Antolin - Progressing Optionality - Model Update
All,
Please find our updated analysis on Antolin here.
As it looks unlikely that the bonds can be refinanced in the market by late 2027, Antolin is building a liquidity war chest, which should create optionality in restructuring discussions. But assuming a solution for this October, those should not commence until H227. We have done well in Antolin, both the first time around and now with the coupon arbitrage. But all good things must come to an end, in this case, before the FY25 reporting in late April.
Investment Considerations:
We are long and short the '30s and '28s respectively for nearly 11% of NAV either side to isolate the positive carry between them, while they trade side by side - the obvious risk being a steepener, of which we are increasingly mindful as refinancing the '28s would eliminate the bank debt's springing maturity and buy time a year longer than addressing the bank debt now. But for that, Antolin need to sell yet another big asset and/or raise more government g'teed financing, and we have not yet heard of anything in the pipeline. When we do, we will likely give up this position and consider going long the '28s instead, never mind the low coupon.
- On the downside, despite apparently significant x-holdings, the '28s could shoot up into the 90s, which would likely send the '30s town to 60c/€. So we do not foresee holding this position for much longer and should be taking it off before the full Fy25 results in late April.
Key Conclusions:
- Europe is slightly negative, but on plan, and Mexico outperformed in Q3, but both the US and APAC are disappointing. Management confirmed reduced FY guidance in Q3’25, with limited visibility into recovery as margins remain structurally weak. Gross margin fell YoY to 35% and EBITDA margin to 6% (slightly above Q2’25), with cost savings insufficient to offset revenue pressure. Q1’25 suggested early turnaround traction (supply contract renegotiations, lower staff costs), but Q2 softness—partly Easter timing, more materially US demand weakness post-tariffs—was not recovered in Q3. Management is vague on achieving balanced FCF in 2026 (Current Trading).
- Disposal of the Indian business provides c.€500m liquidity, creating short-term optionality but insufficient to address refinancing absent FCF generation (Current Trading).
- Cash conversion continues poor. In a distressed recapitalisation, creditors would have to take a haircut and accept PIK instruments, given limited EV support and absence of FCF (Recap Analysis).
- Bonds and bank debt are pari passu. However, the TLA and essential banking lines are likely held by overlapping institutions, which could demand to be elevated into a priority class in return for agreeing to fund the continuation of the going concern through a restructuring. If successful, this would be deeply dilutive to bondholders unless they arrange alternative banking structures (Recap Analysis).
- FX is a headwind: Euro strength (unhedged) forces downward revisions to NAFTA and APAC revenues. Our 2026 base case reverts to zero FCF (better than what management is willing to commit to), with 2026 interest funded from balance sheet cash. (Model).
- CapEx at ~5% of sales is sector-normal; the issue is subscale EBITDA margins. Efficiency gains are likely to be offset by lower sales, implying flat to marginal earnings progression. A ~250bps margin uplift towards industry norms would likely allow for refinancing, but ever since 2017 that remains far off (Model).
- Since acquiring the Magna International US operations in 2017, Antolin has not exceeded 7% EBITDA. Asia, though more profitable, is small and only partially owned; NAFTA drives underperformance. Tariff exposure appears manageable operationally (US/Mexico plant split, 70% US utilisation), but customer concentration—particularly with Volkswagen and Stellantis—materially constrains pricing power and recovery prospects (Company; DCF).
Increased Optionality:
- During Q425, the company sold its Indian business for €159m and applied the cash to its RCF - now undrawn. For a brief period (until Q126 WC outflows) Antolin should have nearly €500m of liquidity, which begins to create some optionality as the bank debt's springing maturity approaches in October of 2026.
Drivers:
- Further asset sales and additional state guarantees could help refinance the bank debt and buy time until April 2028 and relax covenants in the interim.
- Potential new contracts to Chinese OEMs producing in Europe, or JVs with their suppliers coming to Europe.
- Order Intake is strongly up and reportedly on higher margins, to the point where we have to question why it has been lower beforehand. Even so, these orders should only filter through from late 2027.
- Lower CapEx requirements as new models are being postponed. But this will only be transitory.
- The upside for the bonds, if addressed together, is likely capped at an A&E, rather than a par take-out.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk