Rekeep - Servicing its stakeholders - Positioning

All,

Please find our analysis on Rekeep here.

We are taking a 3% long position in the Senior Secured Notes. Ultimately, at current levels of 86% (13.5% YTM), we believe investors are being compensated for the risks posed by this name. In principle, Rekeep is an extremely stable business with a decent backlog of orders underpinning its credit quality. However, we acknowledge there are three main areas of concern with Rekeep, namely capital structure, working capital movement and risks related to tendering and fines/restrictions related to that. 

But, given the non-discretionary nature of its revenue, and the quality of its customer base and order book, we are modelling stable performance over the coming quarters.

Investment Rationale:

- Our base case is earning a 13.5% YTM. We are not anticipating major movements in the short term except a 1/3 turn of influx from working capital that’s been invested mostly into energy contracts. Margins have dropped in the last year due to not earning margin on the higher energy prices but we are comfortable with the stability in the absolute levels. Until early 2026 there is ample time and more than half of the contract book should have rolled by then.

- It can be hard to focus on the financials in Rekeep, with attention always turning to their past indiscretions. Notwithstanding this and other concerns, we are comfortable in taking a long position, taking comfort in the stability and backlog of Rekeep's earnings. We acknowledge there is limited positive event risk in the name in the short term, we view the current yield as sufficient compensation to take a position. 

- We highlight our three areas of concern below, but our comfort comes from the relative size of the Senior Secured Notes in the overall capital structure and the decent liquidity the Company enjoys. 

Concern 1 - fines:

- Fines are a perennial issue for Rekeep with Rekeep still paying their €90m fine in relation to FM4. The FM4 fine, currently €69m, is concerning the tender for office cleaning in 2014. The process of the FM4 is indicative of the overall system in Italy, highlighting the length of these investigations and prosecutions/appeals can take.

- Investigation commenced in 2017 and Competition Authority found against the Company and fined them €91.6m. Despite appeals and still pleading innocence, Rekeep has commenced paying the fine, roughly €1m per month. In May, the Council of State rejected Rekeep's appeal, confirming the amount of the fine. Note that Rekeep intends to challenge this decision in the Italian Supreme Court. 

- The FM4 is not the only recent investigation. The Santobono case involved the omission of a document, which would have disclosed a criminal record on behalf of Rekeep’s lawyers, on a tender in Napoli. The ANAC (Italian National Anti-Corruption Authority) decided to ban Rekeep from tendering for public contracts for 6 months. Rekeep managed to appeal and in 2022 the Council of State ruled in favour of Rekeep, nullifying the ban. 

- It is difficult to mitigate this risk. It should be noted the majority of these fines/investigations are historic and the process of tendering for public contracts in Italy is becoming more transparent. 

Concern 2 - Working Capital:

- This credit negative is not just the working capital but also the extensive use of factoring and reverse factoring facilities. Rekeep manages its liquidity via the use of recourse and non-recourse factoring. The key customers, quasi-government agencies, lend themselves to the use of factoring. 

- However, under any stressed operations, working capital is likely to become a further drain on liquidity. Adjusting for factoring, leverage increases by an additional turn.

Concern 3 - Corporate Structure:

- Rekeep is no longer a cooperative, but the joint stock Company is still negative for the bondholders, with limited likelihood of any financial support from shareholders. 

- Effective February 1st, 2022, MSC, the holding Company of Rekeep Group, transformed its legal form from a cooperative to a joint stock Company (Societa Per Azioni - S.p.A) and as such, changed its name to MSC Societa di Partecipazione tra Lavortori S.p.A.

- MSC, a 100% shareholder of Rekeep Group, is ultimately owned by 300 shareholders, mainly managers and employees of the Group. 

- 20 shareholders, consisting of senior management own more than 50% of the shares. The largest shareholder is c.20% shareholder. 

- The shareholding is split between employee shareholders, who can't sell or pledge their shares (can be annulled) and financial shareholders, who can transfer the shares with board approval. Each employee shareholder has only one vote, regardless of size. Financial shareholders can have up to 5 votes. Note, the aggregate of MSC financial shareholders cannot exceed 1/3 of all votes. 

- Finally, the bonds are the fulcrum, but also the most junior piece of the capital structure, merely secured on shares in the Italian subsidiaries. In a Concordato Preventivo (not currently on the cards), the bonds would be extremely weekly positioned. 

Next Steps:

- As previously mentioned, we don’t see any positive event risk in the name, and expect the FY22 results, on 23rd March to be a relative non-event. Rekeep traditionally doesn’t provide any meaningful guidance and we would expect this to continue. 

- We will focus mainly on the working capital movement, with traditionally sees an inflow in Q4. The impact of the increase in energy prices and the pass-through to Rekeep’s customers has inflated working capital. It will be interesting to see if the Company curtails its use of factoring at year-end.

Happy to discuss this.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk