Vivion – Buying time - Positioning
All,
Please see our unchanged analysis here.
The Amend and Extend (A&E) operation from Vivion has been our core thesis for the last 9-months. The amount of cash incentives being offered to investors is less than we thought, but there are no asset sales so the value of the security package is better. Vivion has accepted that market conditions are not getting better fast enough and have decided to get the pain out of the way. Getting a par refinance done for the 2024 was going to be prohibitively expensive and the knock-on impact for the 2025 bonds would have been even more punishing. As expected the A&E mixes carrot and stick. Vivion has also managed to secure indicative support from some bondholders. Dayan / Hettrich are not seeking a haircut, but the new SSNs will likely trade subpar, and investors will have to stick with it to get all their cash back. The total cash cost of the A&E is above where we estimated cash on hand in the UK to be when the FY22 results were published (in March). No sales of assets have been announced, but Vivion has levers it can pull to get cash whilst retaining control over Golden Partners.
Investment Rationale:
- We will be selling out 2.5% of NAV position in the 2024s into this rally. Things looked worse for some time, but with a 89c/€ exit today, our total return over the period is a flat 0.2%.
- History: We entered the position in August-22 at 91.6c/€, however, Vivion was shortly afterwards hit by a short seller report. Having done our work we decided to hold on to the bonds and at least recover some of the lost value. From here, however, Vivion becomes a longer-term RE trade and we are looking to reallocate.
- If we assume the new bonds immediately trade at 85c/€ (10.75% YTM ignoring PIK), our loss is 1.2%.
- The coupon of 6.5% is lower than the 8% yield on the M&G deal, but it is close, and the PIK portion will bridge that gap.
- The liquidation of the Vivion portfolio is not an outcome that suits anyone (bondholders included).
- Currently, assets cover the debt, and our valuation is still around 7% below Vivion's. However, LTV is now c55% at the Vivion Investments SARL level on our valuation, and refinancing will be increasingly challenging.
2024 A good deal for bondholders:
- On our calculations, the total value of the package is 87c/€ (20c cash + 67c trading value of the new bond. The nominal value is par (20c + 80c par value of SSNs).
- 20c/€ cash payment, 80c/€ in a new Aug-28 SSN 6.5% + PIK. We assume that the bond trades at 10.75% (cash) out of the box.
- €67m of the €700m outstanding 2024s are held by Vivion and related companies and will not be part of the quorum for the exchange offer.
2025 Some pain but better than holding out:
- On our calculations, the value of the new package is 83c/€ (10c/€ cash + 73c trading value of the new bond.
- 10c/€ cash payment, 90c/€ in a new Aug-29 SSN 6.5% + PIK. We assume that the bond trades at 11.5% out of the box. The nominal value is par (10c + 90c par value of SSNs).
- There are also amendments to the bonds, and if the 75% acceptance is reached then the holdout 2025s would face mandatory exchange with no cash payment (100% conversion to 2029 SSNs). The value of the package on 100% conversion is 81c/€.
- Vivion has the indicative support of 77% of the 2025s for the exchange offer. Holding out for a better deal is feasible but high risk.
- €38m of the €640m outstanding 2025s are held by Vivion and related companies and will not be part of the quorum for the exchange offer.
Vivion may need to raise a modest amount of cash in the UK:
- The cash cost before fees is a maximum of €204m plus outstanding coupon.
- Our analysis points to Golden Partners holding most of Vivions consolidated cash.
- If we are right, some asset sales might be necessary, or cash may need to be injected (under £100m).
- Alternatively, we have heard that our estimate of cash at Vivion Investments may be too low, and the company can fully cover the cost from cash on the balance sheet. The next set of numbers (to June 23) is not due until September.
- Vivion would rather sell a UK asset than upstream cash from Golden partners that could impact its control of that company.
I look forward to discussing this with you in more detail
Aengus
T: +44 203 744 7055