Atos - La Danse
All,
Please find our initiation on Atos here.
With the appointment of a mandataire ad hoc and no obvious progress on the potential asset sales, bondholders in Atos are correctly organising themselves into creditor groups. As of yet, Atos have not engaged with bondholders, attempting to negotiate with banks first. We see it as inevitable that bondholders will have to be part of a wider conversation, but we can envisage the scenario that the banks take security prior to any discussions with the bondholders.
Investment Considerations:
- We are keen to take a position but think it is a little early at the current moment. We can see a path to survival for the Company via the sale of both BDS (Big Data and Security) and TFCo. However, the scenario where neither asset is sold, the Company will have to seek court protection. With bank debt reportedly trading in the 40's, we are taking a cautious stance in relation to the unsecured bonds.
- With the appointment of mandataire ad hoc to assist the Company’s discussions with its banks. We note that the discussion has only been with the banks and the Company has not met with bondholders. We fully expect the banks to take security as part of any deal to extend its maturities and provide letters of credit to maintain its working capital. With upcoming bond maturities starting with the convertible in November 2024, we expect the Company to undertake a second legal process post elevation of the banks to senior secured status.
Game Theory:
- With advisers appointed on all sides, everything is prepared for negotiations to take place. But as noted above, the Company has only engaged with banks at this moment.
- The bonds currently are pari-passu with the bank debt, but given the limited restrictive covenants on all three bonds, which allows security to be given to non-listed debt, we assume that the RCF and TLB roll into senior secured paper before a wider restructuring becomes potentially unavoidable in November of this year.
- This is a very effective stick to ensure some level of bank compliance as unless banks agree on a plan with the company, the Company enters into a Conciliation Process in the near term with bonds and banks still ranking pari-passu. Value would leak to whichever party - bondholders or banks - who provide fresh capital.
- We now speculate whether the Company wishes to close any of the asset sales prior to finalising debt extensions with its banks and potential bondholders. An asset sale (or two) would provide greater certainty to cashflow projections and would aid any discussions with the banks. There is the possibility that the bank debt gets repaid with a BDS sale, making an extension by the 2024 and 2025 to 2026 or 2027 more palatable to bondholders (as there would be limited debt maturing ahead).
- However, the flip side is that the Company could aim for Conciliation Process before selling any assets. After all, if a process with bondholders is required anyway, why sell key assets beforehand? Restructuring before selling would remove the time pressure from the asset sales to achieve better conditions from buyers.
- We have not yet reached a conclusion on this. If you have any strong views, please let us know.
Recent Updates:
- 5th February, Atos appointed a mandataire ad hoc to assist the Company’s discussions with its banks.
- Separately, the Company acknowledge the two sales processes continue, with the TFCo sales negotiations focusing primarily on the mechanism for releasing EPEI from its obligation to acquire a stake in the Eviden business.
- In early January, the Atos confirmed ongoing, exclusive, negotiations continue with EPEI (EP Equity Investments - a Krentisky entity) on the sale of Tech Foundations, however, there is no certainty that any deal will be reached.
- Atos are examining the impact of releasing EPEI from its commitment to participate in any future rights issue at Eviden.
- Because of the delay/uncertainty in the sales process, further asset sales are contemplated which includes the sale of BDS (Big Dat & Security) a subset of the Eviden business.
- Atos opened a due diligence phase with Airbus for a potential sale of the entire BDS business. Atos has received two letters indicating non-binding interest in its BDS business, one of which relates only to part of BDS's perimeter. Airbus's indicative offer of an EV of €1.5-1.8bn related to the enitre BDS perimeter. Discussions are currently at a preliminary stage.
- Further asset sales are not ruled out particularly if the transaction with EPEI does not go ahead.
Layering:
- Our starting assumption for Atos is that the banks extend their maturities, coupled with a new guarantee facility in return for a security package. We acknowledge that the current trading levels, mid 40’s imply that there is significant risk to this assumption.
- Note, the convertible bonds can not take security without offering security to the other listed bonds. Note the terms of the unsecured bonds includes a limited restrictive covenant which means Atos can’t give security to other listed bonds. This negative pledge does not restrict the right of the Issuer (Atos) to freely dispose of its assets or to grant security over such assets in any other circumstances.
Asset Sales:
- Post the announcement of splitting the business in June 2022, several parties approached Atos to potentially acquire TFCo.
- Atos entered exclusive negotiations on 1st August 2023 with EPEI, for a contemplated Sale of 100% of Tech Foundations for a net cash positive impact of c. €100m and the transfer of €1.9bn of on-balance sheet liabilities, leading to an EV of c. €2bn. Because of other working capital adjustments, the amount has now reduced to €1.
- However, negotiations have stalled due to the commitment by EPEI to participate in a rights issue at Eviden, c.€215m. With the rights issue now unlikely to proceed, Atos and EPEI are negotiating the impact of EPEI of releasing them from their commitment to participate.
Working Capital:
- The forecasted working capital as at December 31st 2023 is estimated at negative €200m, a €1bn difference, effectively 55% of the €1.8bn impact of all the combined actions of working capital management.
- Working Capital Management overstates liquidity at H1 and H2 balance sheet dates by c. €1.8bn, which is split €1bn for TFCo and €800m for Eviden. The portion that is factoring is €700m for the Group, (split undetermined)
- As part of the announcement of October 16th 2022, the Company disclosed information in relation to its working capital management.
- As part of the Group’s liquidity management, Atos carries out specific actions to optimise its working capital, particularly at half-year and annual closings. Those actions include:
- Reported non-recourse factoring of receivables for cash
- a reduction in the average payment period for trade receivables (inflates cash, reduces receivables)
- Extension of supplier terms (inflates cash, increases trade payables)
- The combined impact of the above results in significant intra-annual swings in working capital compared with reported numbers. Atos estimates that the average working capital excluding these actions would be c. €1.8bn higher than reported figures, €700m of which stems from non-recourse factoring of receivables.
- As part of the proposed transaction, TFCo working capital levels required are estimated at €800m as of August 2023.
Further work:
- In H1 2023, Atos spent €430m in staff reorganisation costs, €1,1bn since December 2020. With further asset sales and divestments, we have not been able to ascertain the quantity of other adjustments that Atos are likely to incur over the coming 12 months. It is these uncertain amounts that may be driving the need for additional liquidity, and give the banks reasons to provide fresh cash enabling them to take security.
- Our model assumption uses a FY21 Revenue split of 30% BDS revenue. We have used this ratio to determine EBIT and EBITDA levels.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk