KME – change in positioning Intek warrants and SACE loan
All,
Please find our updated analysis on KME here.
We are increasing our long position on the KME bonds from 3% to 5% of NAV, at around 81 (YTM~18%). We now see the bonds potentially returning to the high 80s. Recent actions by KME and holding company Intek suggest that liquidity and holdco leverage will be further strengthened over the next few weeks. We estimate a few points of immediate additional upside for the bonds once these actions are completed, as they have not been fully priced in. The reinforcement of the liquidity at the KME level could also open further room for bond buybacks, which the company is already considering as per the latest results call.
Manufacturing momentum: European Manufacturing PMIs remain strong even during the second wave of lockdowns. KME is highly diversified among sectors and should remain well supported going forward, despite a guided lagged impact of the Q2 20 lockdowns into the upcoming Q3 20 numbers.
KME: is reportedly considering a new facility of around EUR100m by SACE, the Italian export credit agency. KME has a significant manufacturing footprint in Italy (the former SMI), the Italian-based Intek holdco is the owner of KME via the reverse merger of SMI into KME, and the group has an important role in developing differentiated product and process technologies in the copper sector, including key military applications. Therefore, we believe it is highly likely that such a loan would be granted, especially in the current context of rapid escalation of the state presence in the economy across Europe. These facilities would almost certainly be structurally senior to the bonds on the assets outside the Osnabruck plant perimeter, but they would mostly be used to reduce the drawing under the asset-backed facilities.
Intek: plans to issue warrants, up to a total maximum of 290m newly issued shares at a fixed exercise price of EUR0.4 per share, for a maximum of EUR115m of proceeds, should further strengthen the holdco structure. This would allow Intek to support KME if necessary. The current share price is around 0.32, so there is further to go before the warrants are exercised. The warrant issue could also lead to more comfort about the strength the capital structure at the holdco level. The holdco market capitalization and Intek’s other assets apart from KME (Culti, real estate, private equity) are often overlooked by High Yield investors. The warrant issue is to be decided by a shareholder meeting on 27 November (first call) or 30 November (second call).
Liquidity: KME already has enough cash reserves and room under the asset-backed facilities to cover its liquidity needs, even under our conservative projections for working capital flows this year. However, the news on the Intek and SACE front should provide further reassurance to bondholders. The formal completion of the merger and extension of the asset-backed facilities, which we see as a low-risk event, could provide further relief.
Please feel free to reach out if you would like to exchange ideas on the name.
Juliano
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