Pro-Gest: Moving the Parts

All,

Please find our updated analysis here.

We continue to hold approx. 6% of NAV in the Pro-Gest bonds, but the thesis is still subject to a (diminishing) number of moving parts:

Paper spreads:

While we have news that the Italian container board and corrugated markets are stable, they are so on a lower level than a year ago. We therefore see LTM leverage multiples rising into next year as we cycle out of older wide-margin quarters before the ramp-up of Mantova can compensate for such lost margin. Nevertheless, we see the company deleveraging again in H2 of next year, as FCF should be more than sufficient to cover interest.

Mantova:

Mantova has started - finally. However, we have flattened the mill's ramp-up to take all of next year, so cash production is now setting in later than in our previous model.

Refinancing:

While FCF should more than cover interest payments next year, the company will have to either continue to draw on its uncommitted bank lines to finance its constant stream of mini maturities or refinance its (messy) struct. sr. loans into one new, more predictable facility. That has been floated already a number of times (by CS we believe), but now that Mantova has started up and is due to deliver commercial grade paper next month, we think that refinancing would make a lot of sense. In this context Pro-Gest have scheduled new meetings for the mini bonds to gain consent for their early repayment.

Thus in short, we think the company will show sufficient cash production to warrant a more stable financing structure. Once that is in place, the 2020 paper spread contraction will have to cycle through GM, and drive leverage for a while, but the incremental cashflow coupled with significant excess inventory should be sufficient to organically deleverage the company from there - even if paper markets remain tight.

Wolfgang
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2 Stephen Street
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E: wfelix@sarria.co.uk
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