HSE24 – Accelerate - Positioning
All,
Please find our slightly amended analysis here.
According to press reports, HSE24 is now talking to its creditors. We do not think an A&E operation that doesn’t reduce debt at HSE 24 will fix the balance sheet. The sooner this company restructures the balance sheet, the better. Agreeing early and quickly would be the best way for the shareholders to increase their share in the post-restructuring company. We understand that Providence/ICG would rather keep 100% control and let bondholders pay for the extension. However, a debt haircut and transfer of equity control to bondholders will likely be the final destination.
Investment Rationale:
- We are increasing our long position by 4% to 6%; our initial 2% holding was bought at 40c/€, and the current price is 53c/€. Our valuation of the bonds is now 64c/€, assuming 15% is retained by the current shareholders. The upside is 11 points, and the downside is five (if the bonds return to pre-news level). In the meantime, the blended running yield of 16% is attractive.
- The capital structure is unsustainable, but the next maturities (the SSNs) are in October 2026. There is no cash coming in from the sponsor, who was trying to exit for some years before the refinance in 2021.
- Value breaks well above the equity, so the shareholders are not going to rush this fence. They would rather hold on in the hope that the results improve far faster than expected. An A&E buys them time, but to what end? We would be back here again in 2/3 years.
Getting a deal done now makes sense:
- Bondholders need to drive this bus, but the shareholders control when the bus departs. So it’s essential that bondholders put management under pressure to prepare the ground for a StaRUG process. We see a quick debt-for-equity swap as the best outcome. If we assume 20% goes to the existing equity, the recovery is 64%.
- Waiting until the maturity is looming will create concerns amongst suppliers and could create a cash need. Our original analysis assumed that it would take two years, and we valued the business at 57c/€, assuming a two-year process and cash required to fund working capital.
- The A&E option would see the bonds trade below 50% (c15% YTW), and we do not see the company as being financeable in 2030 anyway.
- If a lower Risk Premium is used, there is an upside to our DCF model. Debt capacity rises to €320m and recoveries to c80% if the required Risk Premium in the DCF calculations were to fall to 8.0%
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055