Nidda - no point in rushing the fences.
All,
Please find our initiation of Nidda BondCo here.
In recent weeks any exposure to Russia has brought increased scrutiny Nidda has come under the microscope. There is plenty of potential exposure for Nidda although the ability to deal with the consequences if they arise is a very different question.
- Nidda has plenty of liquidity and there is scope for the owners to raise further debt if necessary. The originally intended IPO exit may be delayed but given the SSNs don't mature until September 24, the owners have plenty of time to wait for a more opportune moment or even to reduce leverage ahead of a refinancing exercise.
Russian Exposure:
- Whilst Nidda has significant exposure to Russia the business is not in peril due to the Ukraine war. The Russian business is self-supporting and is financed locally. Also, as a pharma business, it is not currently subject to sanctions. On the Q4 call, management said that operations are carrying on largely as normal.
- Russia accounts for 15% of revenue and ~15% of EBITDA (the higher proportion of branded drugs driving higher margins vs the group).
- If Russia was lifted out of the group net secured leverage would be 6.5x vs 5.8x and net leverage 7.3x vs 6.5x. High figures but manageable.
Strong Free Cash Flow generation:
- Our basic model has an operating cash flow of around €700m and Capex of €200m. Free cash flow of €500m will cover interest around 2x. Even taking out the Russian business, it is still 1.7x. There is enough coverage to keep the bank happy.
- Significant M&A is going to be a challenge in Europe in 2022 and in any event is constrained by the covenants. Retained cash will reduce leverage in 2022.
- We want to do a deeper dive into some of the items within operating cash flow to better understand how Nidda finances itself, however with a €400m undraw RCF and nearly €275m cash in hand we are comfortable being long.
What now for the owners?
- Bain and Cinven are not under pressure to sell. There are no maturities until 2024, although the (undrawn) super sr. RCF will need refinancing by August 23. At <10% of total secured debt, refinancing this facility is not a big challenge.
- NIDDA had been tagged as an IPO candidate in 2021, but no del emerged. The Ukraine war and high leverage now make 2022 unlikely.
- An early full refinance exercise would incur unnecessary expenses given an IPO may still be possible in 2023. Waiting allows time for leverage to fall both from cash generation and closing of the €150m gap between LTM EBITDA and management “normalized” EBITDA.
Positioning:
- We are seeking to take a position in the SSNs 5% 9/2025 at around 91c/€ for 5% NAV to earn at least 8%+ YTM and with the possible upside of a quicker return to par on an early resolution of the conflict in Ukraine. We will be rotating into a position in Nidda.
- We would expect Bain/Cinven to sell or refinance the capital structure in 2023 with the bonds trending towards par. Prodigious cash flow generation before M&A gives us comfort.
As always, we look forward to exchanging ideas on this with you all.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055