KME - What to make of the Paragon deal
All,
Please refer to our unchanged analysis here.
KME’s pressing issue is not the bond’s maturity, and so it is not the bonds that will be addressed with the sale of the Specials division. We do not anticipate a pay-down of the bonds. Contributions to JVs are only permitted up to E40m Euros or 6% of assets and other baskets are also too tight to permit the sale of half the business. If bonds can claim those proceeds, we expect the company to ask bondholders for a waiver - with the threat of insolvency if needed - and imagine that such a waiver will be pre-condition to the sale.
Exclusivity:
At last, KME are entering into exclusivity with German PE firm Paragon on the sale of its Specials division into a JV. The deal values the Specials division at ~ E400m, or at 9x, half a turn lower than Aengus (off today) had assumed. More importantly however, the 2020 EBITDA attributed to the Specials division in the press release is higher than we expected, which leaves less for the remaining copper division.
JV / Sources and Uses:
- KME is to retain a 45% stake in the JV, with Paragon taking 55%. We assume no ordinary dividends or other inflow to KME from Specials division going forward, but there may rental agreements and other supply arrangements which should permit extracting cash flow from the JV.- There is a possibility that the entire amount is not all payable upfront.
- Sources: Proceeds of E260-280m plus vendor note of E32m to the JV.
- Uses: Full proceeds likely to fund KME working capital and arrears. The proceeds approximately match the funding gap in our model.
KME post-sale:
- Copper EBITDA 2021: E40-45m Forecast - downside from lost volume, upside from transitory metal margin (to normalise again in future)
- Still no excess cash
- E 650m Asset-backed debt (incl. Factoring).
- E 300m Bonds.
Leverage:
- Cash (but not excess cash) of 4.4x - to “disappear” (to be invested in copper)
- Comprehensive Gross Leverage of ~ 21x, or 15x including JV.
- KME Business Gross Leverage of ~ 6.7x. or 4.5x including JV.
Liquidity:
- Sufficient. Based on copper prices at 10k/t, we estimate the cash inflow is just sufficient to plug the hole. Provided there is no further increase in copper prices, it does mean that KME should have sufficient liquidity to remain solvent and therefore the market should return to valuing KME on an On-BS basis only, i.e. with 6.7x / 4.5x leverage post-transaction.
Positioning:
- We had halved our exposure to the bonds in April at 79c/E and therefore only retain a small 2% of NAV position in the bonds now.
Happy to discuss,
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003