Orpea - reality dawns
All,
Please find our unchanged analysis on Orpea here.
The reality of the situation is dawning on investors as either an equity injection (via debt for equity swap, aka Vallourec) or full-blown Sauvegarde, appears the only way forward. Orpea published their full H1 numbers post the initial release on the 28th of September. As part of the release, the Company acknowledged that covenant breaches may happen in December subject to underlying performance which is unlikely to improve.
Since the release, there has been rumours that Rothschild have approached banks and bondholders to gauge support for alternative ways forward. Orpea bonds have taken another leg down post results on limited news flow. The implication of the banks having taken security and seniority via the Conciliation Process leaves bondholders in a very vulnerable position.
Debt for equity Swap?
- Rumours are circulating that a debt-for-equity swap is being considered by the Company. We would be of the view that all possible avenues should be explored as the business is over-leveraged and faces significant inflationary pressures on its cost side.
- The Company, via its advisers, has reportedly also started discussions with Caisse des Dépôts to assist the entity, however, it is unclear in what format any assistance would be.
- The standard term-out under Sauvegarde Acceleree may not be a feasible solution the courts would accept. In that contact, we are unclear how the Schuldsheine would be treated. A debt-equity might be more palatable.
Recap of H1 results:
- Operationally, as expected, all regions are experiencing top-line growth as the business rebounds from the Covid crisis. Increases in staff costs are contained but other costs, including catering (food) and energy, have increased substantially, in line with market inflation. Energy costs, as a % of revenue, increased from 1.9% of revenue in H1 ’21 to 2.9% in H1 ’22.
- However, more importantly, the Company outlined the distinct possibility covenants may be broken at December year-end. The new banking facilities do not have any covenants, but c.€4.1bn of debt does have gearing and leverage ratios. Without an improvement in the underlying performance, these covenants are likely to be breached.
Status Quo:
- There appears to be a short squeeze in the shares but the real value breaks in the debt. The bonds have traded down another 15 points to the mid 40’s on little actual news except for the above rumours. The conciliatory process undertaken earlier this year may not be sufficient and the Company may resort to a Sauvegarde process.
- The Conciliation Procedure effectively allowed the banks to syndicate all of the bank borrowings, take security (seniority as well) and refinance upcoming bridge finances.
- The bonds were not part of the process but bond investors had hoped the possibility of asset sales would enable the refinancing. In the current environment, asset sales are proving difficult and with the Company acknowledging covenant breaches are a distinct possibility, a formal Sauvegarde process is becoming the likely outcome. Under this, the bonds will be termed out.
Investment Considerations:
- We are not taking a position in Orpea currently. We struggle to envisage any positive catalyst in the coming weeks and months.
- There is a slim hope that the conciliation process and new facilities will not meet the “hardening period”, reverting the pari-pass status between the bank debt and bonds. This is unlikely in our analysis, given the Conciliation Process was signed off by the Courts, new money was invested in the Company and the likely bankruptcy of the Company in the absence of any new money.
- The negatives are numerous in relation to any potential investment, namely the opaqueness of all the corporate structure and some pre-existing finances, the significant cost pressure the business is facing and lack of transparency (albeit improving under new management) on basic operational metrics such as occupancy rates and regional profitability.
We are going through the full H1 financials, but there appears nothing to change our mind.
Happy to discuss.
Tomás