Ardagh – Positioning ahead of the catalysts
All,
Please find our slightly updated analysis here.
After a lengthy discussion, we have decided to put on a short trade in Ardagh. We still do not expect a major catalyst in the next twelve months, but we cannot see a significant rally at the SUNs level and expect a continued drift lower. The results for the first quarter will be out at the end of March and management guidance shows they will be poor. The recovery in performance will only begin in H2. Even then, our projections for the Glass business through 2026 leave the SUNs significantly underwater, especially with the level of value leakage.
Investment Rationale:
- We are taking a short position for 3% of NAV in the $800m 5% SUNs at Ardagh Group at 69c/$. We will be looking to take a further 1% at the time of the 24Q1 results (at the end of March). We are targeting a valuation in the 50’s over the next two quarters. The SUNs will be volatile, and we could see a temporary rally to around 80c/$, on sentiment, but we would expect that to reverse quickly as investors looked through to difficulties in refinancing the Ardagh Group debt.
- The Ardagh Group SUNs are trading well above their intrinsic value (41c/$). The catalyst for the bonds would be a restructuring or a failed Amend and Extend in perhaps 12 months, but we think the bonds will trade down well ahead of that, as a successful refinancing of Ardagh Group will become an increasingly remote possibility every time results come out. A Q4 update is due in April.
- Ardagh's $700m of maturities in April 2025 can be repaid from internal resources. An Amend and Extend is possible but would likely expose the threat of a potential leakage of proceeds from a sale of the AMP stake. We do not believe the shareholders will inject the AMP stake back into the structure to benefit bondholders and any A&E operation would make that intention clear to investors. We cannot see how the cash levels at Ardagh are sufficient to entice SSN holders to participate.
- The ARD PIK Toggles are holding their value purely in the hope they can block more of any proceeds leaking to shareholders. Paying out the AMP proceeds would be an admission of imminent restructuring by Ardagh, so it is not going to come until the debt stack is near to being current (August 25).
- There is no catalyst for Ardagh Group to try and pay the AMP dividend up before August 2025, when $3.8bn of notes become current. A failed Amend and Extend attempt could prompt an earlier dividend payment.
- The ARD HoldCo PIK Toggles are too expensive to short as they are already trading sub 40c/$.
- The Ardagh Glass SSNs currently trade in the high 80's and are fully covered by the value of the Ardagh Group. There are 15 points of upside, but in the event of a restructuring, there are 10 points of downside (volatility and some forced sellers). The catalyst is not likely in the next 12 months, whilst Ardagh hopes for a rapidly improving market and better operational performance.
- The AMP SUNS have a change of control provision, and if extracting the value of the AMP stake requires the sale of the stake, 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 MAP bonds has a carve-out for Initial Investors, which include Yeoman Capital, Paul Coulson and five other Ardagh investors.
- With Paul Coulson stepping back from day-to-day management and a new CEO and chairman in place, the emotional pull of the glass business is gone.
Aengus
T: +44 203 744 7055