INTU SGS - Timing all wrong

All,

Please find our updated model on INTU SGS here. 

Alix Partners, in conjunction with Global Mutual, presented an upwardly revised business plan in October 2023. This was used as the basis for discussions with key creditors of INTU SGS concerning a potential recapitalisation of the business. With the current debt maturing in March 2024 there is a natural deadline to "right-size" the capital structure. 

Investment Rationale:

- We maintain our 5% long position which we took in June 2021. The trade has not performed as we had expected, despite the recovery in occupancy rates, headline rentals and collections. The impact of the c.3-4% rise in underlying risk-free rate has reduced underlying valuations. 

- We had envisaged an exit in 2024 as the business stabilised post covid and liquidation of the parent, INTU. But we question the proposal of trying to recapitalise the balance sheet at the current time, especially given the poor FCF levels expected in the coming 18 months. 

- We await any further developments on refinancing but are likely to exit the position as part of a successful transaction. 

The Proposal:

- A new Senior Secured Term Loan and a credit facility at the operating level to support CAPEX, both of which are hoped to be provided by new creditors. 

- Existing creditors will be partially repaid with the proceeds of the new senior secured term loan with the remaining cancelled/converted into a holdco-level PIK which is stapled to the equity. 

Timing is wrong:

- FCF, after leasing costs, is depressed over the coming 18 months, which makes refinancing difficult to execute. 

- Depending on the size of the operating level credit facility to support the business (£40m from Mar '24 to Mar '27) will limit the initial debt capacity for senior debt at INTU SGS. Assuming a £50m facility, at 6.5%, and 2.0x Average Interest Coverage over the 3yr period, the senior Secured Loan would be c. £340m. This is equal to c.21c recovery. There is potential for another 3c from excess cash, depending on how aggressive the structure is. The remainder of the value is in the stapled equity/PIK.  

- Waiting for another 12 months, leasing costs are expected to reduce, with Free Cashflow post leasing costs increasing to £70-80m range, from £50m. This would increase the possibility of a larger secured facility. 

The trade has not performed as we expected. We are likely to exit the position on the back of any liquidity seen if this transaction comes to fruition.

Happy to discuss. 

Tomás

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