Clariane - Looking at it differently

All,

Please find our updated analysis on Clariane here.

Clariane has executed three of its four pillars of financial restructuring, with the equity raise completed in early July. With some time available to complete its asset disposal program (the fourth pillar), there is limited event risk left in the name. However, with the current structure still including busted convertibles, there are some dislocations.

Investment Considerations:

- We would like to take a 3% long position in the Perpetual Convertible bonds at 35%, but we can't explain why these perpetual convertibles trade 400bps wide of the Oceane bonds, which are 6 months longer in maturity. We are doing more work on the legal documents.

Subject to ranking, the Perpetual Convertible bonds trade cheaply to the rest of the structure especially when considering the likelihood that that bond will be refinanced in September 2026. The reset rate of Euribor +9% is prohibitive to the Company, and assuming further asset disposals occur, the reset rate is expensive, and the bond will be refinanced.

We were previously cautious about Clariane mainly because we believed staffing costs would take longer to reduce (as a percentage of revenue) due to sustained lower occupancy rates and an overall shortage of qualified staff. We are not as bullish as the Company on this metric reducing substantially, but with higher occupancy rates, we see potential for this number to come down.

The downside for the Perpetual Convertible bonds would be primarily operational issues with a reversal of occupancy rate trends the near-term catalyst. Any delay in asset disposals would also cause the structure to trade down, but with the deadline of December 2025, we don't see this as a short-term issue.

OpCo/PropCo:

- Clariane is a mix of a Property Company and a nursing home, and although the Company fully consolidate the business, we view it as more intuitive to separate into two parts. This is not representative of the Company's organisational chart or operations, but just to assess credit quality differently.

- The Company fully consolidates all of its property partnerships, although only owning c.60% economics of the real estate it controls.

- We have deducted "rent" at 6.3%, which is the cap rate Clariane uses to assign value to its real estate portfolio. We have deducted this charge from the EBITDA, to create an adjusted EBITDA for the theoretical Operating Company. The leverage stats for the operating Company are 4.9x and 5.4x are derived from this adj EBITDA.

- This assigns no value to the residual equity value in the real estate, which is c. €600m.

- We don’t expect Clariane to pursue a splitting of the business into an Operating and Property Company, but seeing the operating entity in this light allows us to calculate more intuitive leverage and interest coverage ratios. At c.5x leverage with c. 1.0x of “equity value” in the real estate, gives us comfort about the sustainability of Clairiane’s capital structure.

- The company are seeking to reduce leverage at the “property” entity to 55% by the end of FY25, which would imply all of the proceeds to be used to repay Real Estate Debt.

Upcoming events:

- The Company only release half-year and full-year numbers so there will be no detailed numbers until late February 2025. There will be a release on 23rd October with revenue numbers and possibly updates on the disposal process and occupancy rates.

- The Company don’t need to update on the disposal process so it will be a positive if the Company discloses.

- We will be more focused on the Occupancy Rates and our expectation is there will be further momentum in the improving trend, with occupancy rates expected to be >90% in Q3.

- The other main driver of the business is staff costs, but this is unlikely to be discussed in the Q3 release.

Model:

- On staffing, we have assumed a static staffing level, consistent with numbers as of the end of December 2023. The Company do not release staffing levels for the half year. Our wage inflation assumption is 3.5% for the remainder of FY24, lowering to 3% in FY25 and 2% thereafter.

- This marginally reduces staff costs, as % of revenue from 60% to 58% in FY26. The Company are guiding for this to reduce to c.55% which will be difficult to achieve without reducing headcount (problematic due to the regulatory environment) and/or higher revenue increases. We see it as prudent to only model modest reductions for this metric.

- Our broader revenue assumption is for 5-6% revenue growth in H2, in line with the Company, reducing to 3% in FY25-27. This allows for improvement in margins but still lagging historic averages.

- On disposals, we expect the sales announced in H1 to complete by year end, with €600m of further disposals to be received across FY25 & FY26.