Algeco - new bond issue and YTD May results update

All,

Please find our updated model on Algeco here.

Algeco announced today a EUR150m mirror note issue, which will have the same terms of the existing EUR6.5% Feb 2023 senior secured bonds. Importantly, the company also provided preliminary figures YTD to May 2020 and Apr-May 20, which both shows continued growth of revenues and EBITDA vs the same period of 2019, both on an organic and on a post M&A basis. We currently have a long position on the USD8% Feb 2023 senior secured notes.

We estimate today’s news should be overall positive for the senior secured notes. Despite the additional debt at this level, the continued organic growth of EBITDA in April and May is meaningful and better than what one could have expected from management’s previously cautious comments (ie of emergency new business only “partially offsetting” the negative impact of the virus). This more than offset the inevitable question of why the sponsors decided not to reinject more of the cash upstreamed last year to the unrestricted group, instead of raising additional debt, especially in the current uncertain environment.

The Unsecured USD notes are impact by this additional debt ahead of it in the capital structure, and by continued investor concerns about the valuation coverage at this level. We remain cautious on this level of the capital structure.

Other key takeways:

-Liquidity of USD278m in May, including USD210m of cash and remaining ABL availability.

- Organic growth of EBITDA of +4% on YTD May and +9% specifically on Apr-May

- Management notes that margin impact of the coronavirus crisis was not felt in Apr-May due to lag between orders and deliveries of 6 weeks-3 months. Presumably this will be seen in Q3 20.

- Motivation of the new bond issue is to ensure Algeco has enough liquidity to pursue existing M&A opportunities going forward, which according to management could exceed the existing liquidity reserves.

- The business has reopened across all geographies.

- Management sees promising government spending in infrastructure across all the countries in which it operates, which should translate into higher demand for units going forward.

Feel free to reach out if you would like to exchange ideas on the name.

Juliano