Codere - Debt/Equity vs. Growth

All,

Please find our updated analysis of the Proposed Codere Restructuring here.

Holders of the Senior Secured Notes will receive in exchange for their notes 95% of the equity, partial reinstatement of 25c, new PIK Notes of c. 29c and a right to fund (pro-rata) the new money requirements via a Bridge Finance (Super Senior) and the New Super Senior Secured Notes. By funding the new money requirement, the SSN holders will benefit from consent fees on the SSNs, Exit fees and OID's and mark to market gains (losses) on the new tranches.

At current levels, assuming the reinstated Senior Secured Notes trade at par, the PIK/equity tranche is created at 3.3x FY19 Adj EBITDA or 3.8x FY22e Adj EBITDA. Although these levels appear cheap, we are not getting involved at current levels for the following reasons:

-The Company's projections are optimistic and were assembled in early March prior to further capacity changes due to worsening Covid outlook in March and April.

-Cash levels are lower than our static calculations, given the Company acknowledge they need external money to fund the online expansion.

- Equity story: Codere is not a growth story, but focuses on right-sizing the Company with little operational growth going forward.

- The level of LATAM exposure: This business is an Emerging Market Company financed via the European High Yield market. The level of hyperinflation in Argentina and to a lesser extend Mexico deserves a higher yield than the 7% we are implying in our calculations.

-Licensee fees: Our base case scenario involves a change in regulatory framework, with our expectation of lower upfront license fee expenditure but higher ongoing taxes. The overall tax burden for gaming companies is likely to increase over time.

-CAPEX: We maintain that the level of maintenance CAPEX at Codere underestimates the required amount.

The deal will proceed, as there is limited alternatives. Holders of the Senior Secured Notes should take up their rights to fund the new money requirement given the relatively high coupon and call protection on the Super Senior Facilities. However, we do not envisage the new PIK notes (plus equity) trading above par post-restructuring due to both expected results for FY21 and a poor equity growth story to gain new investor demand.

Happy to discuss.

Tomás
___________________
E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk