Orpea - still at death's door
All,
Please find our unchanged analysis here.
We continue to avoid investing in Orpea Unsecured following yesterday’s press release from the Company regarding anticipated asset write-downs in audited financial accounts. Our estimate of asset valuation was c.€6bn so the confirmation from the Company that they expect a further €2-2.5bn of additional asset write-downs was within the realm of expectations. However, now that the real estate portfolio has been valued at €6-6.1bn, it confirms our fear that the Gross Senior Leverage remains too high even after the debt-for-equity swap of the unsecured creditors.
Investment Considerations:
- Away from asset valuation, we have many reservations about the underlying business model and point to the Company’s projections for operating cashflow, before expansionary CAPEX, to be in the €100-300m range for FY23 and FY24. This is not sufficient to support €6bn of Gross Debt.
- In our mind, there remains significant doubt over the provision of the additional equity (€1.3-1.5bn). Orpea excepts only 20% of the revised equity to be held by “long-term French institutional investors", there is uncertainty about where, and at what price, the new equity will come from.
Real Estate Write Downs:
- The overall set write-down is in three parts, with
- Real estate valuation is split in two, with the larger part valued externally. This refers to €5.8bn of the €81.bn real estate value as of Dec 21.
- The headline change in the real estate valuation is the increase in the capitalisation rate from 5.3% to 5.5%. However, this only accounts for €300m of change in valuation with an additional €800m of asset write-down due to the revised business plan. In total, this equals €1.1bn of asset write down versus €800m-1bn guided in October.
- The Second part of the real estate portfolio was valued on December 21 at €2.6bn. This value has been reduced with the exclusion of furniture and equipment from real estate valuations. Additionally, this sub-portfolio of assets refers to real estate no longer in use and/or work-in-progress, and in total the write-down is c. €1bn.
- Combined, valuation has reduced by €2.1-2.5bn.
Intangible write-offs:
- Given the projections shared by the Company in November, there is a significant write-off on intangible assets on the balance sheet. The Company are likely to write off in total €2.5-2.7bn in intangible assets, an increase from the €1.3-1.5bn guided in October. The calculation in October was primarily driven by the increase in the risk-free rate to 2.5%.
- However, further, write-downs were necessary with a closer examination of the business plan.
- An additional €400m write-off is expected concerning receivables from partnerships set up by the previous management. The recovery of these receivables (€700m in total) is doubtful and may result in some litigation, leading to an impairment of €400m for year-end accounts.
- Finally, a further 100-200m impairment of balance sheet assets is likely due to changes in deferred taxes and some working capital items, bringing the total non-real estate writedown to €3-3.3bn
Evolving LTV:
At year-end the expected Gross Leverage (assuming the unsecured are fully equitised) equals €5.1bn versus €6bn of real estate, leaving a staggering 85% LTV. This will change over FY23 with an additional €600m of senior secured financing raised in early Q1 less the €1bn of senior secured debt maturing in FY23. Gross leverage will end FY23 at €4.7bn. Additionally, if (a big IF) Orpea raises further equity via a heavily discounted rights issue, an additional €800m of liquidity will be added (€1.2bn equity raise less €420m negative cashflow for FY23). This has the potential to reduce leverage further to 65%.
The Big If:
- Orpea is continuing with its plan to raise an additional €600m in new financing plus an equity raise which was expected to be €1.2bn. The Company have now revised the amount to be raised to €1.3-1.5bn in equity and with the above leverage multiples, any equity raise would have to be at significant dilution to the converted unsecured creditors.
Going Forward:
- The conciliation process continues, with a meeting ongoing today (22nd December). The Company has alluded to margin reduction and debt extension of secured debt at Orpea SA which will help overall liquidity post-restructuring.
- However, the statement provides no update on the level of engagement or support from the unsecured creditors. Timing remains tight with Orepa hoping to secure an additional €600m in secured financing in January to cover Orpea SA funding needs until early summer.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk