KME – Toasting the feet
All,
Please find our slightly amended analysis here.
Since the completion of the sale of 55% of the Specials business, Bondholders have been hoping for much of the cash to come their way. KME's banks have now determined that they will be the key participant in deciding the final destination of the €200m in cash. KME was due to roll its Letter of Credit facilities but on Friday, it announced that the banks had only agreed to roll the facilities for a short period and for a lower amount. Unless KME can secure additional facilities, it will have to fund €75m of Trade Payable exposure currently supported by bank-issued LC’s. Lenders will not allow KME to leak cash needed in the business to tender for bonds. We expect no more than €50m of cash to come to bondholders, in return for extending their positions. We further expect the price action to reflect this shift in risk and see bonds sinking into the ’80s.
Bank lines shorter and smaller:
- KME will need to go back to its banks in the summer to negotiate an extension. KME is having its feet held to the fire whilst it has cash that the bondholders are eyeing up.
- KME has had a €395m LC line with a pool of banks to support Trade Payables with LC’s, the banks have also only extended the facilities until November 2022, ahead of the bond maturity in February 2023. The original lines were due to expire at the end of February 2022. They are fully utilised at each quarter-end so KME will have been increasingly unable to offer standard 30-day terms backed by a letter of credit.
- Management has tried to increase the LC facilities without success in recent years and the rollover is for only €320m, not €395m. Although KME has said it has “received the approval” for a new €75m long term facility which will be approved in the next few days. Absent an additional €75m line, KME will have to fund the drop in trade payables with cash. €320m will allow them to roll over payments with certain suppliers while the rest of the facility is sorted out.
- This will likely have prompted the distinctly odd timing for an announcement when the facilities are not yet fully in place.
Where to now for bondholders?
- We have been sceptical that bondholders would get their hands on much of the Specials cash as KME needs it to fund the operations in its copper business. The banks are not going to allow a large transfer of this much-needed cash to bondholders whilst they are left funding operations.
- Our expectation is that a refinancing operation is needed with an "amend and extend" request for bondholders in return for some cash and the extension of the LC lines to support the working capital position of the company.
- Our model shows that cash on hand will fall to around €60m by the end of 2022. Our analysis shows that volumes have been falling as KME struggled to finance itself. We see a way through this via the use of most of the Specials windfall.
Positioning:
- We are short the SSNs for 5% of NAV, our catalyst for this is the realisation that bondholders will not be seeing significant cash coming their way. Today’s news is that proverbial bucket of cold water.
- We see the banks as wanting to force a refinancing of the capital structure while KME has the cash to execute it. We expect bondholders to be offered up to €50m as a sweetener to a deal to extend the bond maturities beyond February 2023.
We are happy to exchange ideas on this with you all
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055