Rekeep - Path to Refinancing
All,
Please find our updated analysis here.
Rekeep continues to bobble along, but as time ticks closer to the maturity of their bond in February 2026, the lack of cash deleveraging will hamper its refinancing efforts. The inflow in Q4 from working capital was lower than our expectations as receivables remained at elevated levels. A 13% yield for 22-month paper sounds wonderful, but on its current trajectory, a refinancing is going to be difficult. To execute a refinancing the business needs to improve its working capital and/or sell a business.
Investment Rationale:
- We increased our position to 5% in December on the back of Q3 numbers on the expectation that the market hadn’t priced correctly the expected cash inflow from Working Capital which has materialised. However, we are disappointed that the inflow wasn’t greater and that Receivables has stayed elevated.
- We are maintaining our position but our patience for working capital is beginning to strain. We will need to see further reduction in Working Capital in Q1 to maintain the position as we are conscious that the business hasn’t deleveraged since the bond issuance in January 2021.
- The Company acknowledged it is working on a refinancing and deleveraging via a potential asset sale, but with current leverage and trajectory, the business is unlikely to be able to refinance inside 10-12% rate.
- We await Q1 results in mid-May and unless there is further improvement in working capital we are likely to reassess our position
- On its current trajectory, a straight refinancing will still be difficult to achieve.
Current Liquidity:
- With €90m of cash or cash equivalents and €75m undrawn revolver, Rekeep have ample liquidity in the next couple of quarters. We acknowledge that the SACE facility, €36m balance as at December 2023, needs to be repaid in three equal instalments during 2024, but Rekeep have already secured an additional €12m from SACE with 5yr term and we would expect further SACE facilities to be finalised during the year.
- Net operating Working Capital has started to return to pre-energy crisis levels, as the Company continues to see a normalisation in energy prices.
- As indicated at the time of securing the SACE facility, both recourse factoring (on debtors) and non-recourse factoring (mainly payables) have reduced in lieu of the larger “term loans and overdrafts” which include the SACE facility. This is primarily driven by factoring facilities becoming relatively more expensive due to rising rates.
Potential Refinancing / Deleveraging:
- Prompted by a question from an investor, Rekeep acknowledged they have appointed advisers to examine the potential for a refinancing. This is not surprising given the upcoming maturity in February 2026. However, the Company did state that they were also examine the potential to sell some assets in order to de-lever. Our base case has always been a straight-forward refinancing but with refinance rates likely to be wider than the current 7.25% coupon management may feel they need to sell an asset in order to achieve favourable terms.
What has happened since refinancing in January 2021?
- We are using March 2021, the first reporting date post-refinancing. EBITDA has broadly stayed the same since 2021 (excluding the tax credits), with net debt levels having increased by c. €80m. This is primarily driven by the €60m increase in on-balance-sheet Term Loans (the SACE facility) to redeem off-balance-sheet factoring. However, despite the SACE facility drawdown, factoring including non-recourse factoring has still increased by €12m since March 2021.
- Why has the debt increased? Net Working Capital, which has increased during the period by €75m due mainly to higher Receivables. The latter have reduced during 2023 from elevated levels at the end of 2022 from the energy crisis, but still remain elevated versus 2021 levels.
- Therefore, excluding the partial paydown of the FM4 fine by €32m, the business has not deleveraged since the refinancing, and if anything, because of the increase in working capital, has increased Net Leverage.
- The FM4 fine is in relation to the tender for office cleaning in 2014. Investigation commenced in 2017 and Competition Authority found against the Company and fined them €91.6m. This is payable at c. €1.3m per month, and as at December 2023 there was still €57m outstanding.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk