Company issued $400 million ten-year bond. Hopelessly in debt?

BenJustusRiepe's picture
Rank: Monkey | 45

A company in my town issued $400 million in ten years. revenue is $550 million, net income $8.2 million. Is there any way they can pay this back?

Comments (9)

Mar 21, 2020

they probably can. paste the prospectus

Array

    • 1
Mar 24, 2020

Peculiar question especially with the lack of information. But I will play along, making assumptions of course-

Average small cap EBITDA margin is around 17%, so this Company is generating around $94mm. Which is pretty big i.e. not middle market.

The Company also would be about 4.25x levered, which is pretty high, but far from outrageous. Probably would fall somewhere in either Low-BB/High-B land, depending on the sector. Again, not out of the ordinary.

Now- I cant answer whether the Company is solvent... But nothing that you wrote suggests that this Company is doomed.

    • 1
Mar 24, 2020

Just as a follow-up why sector is important.

If this is a consumer staple company (avg multiple 12x) your $400mm is supported by $1,128mm of Enterprise Value.

If this is an upstream company (avg multiple 3x) your $400mm is only supported by $282mm of Enterprise Value.

Mar 24, 2020

Hey,
thank you for your response. I try to respond as extensively as you did.

The company is a producer of hygienic tissues. Relatively well known around the globe in fact. It is a German company called WEPA Hygieneprodukte GMBH. You can look it up on Google and find the bonds I was talking about on finsight.com.

Company has about $730 million in assets (I did not use the most recent exchange rate, please don't mind potential inaccuracies). This does of course include all machines needed for production so it's mostly rather illiquid assets for which an accurate price can't be determined. Inventory is about $200 million, company has $120 million in receivables and about $20 million in cash.

It also has $280 million in capital reserves, allowances of $75 million and $827 million in liabilities.

In 2018 before the bond issue (that's the most recent data available) annual net profit was $8 million.

This balance sheet does of course not look too bad. I still feel like they have gone a step too far with this bond issue. They issued $550 million in December and an additional $50 add-on in a dual-tranche offering. Bonds are rated BB- and trading about 15% below par as of today. The junk-bond rating mirrors the market's expectation or precaution that they might default on those bonds.

The highly-competitive industry leaves little room for growth which this company need profit wise if they want to pay back these bonds without greater losses asset wise.

Ben J. Riepe
    • 1
Mar 25, 2020

I'm surprised you posted such a vague question if you know this much about credit analysis.

Array

    • 2
Mar 25, 2020

I know much about credit analysis? C'mon, no I don't. This is why I'm asking

Ben J. Riepe
Most Helpful
Mar 27, 2020

2018 numbers not representative of current performance
Looked at their annual report and in 2018 they made 549m while in this 2019press release they state they make 1.2bn. They probably acquired assets/businesses as also stated in the press release, so your 2018 numbers are not representative.

How to proceed with your analysis
If you want to do more research you should try to find more recent numbers. If you have access to the credit agency reports you probably will find a better profit and loss statement there. Alternatively you can look for press releases and try to figure out how much cash flow they acquired.

Final remarks on net income, asset value and profitability
Net profit isn't a great indicator of debt servicing capacity. For example amortization of goodwill will have a negative effect on net income while it's non-cash and does not require capex to 'maintain' the goodwill. First focus on EBITDA, then on capex (including planned divestments) and then on w/c. Assets are much less interesting: if a company can't generate profit with them, their value is also rather low in reality compared to the book value. No bank wants assets in the end, they want cash flow. Monetising collateral is a pain in the neck.

    • 2
Mar 26, 2020

Embezzlement?

Mar 26, 2020
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Ben J. Riepe