(Debtwire) Takko liquidity buffer surges but cost inflation and deferred payments provide medium-term headwinds

09 July 2021 | 15:11 BST

Takko’s earnings remain way behind pre-pandemic levels. But 98% of the German-headquartered fashion retailer’s stores reopened from 25 May, bringing May and June 2021 revenues up around 12% Year-on-Year (YoY). The group’s cash balance of EUR 150m as of 27 June also provides a strong liquidity buffer though this will likely reduce in future given eventually due deferred payments and working capital swings, according to three buysiders and a deep-dive analyst.

The company held an earnings call on Tuesday (6 July) to discuss its 1Q21/22 results for quarter-end 30 April. Click HERE for the 1Q21/22 earnings call transcript.

Takko’s management highlighted positive current trends for the May and June trading period post-quarter end. The guidance was welcome given 1Q21/22 numbers were weak due to lockdowns. Adjusted EBITDA for the quarter was a negative EUR 24.4m versus a negative EUR 35.7m for the prior fiscal year 1Q20/21 period.

Despite the weak 1Q21/22 earnings, Takko outperformed the market. The company’s Germany like-for-like offline sales for the quarter were down 33% YoY versus a 66.7% YoY drop for the German industry TextilWirtschaft data.

Raw material prices, however, could be a headwind down the line, according to one buysider. A number of Takko’s products for sales in the current and next quarter were bought a year ago when commodity and freight prices were lower, he noted.

“Cotton prices have increased in the past year; it was much cheaper a year back as no-one bought fashion and there was too much inventory [while] now there is a shortage,” he said. “They could be squeezed on pricing with suppliers for 2022 renegotiations and a low margin for Spring 2022 unless they pass through raw material cost increases to the customers.”

A second buysider was also cautious on the outlook. “It’s amazing how things can change: some other deals like [German-headquartered beauty retailer] Douglas managed to pull off a refi,” he said. “This suggests that all these names could be fine but they could all be dependent on Christmas trading and who knows what the world may look like then.”

Ready for Takko-off

Takko’s 1Q21/22 LTM adjusted EBITDA of EUR 96.2m was up versus the EUR 84.9m at FY20/21 but still below the EUR 157.4m at FY19/20.

The business has the potential to deleverage through both earnings growth and free cashflow. With a 1Q21/22 LTM adjusted EBITDA of EUR 96.2m, Takko last year faced EUR 14.4m capex, EUR 31.7m interest, EUR 1.1m cash taxes and EUR 46m of exceptional items, which could mean possible annual free cashflow of EUR 3m, with upside should earnings recover.

The pick-up in earnings and a working capital inflow meant that the company had an operating cash balance of EUR 150m as of 27 June post-quarter. The cash was still in excess of EUR 140m as of the 6 July earnings call.

Net leverage stood at 6.1x at 1Q21/22 on a pre-IFRS 16 basis. The rise in cash balance as of June suggests that net leverage could reduce as of next quarter-end.

However, the average cash balance going forward is likely to be more towards EUR 100m, given the company will have to meet some deferred payments of EUR 40m, mainly consisting of tax deferrals.

“The company has only been trading normally for a month or so and the first banks are already talking about refinancing it. But sure, if you want to be really foolish, you should assume a swift return to all-time-high 2019 EBITDA, multiply that by your favourite multiple and add the full EUR 150m of 27 June cash we’ve just seen,” independent special situations firm Sarria said. “Then you want to stand in line for a refi with a 3.5% BB perpetuity and stop asking impertinent questions.”

Takko’s June liquidity position could reduce, the first buysider agreed. The 1Q21/22 cashflow benefitted from EUR 31.1m of other items, which was likely payments deferrals and unpaid V.A.T. Additionally, there was the working capital inflow that could unwind, he noted.

Takko at 1Q21/22 had just EUR 75.3m of operating cash and EUR 1.7m available undrawn lines with EUR 41.3m letter of credit availability on its EUR 185m letters of credit borrowing base.

The liquidity guidance means the company has ample covenant headroom versus a EUR 25m minimum liquidity cover test.

Tactful support

Takko’s liquidity has improved following a March financing deal. Takko received EUR 53.6m of new money split between a EUR 30m private placement with investors including funds advised by sponsor Apax and a EUR 23.6m super senior facility provided by existing lenders, as reported.

“Apax provided EUR 30m of new money but if you look at the size of the capital structure Takko has EUR 590m net debt, so it was 5% of it,” the first buysider said. “It was a small proportion of support on a pari passu basis and not a large commitment from the sponsor.”

Triton provided a small amount to [German heat exchanger business] Galapagos but that was equity rather than debt, he continued. “[In Takko’s case,] there is a reluctance from the sponsor to put in significant new money; they had an opportunity in 2020 to put equity in and then again in 2021 but they tried to defer and get state aid,” he said.

“The shareholders are not incentivized to do anything unless Takko runs out of liquidity and this looks unlikely while the maturity is not till 2023,” a third buysider said. “We’d not short as there is no negative catalyst but the prices in the 90s look too high for retail so we are not tempted.”

Apax acquired Takko in February 2011 at an enterprise value of around EUR 1.4bn, implying a 9.5x EV/EBTIDA multiple.

Earlier this year, the company announced a raft of management changes. Kurt Rosen was appointed as CFO effective as of 7 June, as reported. On 25 May, the company disclosed the exit of CEO Markus Rech, who had only been appointed CEO in February and began working in April. Karl-Heinz Holland is acting as interim CEO.

“Only the Mattschull family was able to manage the business well,” the first buysider said. “The sponsor bought when online was not so much of a threat and overpaid versus the equity value. One cannot IPO a retailer like this.”

Alexander Mattschull was appointed CEO and led the company for several years, including being CEO between 2004 to 2008 and taking the helm again in 2016, before leaving at the end of 1Q21.

Refi odds tightening

Should earnings improve, Takko could be a near-term refinancing candidate given the 2023 maturities on its fixed and FRN bonds. The EUR 285m 5.375% senior secured 2023s are currently callable at 101.344 with the schedule stepping down to par from 15 November while its EUR 225m Euribor+ 537.5bps senior secured 2023 FRNs are callable at par.

Management noted on the earnings call when pushed on its refi plans that “we are watching the market, and we will go into the market when we feel it is time and we are fit for it.”

Takko’s Caa2/CCC- rated EUR 225m E+ 537.5bps senior secured 2023 FRNs are indicated 1.5 points higher at 93.875-mid with an 862bps discount margin while its EUR 285m 5.375% senior secured 2023s are indicated 1.5 points higher at 94-mid yielding 8.2%, according to Markit.

“There is the delta variant and cases are increasing. This is not a business that can withstand another lockdown,” the first buysider said. “Liquidity was good in June, but the bonds could fall to the 50s if there is another lockdown and has been lower before. Otherwise there is seven points upside if they refi and extend,” he said. “But for this you perhaps need a more supportive sponsor like [German beauty retailer] Douglas had for example.”

Sarria noted they were short earlier in the year thinking they would run out of cash, and it was “astonishing” they didn’t. “The franchise is unimpaired and the move to online still stops at their price bracket, but they are now more levered than before – despite appearances,” they commented. “The EUR 100m cashflow in June only shows that the Takko had good sales and management said as much. We can rest assured that the EUR 150m [cash balance] won’t be around at quarter end.”

Buying Takko bonds in the past year has been a hugely profitable trade. The fixed rate 5.375% notes were indicated down at 19-mid back in mid-May 2020 during the pandemic sell-off before rebounding back to the 90s.

“It was a fantastic trade for those who bought but we missed out and you can only buy so much,” the second buysider said. “There are the same questions swirling around this as [UK retailer] Matalan and they both look okay but refinancing may be a hurdle.”

“This is too tight and sub-10% for retail risk is not great. People talk about reopenings but the UK retailers have been open and retail sales figures are still not great versus 2019,” the third buysider said. “You are not compensated for the risk.”

Takko and Apax Partners declined to comment.

by Adam Samoon