Victoria Plc - Cyclical or Structural?
All,
Please find our model on Victoria Plc here.
Victoria has seen an 18-month downturn in demand, which has reduced EBITDA from c. £150m to an expected £60m for FYE Mar-'25. The Company has significant operational leverage and the recent poor performance appears top-line driven. Victoria has upcoming maturities and options for a straight refinance will be difficult given the poor cash flow and EBITDA. Rumours are circling on a potential drop-down MIdCo refinancing for the upcoming 2026 bonds, which will subordinate the smaller 2028 bonds.
Investment Considerations:
- We are not taking a position at the current time. Any long thesis in Victoria is predicated on a recovery in the underlying demand in the UK and Australian flooring demand. Our model indicates a significant degree of operational leverage (albeit we think there is more than the 10% fixed cost base the Company cite) and it is well placed to benefit from any meaningful recovery in consumer demand.
- However, we are cautious as the downturn in FY23/24 and H1 24/25 is longer than any observable historic period and the consumer weakness is not as visible in other non-discretionary spending.
- With full H1 numbers due later this month, we are minded to wait for them. We have explored the possibility of shorting the 2026 bonds. We will be looking mainly at the volume numbers and, specifically, if pricing has remained stable in H1. The Company pre-release indicates cash is lower than we have modelled as we have expected an inflow in working capital movement in H1.
Refinancing Options/Drop Down:
- Given the relatively poor recent performance coupled with continued weakness for FY24/25 a straight refinancing of the upcoming 2026 bonds is unlikely.
- There are rumours that the existing documents governing the 2026 and 2028 bonds potentially allow the Company to move assets outside the restricted group and raise finances at a new entity. We struggle to see how this is possible, given the covenants.
- Any movement of assets would have to include the RCF lenders, who may not be amenable to sharing their seniority with other lenders. Regardless, unless there is a springing maturity, any new lender would have to extend finances beyond the 2028 maturities.
- A transaction along these lines would buy the Company some time, but shareholders are likely to be more concerned with the upcoming 5th anniversary of the preferred equity, which triggers the possibility of Koch Investments diluting existing shareholders via conversion of their preferred equity.
Which Shareholders:
- Koch Investments, via their Preferred Equity, deserve a seat in any restructuring discussions. However, converting their preferred equity into ordinary shares would trigger a change of control, which they are unlikely to want. There is also the possibility they will not wish to consolidate an ailing carpet manufacturer into their accounts.
- With the option commencing in November 2026, any restructuring will need to consider this conversion.
- The Company have appointed Latham & Watkins and Lazards as advisers, but we would expect both bondholders and Koch Investments will appoint in due course.
Next Results:
- Victoria released a trading update in October before their H1 numbers later this month. The overall tone is negative, with revenue down c.10% and underlying EBITDA (EBITDAR) to be c.£50m. This is on the back of a 20-25% fall in demand versus 2019.
- Pricing has remained stable with low demand impacting margins due to operational leverage. The Company outlined several measures to lower the cost base.
- Liquidity is significant with more than £200m available. This is lower than we are modelling, as we had expected a slight improvement in cash in H1, mainly from working capital unwind due to lower volumes.
- Following the Company's FY 2024 Results announcement in June, which noted that the Board was beginning to plan for the refinancing of the Company's Senior Secured Notes, due in Aug '26, Lazard has recently been appointed as debt advisers, with Latham & Watkins continuing as legal advisers.
We will await the H1 numbers, focusing on any snippets of information on operational leverage and level of fixed costs. We concur with the Company that Victoria will benefit from any recovery in underlying demand; however, the question remains: is the recent downturn cyclical or structural?
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk