Schoeller 2024 Notes Yield 34% as Investors Worry About Refinancing Risk Due to High Capex, Inconsistent Cash Flow; Buysiders Pin Hopes on Support From Sponsor Brookfield

Relevant Documents:
Q3 Presentation
Q3 Report

Plastic container producer Schoeller Allibert’s €250 million bond has declined by about 10 points to about 65/70, yielding about 34%, since the company reported in November that its third-quarter EBITDA slumped by 54.4% year over year to €8.3 million.

Investors have voiced concerns about the company’s refinancing chances ahead of the €30 million RCF maturing in May 2024, followed by the €250 million bond maturity in November 2024.

Two buysiders noted that the company’s sponsor Brookfield has been supportive, evidenced by the provision of a €65 million loan facility, which was drawn by €31.3 million at the end of September. Some investors said they hope Brookfield would potentially support a refinancing as well.

The company told investors on a call in November that it is looking to refinance in 2023 with several options including a loan or direct lending being considered, sources told Reorg. Additionally, one investor saw the appointment of Oliver Iltisberger as CEO in August as a positive.

However, some investors said they would value the business at about 5.5x EBITDA, or about €300 million based on an EBITDA after exceptional items and operational improvements of about €50 million to €55 million, which would barely cover the debt and may make an additional equity investment by Brookfield potentially unattractive.

On the other hand, a recent merger between SPAC Dutch Star and Cabka Group, whose business is broadly similar to Schoeller, valued Cabka at about 8x, one investor noted. Cabka also said it has identified an acquisition strategy focused on expanding both end-market and recycling positions across Europe and the U.S. and Schoeller could be a potential M&A target, sources said.

Reorg calculates an average EV/EBITDA multiple (post-IFRS 16) of container and packaging as well as paper packaging producers at an average 5.8x, which multiplied by Schoeller’s LTM adjusted EBITDA at €56.9 million implies an enterprise value of €330 million. Transaction comparables are below:
 

Pressure on Margins, Inconsistent Cash Flow Generation

The company’s third-quarter results were hurt by some deferred and canceled orders at a time when resin costs started to fall and negatively impacted the value of the inventory. Schoeller said prices decreased 15% to 21% in the third quarter compared with the second quarter. In the last twelve month period to Sept. 30, 2022, Schoeller’s gross margin stood at about 47%, down from 50% a year earlier and adjusted EBITDA margin was around 9%, down from 12.5% in the same period a year earlier.

However, some investors noted that eventually customers will have to restock and management also told investors some of the negative effects mentioned above are expected to abate in the fourth quarter. The company said in its third-quarter report that it will increase its sales price where possible to compensate for the inflationary pressure on electricity prices and other input costs in the fourth quarter. However, a full recovery on the demand side from pooling customers is only expected in the first half of 2023, one buysider noted. Moody’s also highlighted in December that the company’s largest client IFCO has a contract expiring in 2024 although one investor was confident the contract would be renewed.

Some buysiders also noted that liquidity is comfortable with €19.9 million of cash at bank, €7.6 million in available RCF and €33.8 million available under the Brookfield facility, which sits outside of the restricted group. However, some investors highlighted that availability under the Brookfield facility is subject to shareholder consent.

The group said it is on-track to deliver up to €3.5 million of operational improvements, of which, one-third has been realized as of the third quarter and the company expects two-thirds to be realized in the fourth quarter, which would improve liquidity.

According to Moody’s, Schoeller's liquidity profile is weak for its near term operating needs given Moody's expectation of ‘highly’ negative free cash flow compared with cash balances of €19.7 million as of Sept. 30 and the €7.6 million availability under its RCF. Moody’s, however, said that the group still has €55 million availability under €100 million committed non-recourse factoring lines, given that only €45.4 million of factoring was drawn as of Sept. 30. See non-recourse factoring commitments, according to the 2019 OM.

The super senior RCF has a springing covenant (maximum net drawn super senior leverage of 1x), which is tested when the RCF is drawn by more than 40%. Moody's said it expects the company to continue to comply with this covenant.

In the LTM period, levered free cash burn amounted to €62.8 million driven by a drop in EBITDA, an increase in capital expenditure and €29.2 million in working capital outflows. The company’s free cash flow generation has been inconsistent even without accounting for capex. Before capex and after lease payments, Schoeller generated €14.6 million in 2017, €2.4 million in 2018, €1.7 million in 2019, €33.7 million in 2020, €40.7 million in 2021, while it burned €23.9 million in the LTM period.

With the exception of fiscal year 2020, Schoeller has burnt cash after net capex since 2017, according to Aggredium calculations.

Assuming the company was able to refinance the €250 million notes at 9% compared with the current coupon of 6.375%, its interest payments would rise by about €6.6 million, deepening its cash generation woes. If the company refinanced the entire amount of the €250 million notes at 9%, yearly-adjusted EBITDA would have to be between €89 million to €94 million for the group to break even. These calculations assume neutral working capital movements, cash taxes at €2 million and lease payments at €20 million (in line with historical figures), that Scholler does not cut capex and spends between €40 million to €45 million (of which 70% is growth capex).

Capex remains a key concern for investors. The company said on an LTM basis as of September, the group had €47.8 million capex spent, of which €21.7 million was growth capex and €20.4 million maintenance capex. The rest was capex for the rental business and is funded by shareholders. While the company highlighted that it is looking to find a separate asset-backed financing solution for the rental capex, one investor said growth capex is persistently high and some of it may be better defined as maintenance capex.

As of Sept. 30, net debt excluding the Brookfield loan facility of €31.3 million and an additional shareholder loan facility of €26.5 million, stood at €313 million, with net leverage at 5.5x. The company’s capital structure is below: 
 
–Aurelia Seidlhofer, Robert Schach, Manuel Coelho