Analysis: can Yang Ming's new bid to raise cash keep insolvency at bay?
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Over the past few weeks I have had a number of conversations concerning the future of CEVA Logistics – and its very short-term financing needs.
To describe them as intriguing would be an understatement.
I am grateful to debt investors on both sides of the Atlantic who helped me investigate whether the logistics behemoth would actually manage to service its outstanding debt obligations next year, or whether a debt rollover is a more likely option – and if this transpires, then what its resulting capital structure would look like.
I do not have an answer for that, but I gather that CEVA has several irons in the fire, and a refinancing deal could be sorted out within weeks, rather than months.
Notably, new equity capital might be part of a refinancing package aimed at giving the existing management team led by Xavier Urbain more time to deliver operationally; as the release of annual results on 28 February approaches swiftly, I have heard CEVA is on the right track there.
Earlier this month, distressed debt specialist Debtwire reported that its “recent spate of earnings erosion may force management to employ several non-traditional refinancing maneuvers when targeting upcoming debt maturities, noted four buysiders and a sellside analyst following the situation”.
“Capital structure tools that could be exploited over the next year include a potential draw on an untapped revolver, leaning on deep-pocketed sponsors for additional support and possibly looking to raise debt at non-guarantor opco [operating company] subsidiaries, the sources added,” wrote Debtwire.
The only big debt maturity that counts is May 2018 – some of my corporate sources indicate there is very little chance that an upcoming debt refinancing would be structured at non-guarantor opco level, where the majority of cash flows are generated. But reading between the lines, and after several conversations, the possibility that new equity would be injected in the capital structure is real.
(For the record, that doesn’t necessarily mean an IPO – but I will return to that later in this column.)
While more and more details have continued to emerge, official sources have remained tight-lipped and it is also unclear whether Apollo, its third-largest shareholder, would commit to a deal of any kind.
However, in my view its other shareholders may have little option but to write an equity cheque worth $100m-$200m – which would come on top of new debt – because they have vested interests in keeping up the value of the debts traded in the secondary market, where they are also invested. And those debts are now underwater, based on prevailing prices across different tranches – but those shareholders who own the debt will be rewarded awesomely.
In short, all eyes are on Franklin, I gather, which controls 26.8% of CEVA’s equity.
The biggest hurdle, bears point out, is represented by 4% senior secured notes which are due in May 2018 – in the secondary market these trade at about 95 cents on the dollar, or just a small discount to par.
Outstanding debt with 2021 maturities trade at much lower levels, which essentially signals stress, but that is hardly surprising. Despite a debt pile of $2.1bn at the end of the third quarter, once the 2018 tranche is sorted out, the company has little to refinance for over another two years, which is why a new refinancing could be a milestone for CEVA.
What exactly does it have to refinance, though?
“On 2 May 2013, the group issued $305m of 4% senior secured notes due 2018. The group issued another $85m 4% senior secured notes on 18 July 2013. As at 31 December 2015, the $390m principal amount of the 4% senior secured notes was outstanding. Interest is payable bi-annually, on 1 May and 1 November.” (emphasis is mine)
Everybody’s focus here is on the principal maturing in 2018, where shareholder Franklin is heavily exposed.
In fact, as CEVA noted in its most recent results, “at 30 September 2016, funds and accounts managed by Franklin Advisers Inc and Franklin Templeton Investment Corporation held approximately (i) US$177.5m of CEVA’s 4% first lien senior secured notes due 2018 (ii) $27.1m of CEVA’s tranche B pre-funded letter of credit (iii) $27.9m of CEVA’s 6.50% Dutch BV term loan, (iv) $4.8m of CEVA’s 6.50% Canadian term loan, and (v) $38.4m of CEVA’s 6.50% US term loan”.
Given its cash balances and its cash-burn rate, CEVA might be able to repay debts maturing within 15 months, although it doesn’t have to.
If I am right, it will shortly close a key refinancing deal that would help it avoid the full repayment of that large upcoming instalment, and that could boost confidence from clients, many of which would be willing to do more business with CEVA, were it to put to bed talk about financial constraints after the latest few months of trade that have been mixed, but encouraging.
As we reported in November, third-quarter results showed it was winning market share in both freight forwarding and contract logistics, “but despite strong volume growth in both air and ocean forwarding, group revenues remained flat”, due to weak pricing.
A strong reporting currency complicates matters, while CEVA burned $197m in the first nine months, mainly due to its over-leveraged capital structure, as its debt maturity profile has shortened significantly since the initial restructuring was hammered out three years ago.
“As at 30 September 2016, the weighted average period to maturity was 3.7 years,” it recently said.
IPO & ABS
Finally, the IPO option – at a time when equity markets are breaking record highs on a daily basis, what chance does it have?
The value of its highly illiquid common equity in the secondary market, according to some market makers, is now up to $234m, although a massive spread persists between bid and ask ($130-$205).
It is possible that a massive dilution for existing equity holders could be on its way if the IPO route is embraced, although a public offering is not strictly necessary for 18 months or so, given the cash reserves on its books.
“As at 30 September 2016, the group had $238m (31 December 2015: $309m, 30 September 2015: $249m) of cash and cash equivalents on its balance sheet. With undrawn central facilities of $286m available at 30 September 2016 (31 December 2015: $267m, 30 September 2015: US$268m), we therefore had headroom of $524m at 30 September 2016 (31 December 2015: $576m, 30 September 2015: $517m).”
Asset-backed financing – the kind of securitisation, or ABS, it entertained in March 2016 – is another option, but there is one big caveat, I am told, which is not uncommon for a business such as CEVA that operates in many jurisdictions worldwide and thus faces a variety of counterparty risks on invoices. Although its existing agreement with lenders allows it to be lent significantly more than presently under a securitisation programme, the quality of certain underlying receivables may actually allow it to borrow only about 20% of its maximum funding capacity, or just about $100m – and, given that, I am going to stick my neck out and rule this funding option out.
Finally, there are M&A options – there have been many rumours in the past 12 months, but we have been unable to confirm that any third party is actually ready to shell out top dollar for CEVA for the time being. However, this situation could certainly swiftly change, I have been told by a few deal-makers in New York, if existing shareholders managed to rebalance the capital structure – while securing additional debt maturing in 2022 or later – which could initially be structured as a bridge financing.
It’s my view that CEVA would do well to try and offload most of its refinancing risk onto the balance sheet of commercial banks – say $250m or so – while raising a smaller amount of equity from its existing shareholders – at least, those willing to commit to it (which would solve the Apollo problem).
In exchange for a tiny bit of money, the banks, of course, could secure what in the banking industry is known as “ancillary business” – hence the promise of a mandate for any future sale and the rich fees that would come with it.
If that is the case, I dare say we could have a happy ending in the making.