Branicks (DIC Asset) - Seeking consent - Positioning
All,
Please find our updated analysis here.
Branicks needs its short-term creditors to give it breathing space by pushing out maturities. Issuing secured debt now would be very expensive, and the increase in interest cost would lead to a breach of the Interest Coverage Ratio. Unsecured debt is not going to be possible. As a forced seller in a weak market, Branicks has struggled to achieve what it considers fair prices. On the other hand, enforcement would be a costly and damaging exercise for creditors. Our core thesis is that the 2024 creditors will agree (at a price) to extend maturities, and Branicks will look to execute an amend and extend of the SUNs before Q425. The earlier this happens, the better.
Investment Rationale:
- We are taking a position for 3% of NAV in the SUNs at 30c/€. The liquidity challenges facing Branicks are significant, but the German corporate structure makes enforcement very painful for all concerned. We expect a consensual restructuring to avoid an extended and unpredictable court process. The most likely trigger would be the ICR being breached, but a failure to extend the Bridge could bring that about as soon as July. If Branicks could sell assets and have net proceeds of €150m - €170m, they could push the liquidity issue out to Q325.
- The upside in the trade is nearly 30 points, and the downside is 10. The downside would occur if a non-consensual process became more likely. We would expect an immediate 10-point drop before we could exit. If a liquidation was to occur, the bonds could be wiped out, but we consider this unlikely.
- We expect Promissory Notes maturing in 2024 will be extended under the StaRUG process, leading to further covenant relief and a further < 1-year extension of the Bridge loan. If the bridge loan is not extended (beyond July) or repaid from asset sales, Branicks would be forced to enter a more comprehensive restructuring process likely to Include the Bank Debt and the 2026 Notes. Alternatively, an expected breach of the ICR could force the process onto Branicks.
- We have applied a discount to NAV, which indicates an intrinsic value for the SUNs at 67c/€. In our view, company-reported market values of owned property (based on external appraisals) are well above where the assets would likely trade in the market.
- Regardless of the LTV, Branicks cannot issue debt, as the cost of senior debt would trip the ICR. The €200m secured loan from VIB will be the extent of direct support. The director’s obligations to minorities will prevent excessive transfer of value. SUN prices of 30c/€ preclude parri issuance.
Branicks needs to roll maturities or sell assets:
- Branicks has >€500m of maturities in 2024, including a €200m Bridge loan due in July. The liquidity gap is €400m and needs to be filled via maturity extensions or asset sales.
- The company trying to get the Schuldschein note holders to extend their 2024 maturities.
- A secured upstream loan from VIB (maturity in 2025) reduced the Bridge to €200m. VIB is still listed, and without a domination agreement, the ability to pass further cash to the parent is limited.
- Asset disposals to third parties in 2024 will still be challenging in a weak market.
An Amend and Extend would be a neat solution, but will not happen immediately:
- Most of the debt is not near maturity, so there is no immediate pressure to execute, but this could alter if the ICR is tripped or management cannot repay/reschedule the Bridge.
- As a German structure, enforcement is not an attractive route for Creditors, and a consensual approach is more likely.
- Branicks could offer a double luxco structure with partial repayment followed by scheduled redemptions and a coupon enhancement. In exchange, creditors would be asked to extend maturities by three years (to the same time as the syndicated loan).
- A pause in repaying bank debt would allow Branicks the time to sell into a stronger market to try and create some additional option value for shareholders.
- The restructuring could also allow the ICR to be lowered to 1.5x for 12 months for instance, which would allow an additional €20m of annual interest across the debt stack (LTM interest was
€81m).
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055