Ardagh Metal Packaging – Time for a parting - Positioning
All,
Please find our unchanged analysis here.
The Ardagh Metal Packaging (AMP) SUNs fell 3-4 points on the appointment of advisors to the Ardagh Group. AMP headline leverage of 5.5x (FY23) will fall over the next two years, and we see the SUNs as being asset-covered. The SUNs should rally on the back of improving Metal packaging results led by the Americas. AMP currently supports Ardagh through dividends, but this could reduce, or cease as part of debt renegotiation. A restructuring of Ardagh Group’s debt may lead to a change of control at Ardagh Metal Packaging, which would increase the upside (via a par put)
Investment rationale.
- We are taking a long 3% NAV position in the 3% €500m 2029 SUNs of Ardagh Metal Packaging Inc (AMPBEV) at 77c/€. The SUNs should rally as the glass business improves (first in the Americas and then Europe).
- The upside in the trade is 8 points of capital plus 1.5 in coupon over the next six months. We expect a return of 12% (26% annualised)
- The Metal Packaging business will see headline leverage fall from 5.5x to 5.2x by December 2024 and 5.0x by December 2025.
- The SUNs trade around 425bp over the US 5-year swap rate. On issue, the bonds were close to 300bp over the 7-year swap rate. There is scope for tightening in spreads in the next 12 months falling USD rates will be the main driver.
- If Ardagh Group shareholders dispose of their 75% share during the restructuring of the Ardagh Group debt, there could be a further upside. The AMP SUNS have a change of control provision, and if extracting the AMP stake requires its sale, there would be an investor put at 101. However, if the AMP shares were moved to ARD Holdings, there would be an argument as to whether a change of control had occurred. The Change of Control language in the AMP bonds has a carve-out for Initial Investors, which include Yeoman Capital, Paul Coulson and five other Ardagh investors. Change of control is not our base case.
- On the downside, if nothing happens and the metal packaging results take longer to recover, there are 5 points of downside as the bonds could widen to 10%. If the Ardagh Group debt was restructured there would be no cross-default with AMP, so we feel these bonds are well insulated from what will be discussed over the coming year.
AMP results will improve in 2024:
- 2023 was a low point for AMP and its peers due to destocking by customers. Industry peers, Silgan and Ball both reported volumes down by 5%+. The first quarter of 2024 is expected to also see lower volumes across the sector, but growth is forecast in H2. AMP expects the Americas to recover first with Europe more weighted to the end of the year.
- Revenue at AMP is forecast to rise around 4% in 2024, driven by a recovery in volumes. Higher volumes will improve fixed cost recovery so we expect EBITDA to come in at the higher end of guidance of $630m - $650m.
- 2024 leverage will be c5.2x (vs 5.5x in 2023) with a further fall to 5.0x in 2024.
- The SSNs and SUNs are supported by an equity cushion exceeding $2bn.
- Ardagh Group continues to suck cash out of AMP to support its debt pile. A benefit of any restructuring of Ardagh Group could be the end of this level of payment. We forecast that nearly 100% of the Free Cash flow after interest in the next two years will go out in dividends. AMP currently pays $200m a year in dividends to support the Ardagh Group (and a further €23m in dividends on €250m of Preference Shares.).
AMP is insulated from a default at Ardagh Group:
- A default on the Ardagh Group or ARD Finance bonds does not constitute a default under the SSNs or SUNs issued by AMPBEV.
- The Asset-Based Loan Facility (ABL) at AMP matures earlier than the ABL facility at Ardagh Group. It is undrawn and the facilities are accounted for on a separate line in the consolidated accounts. The Ardagh Group ABL facility is also undrawn. If AMP was on the hook for a possible default under a facility to Ardagh Group over which it has no control, it would have to make a note in the accounts.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055