additional potential 10 cent early-bird fee meant any successful company takeover bid could have still generated meaningful upside according to a 31 July 2023 Debtwire report, despite bondholders not receiving a 101 change of control. The company was subsequently acquired by peer Villeroy & Boch in a EUR 600m deal announced in September 2023.

There remains the possibility of preferred equity holders being incentivized to help buffer any new-money need should a refinancing prove difficult given they may want to retain the prospect of potentially owning common equity.

“If 2H24 doesn’t go well, then they will need someone to put in new money to delever the OpCo. [Selecta Executive Chairman and KKR senior advisor] Joe Plumeri is good friends with [KKR co-founder and Co-Executive Chairman] Henry Kravis. It depends on KKR, and if they don’t provide new money, then the ball is in the court of the preferred equity,” the first buysider said. “If the [Class A] preference shares are not redeemed in 2026, then they convert into common equity and KKR loses control of the business. The preferred equity may provide new money. For the preferred equity to be covered, then the business needs to be worth around 9x.”

The second buysider noted that there could be an extension option on the preferred equity that can convert into common equity and agreed that if the preferred equity is not redeemed by October 2026, then KKR loses control of the business.

Selecta’s CEO Christian Schmitz previously said growth will be a focus and “now the fun part starts.” This prediction may still be pertinent given the share price rise of comparable IVS, boosting EV/EBITDA multiples, and Moody’s decision to change Selecta’s outlook to positive. This meant there could still be attractive returns across the company’s junior capital structure, according to a 15 April 2024 Debtwire report.

Click HERE for the Debtwire 3Q23 credit report.

Sponsor KKR has owned the company since 2015. Selecta was touted as a restructuring candidate back in 2013. Its IPO plans never came to fruition, and it struggled with low growth, a heavy debt load, and more recently with working capital shortages— all before the pandemic struck in 2020.

The company’s previous operational track record poses a risk for investors after it completed a debt recapitalisation in October 2020. All outstanding senior secured notes issued in 2018 were exchanged for a combination of first lien and second lien notes issued by the company and preference shares issued by Selecta Group FinCo SA. The recapitalisation led to reduced debt, an extension of maturities to 2026 and reduced cash interest payments in the near-term. Additionally, Selecta’s shareholders provided EUR 175m of new capital through EUR 125m of cash funding and the settlement of a EUR 50m super senior liquidity facility in consideration for the EUR 175m preference shares issuance by Selecta Group FinCo S.A. The super senior RCF maturity was also extended to 1 January 2026 with a new financial maintenance covenant.

Selecta’s 2Q24 capital structure is broken down below (see Debtwire analyst calculations).

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Selecta and KKR declined to comment.