The company has announced a proposed financial restructuring that should clear the way to resume more normal operations. FY17 results are still to be released, and are expected in January 2018. Until we have a more current financial base to work from, we are withdrawing our forecasts. That is not to say that existing shareholders may not finally benefit from the restructuring. In our opinion, greater risk lies with the proposals not proceeding. The debt for equity swap, interest savings and discount being assumed by the bondholders should provide a solid foundation for Avanti to execute its strategy, with an improved prospect for equity holders.
Written by
Avanti Communications |
Return to base |
Financial restructuring |
Fixed satellite services |
15 December 2017 |
Share price performance
Business description
Next events
Analysts
Avanti Communications is a research client of Edison Investment Research Limited |
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The company has announced a proposed financial restructuring that should clear the way to resume more normal operations. FY17 results are still to be released, and are expected in January 2018. Until we have a more current financial base to work from, we are withdrawing our forecasts. That is not to say that existing shareholders may not finally benefit from the restructuring. In our opinion, greater risk lies with the proposals not proceeding. The debt for equity swap, interest savings and discount being assumed by the bondholders should provide a solid foundation for Avanti to execute its strategy, with an improved prospect for equity holders.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/15 |
85.2 |
(73.3) |
(61.4) |
0.0 |
N/A |
N/A |
06/16 |
82.8 |
(67.0) |
(49.3) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Debt reduction removes operational barriers
If accepted, the proposed financial restructuring has two main elements, one for each of the main bond classes. The primary element is the issue of around 2bn new 1p shares, compared to the current 162m, to retire the entire $557m 2023 Note issue. The note holders thus crystallise a significant write-down against the nominal value of their holdings, with the bonds trading at a substantial discount (c 75%) in the market due to risk and uncertainty over the future. The risk reduction this implies facilitates the second element of the restructuring relating to the 2021 Notes, the ‘90% Proposed Amendments’. The term will be extended by a year and the rates for both cash and PIK interest will fall to just 9%. The revised model transforms the capital allocation outlook, retaining annual interest savings from the debt elimination and coupon reduction, which should total around $92m for the benefit of the company and its equity holders, with improved security for the 2021 bonds.
Outlook to be rebased and reset
We suspect that the trading situation has remained problematic while the current restructuring package has been put together. Until we have better insight on these factors we are withdrawing our estimates, which we will rebase and reset. In our opinion, the restructuring proposals leave a more positive future for equity holders, although this will depend on the future revenues and cash flows generated. The proposals should pave the way for hiring a new CEO, who will be joining when the company is in a far more satisfactory financial position. The launch of HYLAS 4 in March 2018 should mark the end of the investment phase.
Valuation: Bondholders’ interest in equity
While the debt for equity swap does dilute existing shareholders’ prospects, in our view the outcome is better than might have been expected. In return, the restructuring reduces the operational risk, securing upside value potential for equity as business develops and cash flows grow, which clearly has attractions for the bondholders swapping into shares.
Financial restructuring
In consultation with and supported by shareholders owning 34% of the equity and bondholders owning 62% of the 2021 Notes and 55% of the 2023 Notes, Avanti is proposing two separate financial restructuring measures to reduce the huge debt burden that has weighed on the company’s prospects.
A debt for equity swap is being proposed for the c $557m of outstanding 2023 Notes, which currently trade at around 25% of par. These will convert into around 2bn (2,000m) of new 1p shares. Essentially, the nominal value is being converted to equity at c 21p a share, although the value being accepted is more like c 7p per share. The reduction in debt burden this implies may provide a boost to existing shareholders as the equity value is higher than the current market price. In effect, the bondholders appear to be accepting the potential gearing of equity stakes over the greater security of interest payments, which threaten maintenance of the operations, hugely increasing risk. The $81m annual interest savings will be retained for the benefit of the company and its owners, including equity holders.
In addition, the outstanding 2021 bondholders are being asked to accept a reduction in the coupons paid, as well as an extension to the term and changes to covenants and restrictions.
In aggregate, the package should reduce the annual interest burden from $128.7m to just $36.6m. Details are provided in Exhibit 1 below.
Exhibit 1: Positive impact of Avanti Communications’ debt restructuring
$m |
Super senior facility |
2021 Notes |
2023 Notes |
Total |
Pre-restructuring debt |
100.0 |
323.3 |
557.0 |
980.3 |
Debt for equity |
(557.0) |
(557.0) |
||
Post-restructuring debt |
100.0 |
323.3 |
0.0 |
423.3 |
Previous cash interest rate |
7.5% |
12.5% |
14.5% |
|
New cash interest rate |
7.5% |
9.0% |
- |
|
Previous cash annual interest |
7.5 |
40.4 |
80.8 |
128.7 |
New cash annual interest |
7.5 |
29.1 |
0 |
36.6 |
Source: Avanti Communications
Exhibit 2: Financial summary
$m |
2014 |
2015 |
2016 |
||
Year end 30 June |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||
Revenue |
|
|
65.6 |
85.2 |
82.8 |
Cost of Sales |
(86.7) |
(83.8) |
(86.0) |
||
Gross Profit |
(21.1) |
1.4 |
(3.2) |
||
EBITDA |
|
|
(7.7) |
12.5 |
4.6 |
Operating Profit (before amort. and except.) |
|
|
(53.9) |
(32.6) |
(39.8) |
Intangible Amortisation |
(0.2) |
(0.2) |
(0.2) |
||
Exceptionals |
5.3 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
(48.7) |
(32.8) |
(40.0) |
||
Net Interest |
(38.9) |
(40.5) |
(27.0) |
||
Profit Before Tax (norm) |
|
|
(93.0) |
(73.3) |
(67.0) |
Profit Before Tax (FRS 3) |
|
|
(87.7) |
(73.3) |
(67.0) |
Tax |
0.0 |
0.0 |
(2.2) |
||
Profit After Tax (norm) |
(92.0) |
(73.3) |
(69.2) |
||
Profit After Tax (FRS 3) |
(87.7) |
(73.3) |
(69.2) |
||
Average Number of Shares Outstanding (m) |
107.4 |
119.0 |
139.4 |
||
EPS - normalised (c) |
|
|
(85.2) |
(61.4) |
(49.3) |
EPS - normalised fully diluted (c) |
|
|
(85.2) |
(61.4) |
(49.3) |
EPS - (IFRS) (c) |
|
|
(81.2) |
(61.4) |
(49.3) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
-32.1 |
1.6 |
-3.9 |
||
EBITDA Margin (%) |
-11.7 |
14.7 |
5.6 |
||
Operating Margin (before GW and except.) (%) |
-82.1 |
-38.2 |
-48.1 |
||
BALANCE SHEET |
|||||
Fixed Assets |
|
|
645.9 |
721.5 |
804.5 |
Intangible Assets |
14.0 |
11.0 |
10.8 |
||
Tangible Assets |
610.9 |
691.0 |
775.1 |
||
Investments |
21.1 |
19.5 |
18.6 |
||
Current Assets |
|
|
235.7 |
160.3 |
137.8 |
Stocks |
1.7 |
2.6 |
1.9 |
||
Debtors |
21.0 |
17.8 |
39.3 |
||
Cash |
195.3 |
122.2 |
56.4 |
||
Other |
17.6 |
17.7 |
40.2 |
||
Current Liabilities |
|
|
(44.4) |
(36.6) |
(86.1) |
Creditors |
(39.9) |
(31.9) |
(82.8) |
||
Short term borrowings |
(4.5) |
(4.7) |
(3.3) |
||
Long Term Liabilities |
|
|
(527.7) |
(540.5) |
(654.7) |
Long term borrowings |
(512.4) |
(523.7) |
(642.0) |
||
Other long term liabilities |
(15.3) |
(16.8) |
(12.7) |
||
Net Assets |
|
|
309.4 |
304.7 |
201.5 |
CASH FLOW |
|||||
Operating Cash Flow |
|
|
5.1 |
(8.1) |
(22.7) |
Net Interest |
(39.0) |
(54.4) |
(67.4) |
||
Tax |
0.0 |
0.0 |
(2.2) |
||
Capex |
(25.8) |
(102.0) |
(95.7) |
||
Acquisitions/disposals |
0.0 |
0.0 |
0.0 |
||
Financing |
(7.6) |
80.0 |
5.3 |
||
Dividends |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
(67.3) |
(84.5) |
(182.7) |
||
Opening net debt/(cash) |
|
|
254.4 |
321.7 |
406.2 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
||
Other |
(0.0) |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
321.7 |
406.2 |
588.9 |
Source: Company accounts, Edison Investment Research
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