Ardagh – Time on their hands
All,
Please find our new analysis here.
Ardagh Glass is struggling underneath its debt stack. The Glass business can support the Senior Secured debt, but weak covenants mean that the impairment for the SUNS is significant. However, there is no immediate crisis here as Ardagh has nearly 18 months before its 2026 maturities become current, and it can repay the $700m April 2025 bonds from cash and available facilities. An attempt at an amend and extend could happen but, the level of value that would need to come in from the Unrestricted group is unlikely to be palatable to the shareholders.
Investment Rationale:
- We have not taken a position yet as we believe the catalyst for significant bond moves is too far out. Ardagh's $700m of maturities in April 2025 will be repaid from internal resources. An amend and extend is possible but would expose the intentions regarding potential proceeds of a sale of the AMP stake. We cannot see how the cash levels at Ardagh are sufficient to entice SSN holders to participate.
- We will look to short the ARD HoldCo PIKS. One of the first indications that Ardagh is running out of cash would be a decision to PIK these bonds, and a dividend of the AMP proceeds would likely follow.
- The Ardagh Group SUNs (72c/$) and the ARD Finance SUNs (44c/$) are trading well above their intrinsic value (41c/$ and 17x/$ respectively). The catalyst for them to drop would be a restructuring or a failed Amend and Extend. We do not see this happening in the next 12 months.
- 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 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 ARD SUNs are holding their value purely in the hope they can block more of any proceeds being paid to shareholders. Paying out the AMP proceeds would be an admission of imminent restructuring by Ardagh, so is not going to come until the debt stack is near to being current (August 25).
- If Ardagh waits too long, it could jeopardise the ability to dividend the AMP holding to shareholders, but no catalyst will occur until August 2025 when $3.8bn of notes become current.
- With Paul Coulson stepping back, the emotional pull of the glass business is gone.
Ardagh Glass will need to restructure, but not until 2025:
- The catalyst for restructuring will be the $3bn of 2026 maturities, with the 2025 bonds financed out of internal resources and ABL drawings.
- The SSNs are in the money, and the SUNs will be the fulcrum security. The double LuxCo structure should allow for the SSNs and SUNs to be treated as separate classes, with the SUNs crammed down if necessary.
- The choice of jurisdiction will be made by the company and is likely to be England or possibly NL.
Significant cash can be paid to shareholders from certain asset sales:
- The AMP stake is held in an unrestricted subsidiary, and up to $1.4bn of the $1.6bn value of the stake could be paid up to ARD Finance.
- ARD Finance has a Restricted Payments basket of $1.2bn, so only $270m would be captured for the PIK Toggle holders.
- Our analysis shows that the Pref Share and Trivium proceeds would be available to creditors of Ardagh Group as they would be
caught by the Restricted Payments test
Trading Update – FY 2023
- FY results were in line with the guidance given a few weeks ago. 2024 will see a gradual stabilising of shipments, and margins will improve in H2 as higher volumes lead to higher fixed cost recovery. EBITDA guidance for 2024 has been cut to $750m - $780m (before $200m in dividends from AMP). Previously, the 2024 EBITDA guidance was $850m.
- Q4 Revenue was down 6%, reflecting a fall in shipments of -20% that more than offset price increases. Customers have been reducing inventory built up in COVID-19 times to combat supply chain issues. Ardagh Glass has reduced production to match lower demand (reflected in lower inventory days).
- In the 4th Quarter, Group EBITDA fell 48% to $94m, reflecting the volume loss leading to lower recovery of fixed costs.
- Revenue in Europe/Africa was down 2% at $718m, with Africa performing well. Shipments were down 24% in Q4. EBITDA in Europe/Africa fell 24% to $50m although this included out-of-market energy costs of $24m, which will not occur in 2024. Adjusted EBITDA was $74m.
- North America Revenue was down 13% at $364m in Q4. In addition to destocking, demand in North America was also impacted by reduced shipments of Bud Lite due to brand issues in the US.
- EBITDA in North America fell to $20m in the quarter.
- Ardagh Group is reviewing its capital structure and is considering (amongst others) extending maturities. No further update was given. Continued access to the ABL facility is critical here.
2025 outlook is for an improvement in H2:
- Ardagh expects inventory levels to fall and shipments to normalise in 2024/25, and they do not see a fundamental shift in demand for glass packaging. Since the pandemic customers have run with higher stock to combat supply chain challenges. The supply chain challenges have eased, so customers are destocking to normalise inventory levels. Destocking has not ended yet, but the first six weeks of 2024 saw shipments down 10% (vs 20% in Q4). Northern Europe was hit earlier and should come out late in H124, North America will be in H2.
- Glass EBITDA is guided in the $750m - $780m area (plus $200m in dividends from Ardagh Metal Packaging). Ardagh Glass will likely burn around $25m in cash in the year.
I look forward to discussing this with you all.
Aengus