AMS Osram - Clarity on the guarantees - Positioning
All,
Please find our unchanged analysis here.
We reported on the Q1 results in early May but had some outstanding issues concerning the differential ranking and guarantees available to the various outstanding debt at AMS Osram. We have managed to confirm the situation with AMS Osram management, details are below. Following this discussion, we have decided to take a long position in the 2025 HY and 2025 convertible bonds.
Investment Rationale:
- We are taking a 2% long position in the 2025 HY bonds at 88.5% and a 2% long position in the Convertible Bonds at 75%. We feel the current yields, (HY: 13%, convertible 17%) are sufficient to compensate for the current headwinds experienced by AMS in its core business.
- we are comfortable with the growth opportunities within the business, and with its wide diversified segments, we don't foresee any major difficulties for the business.
- Our base case scenario is the Company achieves a refinancing without having to resort to a court process.
- There is always the possibility that the original lamps and systems business is sold to assist a refinancing but again this is not in our base case.
- Upside: There is a small possibility that the Company move early to refinance the capital structure. We expect the Company are already in discussions with its banks to extend the maturities on its RCF and Term Loans and would view any extension as positive for the overall structure. Note there are negative pledges in several of the bonds that prevent the banks from taking security.
- Downside: This position is not without risk. The short-term outlook is poor, with subdued demand and seasonal impact will impact performance in the coming months. However, liquidity is not a concern and with the new management committing to the new Malaysian plant, the underlying positive macro picture is not in doubt. Note, the pre-funding by one of AMS’s customers has not been received on the balance sheet yet.
Outstanding bonds/Convertibles:
- All outstanding debt instruments rank pari passu at AMS AG (no collaterals / unsecured).
- The RCF, High Yield Bonds and the Convertible 2027 are guaranteed by material entities as additional obligors. The additional guarantors include OSRAM Licht AG, Germany, OSRAM GmbH, Germany, OSRAM Opto Semiconductors GmbH, Germany and OSRAM Opto Semiconductors (Malaysia) Sdn BND, Malaysia.
- These additional guarantees have not been added to the Convertible Bonds 2025. For clarity, the 2025 convertible bonds do not have additional guarantors and the documents have not been amended.
- As the 2027 convertible bonds were issued as part of the acquisition finance of the Osram takeover, the same guarantees which were included in the High Yield bonds have been included in the 2027 Convertible bond.
Note: All the bonds do currently rank pari-passu and the above distinction only comes into play in a court proceeding, or a liability management exercise before that background, which is not our base case.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk