(Debtwire) Takko boasts low reported leverage and earnings growth potential but May 2023 maturities provide looming refi risks

20 June 2022 | 16:52 BST

Takko has low reported net leverage with free cashflow generation and earnings upside as LTM EBITDA will soon include the impact of more open stores. But the German discount retailer stretched its days-payables outstanding to 151 days in FY21/22 fiscal year-end 31 January 2022. With a EUR 80m term loan, EUR 15m ancillary facility and EUR 181.4m drawn letters-of-credit facility maturing on 9 May 2023 ahead of its EUR 510m fixed and FRN November 2023 bond maturities, a refinancing currently looks tough according to four buysiders, with a fifth buysider attracted.

The company has Caa2/CCC- rated EUR 285m 5.375% senior secured 2023s indicated at 83.675-mid with a 19.2% yield to worst while its EUR 225m Euribor plus 537.5bps senior secured 2023 FRNs are indicated at 83.875-mid with a 1865bps discount margin on Markit.

Takko’s upcoming bond maturities are on 15 November 2023. But the company also faces large maturities on 9 May 2023, which means it may have to address the refinancing of its capital structure even sooner.

Takko has a letter-of-credit facility of EUR 185m, drawn at EUR 181.4m at 31 January 2022, which matures on 9 May 2023. The company also disclosed in its FY21/22 financial report that it had extended its EUR 80m term loan B and EUR 15m ancillary facilities maturity from 31 May 2022 to 9 May 2023 to align the maturities with that of its letter-of-credit facilities.

Takko gave no mention of how the company would finance its upcoming maturities on its 24 May 4Q21/22 earnings call, as reported.

Click HERE for the 4Q21/22 earnings call transcript.

“The main maturity is the letters of credit which are almost fully drawn. This is material like the borrowing base facility for [German-headquartered copper alloy group] KME,” one buysider said. “If letters of credit are not extended, there will be a new money need of the same amount.”

A second buysider agreed, noting the May 2023 maturities mean the company’s capital structure needs to be addressed.

Executing an extension to its letter-of-credit facility will be paramount in preserving Takko’s liquidity. The company ended the FY21/22 period with EUR 171.5m of available liquidity including EUR 167.2m of cash and EUR 4.3m of undrawn lines.

Its cash position, however, reduced post the FY21/22 fiscal year-end, with the company disclosing in its presentation it came down to EUR 110m at 16 May.

Takko’s liquidity could come under pressure from working-capital outflows in the coming quarters. The company disclosed in its FY21/22 investor presentation that days-payables outstanding had increased to 151 days for FY21/22 compared to a shorter 120 days for FY20/21.

The increase in day- payables outstanding gives Takko a longer time to make payments but this “stretching of payables” could mean a normalisation and working-capital outflow in the coming months.

Days-payables outstanding is now coming down and this will absorb cash, the first buysider noted, adding that the stretch was put in place so they could access the primary market in 1Q22 but the window is now closed. We saw with [Dutch retailer] Hema that stretched payables are unsustainable, he added.

“This name is risky, we don’t like the business model and we are unsure on the sponsor plans while we are also cautious on their market positioning and therefore not paying attention to Takko,” a third buysider said.

Takko reported a low 3.9x net leverage at FY21/22 on a pre-IFRS 16 basis. Net leverage including lease liabilities and shareholder loans climbs to 8.4x according to Debtwireanalyst calculations (see analyst capital structure below). Adjusted metrics also climb further when adding the EUR 181.4m letter-of-credit draw to its reported net debt position, the buysiders noted.

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The company has the potential to deleverage through free-cashflow generation but if one works off the reported EBITDA and strips out adjustments then cash generation is thin. Takko had a FY21/22 adjusted EBITDA of EUR 124m but if earnings add-backs are stripped out then FY21/22 reported EBITDA was EUR 86.7m. Deducting around EUR 13m for annual capex, EUR 35m of bond interest and EUR 31m in cash taxes would mean around just EUR 8m of annual free cashflow off reported earnings with upside on the inclusion of a full-year of reopened stores.

Earnings have been volatile in the past. Takko had adjusted EBITDA of EUR 124m at FY21/22 which was up 46% YoY versus EUR 84.9m at FY20/21 but remains below the EUR 157.4m at FY19/20. The company faces upcoming earnings headwinds from volatile consumer demand, raw-material cost inflation, higher logistics costs and a rise in the minimum wage and energy prices.

Takko delivered a 55% gross margin at 4Q21/22 versus 58.5% at 4Q20/21. This suggested a recent decline versus the 59.4% achieved for FY21/22, 60.9% achieved at FY20/21 and 61.7% at FY19/20.

The business faces multiple headwinds according to the first buysider. Energy and cost of goods sold have gone higher and the minimum wage in Germany will increase while it is bricks-and-mortar business, so there will be a significant impact, he noted.

“Operationally they can pay a 10% coupon if needed,” a fourth buysider countered. “There is a chance they will be able to issue at 10% within a year if the market allows and we like the operational model, while they have one of the greatest gross margins in the industry.”

The fourth buysider noted he’d always been a fan of the company, but it has dollar FX exposure and cost headwinds. Gross margins have fallen and there are cost pressures, but it can pass these through to consumers, he added.

One potential salvation for Takko could be possible support from its sponsor, though Apax only provided limited recapitalisation support to the company back in March 2021 when Takko announced fresh liquidity of EUR 53.575m. The new money was split between a EUR 30m private placement with investors including funds advised by sponsor Apax and a EUR 23.575m super senior facility provided by existing lenders, as reported. The EUR 30m instrument would rank pari passu with the group’s EUR 285m 5.375% senior secured 2023s and EUR 225m Euribor+ 537.5bps senior secured 2023 FRNs.

Of the EUR 30m private placement, EUR 15m was provided by the shareholder, while an existing lender in the capital structure contributed to the remaining EUR 15m, the company highlighted in a corporate presentation, as reported.

In its defence, Apax has owned Takko since 2011. The sponsor had already invested EUR 963.6m from 2011 up to the October 2017 date of the Takko bond prospectus. Apax acquired Takko at an enterprise value of around EUR 1.4bn, implying a then 9.5x EV/EBTIDA multiple.

“There is no equity interest here as Apax is out the money since 2011. They put in money to help that was pari passu to the bonds and not in the form of equity,” the first buysider said.

It is an unusual situation that credit is weak while there was no real support from the private equity owners, the second buysider noted. Apax lost goodwill and almost walked away, he added.

“The sponsor brokered the deal with existing lenders extending maturities and there is support from the banking group including letter-of-credit providers,” a source familiar countered.

In the meantime, Takko remains in compliance with its financial covenants. It had to comply with a minimum liquidity covenant from 31 October 2020 to 31 January 2022, and also maintain a minimum adjusted EBITDA (without the application of IFRS 16) as of 30 April 2022. The liquidity covenant was tested monthly and set at EUR 25m while it will have to meet a minimum adjusted LTM EBITDA covenant of EUR 70m by April 2022 before the level ratchets up to EUR 110m in July 2022, as reported.

Takko’s fixed-rate bonds were indicated down at 19 cents on the euro back in May 2020. As reported on 15 May 2020, Takko announced a suspension of interest payments on its senior secured notes and the appointment of advisors to find a long-term solution for the group and its capital structure and to evaluate all options for the business.

This was followed by negotiations between the company and a group of its bondholders. The bondholder group was at the time advised by Freshfields and Houlihan Lokey, asreported, before the company resumed its interest payments in mid-August 2020. Takko had been working since the summer of 2020 with financial advisor PJT Partners, asreported.

Takko has announced the appointment of CEO Tjeerd Jegen from May 2022. Jegen was CEO of Hema from 2015 to 2021, during which Hema completed its recapitalization process in December 2020.

Takko-private transaction

Takko could try to solve any upcoming refinancing risks in the private debt market. Otherwise, issuing in the public debt markets now looks challenging given the relative-value of other lower rated higher levered retail sector credits.

German beauty retailer Douglas, with 6.3x senior secured net leverage at end March 2022, has B2/B-/B rated EUR 1.305bn 6% senior secured 2026s indicated at 78-mid with a 13.6 % yield to worst while Dutch DIY retailer Maxeda, 4.2x net levered at end-January 2022 according to Debtwire sister service Credit Rubric, has B2/B+ rated EUR 420m 5.875% senior secured 2026s indicated at 71-mid with a 15.3% yield to worst on Markit.

Takko will need to refinance in private markets which do not mark down debt positions to market, so Takko could perhaps have a private PIK at 10%-12%, the second buysider noted.

“The bond maturity is November 2023, and they could get downgrades in the coming months while they are in a vicious cycle as the bonds trade down as they can’t refinance, and as the bonds fall the chance to refinance falls further,” the second buysider said.

Should any refinancing not materialise, then there remains a risk of a debt restructuring according to a 17 June desk note from independent special situations firm Sarria.

Sarria noted that there is a chance that bondholders split into two groups, (those who equitise in full and those who largely roll into a new instrument). If so, the latter might be able to write off less in return for a large OID, so the stub would not trade at par, but the face value may be less impaired, they added.

“Apax have owned the business for so long, but it has been a toxic hole in their portfolio,” the fourth buysider said. “There is still time to the November 2023 bond maturity, but it is attractive short-dated paper and they can do an amend-and-extend which is not horrible for bondholders as they get equity.”

Takko’s bonds are governed by New York law with an amend-and-extend requiring a 90% bondholder acceptance threshold, according to the bond prospectus.

Takko pre-marketed a high yield refinancing attempt in November 2021 led by Deutsche Bank, but did not follow up with a formal roadshow given a pricing mismatch, as reported.

“There is no way they can issue a bond at the current c19% yield to worst,” the second buysider said. “They should have refinanced last year.”

A fifth buysider noted he was quick to exit a story like this and added it can be too painful.

“The company is aware of maturities and has explored refi options previously where there was positive feedback from investors,” the source familiar countered. “Net debt is lower than pre-covid levels and there have still been store closures. Many refi options are possible.”

Takko and Apax declined to comment.

by Adam Samoon with capital structure by Adeline Bockarie