Ardagh Group - Endgame
All,
Please find our updated analysis here.
There is still some drama around the PIKs, but whether the process is consensual or vis the courts, the restructuring of the Ardagh debt structure is nearly complete. The new SSNs and the New Money are comfortably covered by the value of the company (including the value of the AMP and Trivium stakes). The SUNs recoveries will be largely determined by the performance of AMP. Operationally, the glass business is struggling, and there is little evidence of a turnaround yet.
Investment Considerations:
- We will not immediately take a position in the capital structure when the recapitalization is complete. We do not think the Ardagh Group equity will be easy to value or trade, so we expect our primary focus in the near term will be the SSNs and the New Money (if it is structured to be traded as a bond).
- The SSNs are being made whole in this restructuring. We see up to seven points of downside initially as some investors look to exit through a small liquidity window. We see two to three points of upside as the notes are NC 0.5, 50%/Par. If the bonds trade down to the mid-90s, this is a long. The final coupon will be 12% although the mix between cash and PIK hasn’t been confirmed yet. The new SSNs should trade no more than 150bp – 175bp wider than the first lien.
-The SUNs will be equitized, and recovery will be when Ardagh Group is finally sold. We expect this process to take two years, as the industry remains depressed. The SUNs holders will have an illiquid equity instrument. Applying an annual equity return of 20% to a recovery of 72c/$ in two years gives a fair value of 50c/$.
- The Holdco PIK notes will get 7.5% of the Ardagh Group equity (including a proportion of the AMP and Trivium stakes). We estimate this to be worth $131m or 7%; the fair value of the stake is around 5%. The Holdouts are hoping that the nuisance value of forcing Ardagh to go via a court process will be enough for the company to throw the PIKs a bone. In a court hearing, we would expect the PIKs to be crammed down.
- The transaction will reduce leverage to 5.5x from 10.2x (though the PIKs). We expect some improvement in Glass over the next few years, but our current DCF only has equity at Ardagh Group of $100m. However, the SSNs would be cushioned by the AMP/Trivium stakes.
Key Conclusions
- As we discuss in our Restructuring section, Ardagh is on the cusp of completing a transaction that will equitize all of its SUN and Holdco debt, taking leverage down form 10.0x to 5.5x. The PIK holders could force a court process on to the company, but they would be crammed down.
- The Trading and the DCF sections highlight the very tough operational environment for the glass business and how it will only slowly improve.
- Ardagh Glass is seeking volume growth in Europe and Africa, but the US will focus on improving margins over seeking volume growth.
- Our analysis pinpoints the gap between the value of the Glass business and the debt on the company. However, the Restructuring section shows that the SSNs are covered.
- The SUNs are heavily dependent on continued strong performance at Ardagh Metal Packaging for their recovery.
- As our industry section shows, there is substitution of Glass containers with Aluminium, this is driven by the high cost of energy (particularly in Europe), but also an increasing preference for lightweight cans.
Recent trading
- Q225:
Glass Revenues fell 12% (Constant currency), with Africa underperforming.
Adjusted EBITDA fell 21% as lower cost recovery (lower volumes) and volume mix weighed on performance.
Management reiterated its expectation of mid-single digit Adjusted EBITDA growth for the full year.
Focus has been squarely on the restructuring over the quarterly results, but operationally, Ardagh Glass has not yet bottomed out.
Metal packaging being switched in for glass remains a headwind, and there is no expectation that these volumes will return in the US
In Europe, lower electricity prices will narrow the cost gap between glass and aluminium. However, glass remains a heavier and more expensive commodity to transport.
- Q125:
Glass operations are not what’s driving bond prices, and the maintained 2025 guidance doesn’t change much for creditors. AMP stock jumped 30%, which is a positive for holders of the SUNs. However, a higher AMP stock price is likely to lead to a more aggressive stance by Coulson in dealing with the SUNs.
Glass packaging performed better than we feared in 25Q1, but 2025 guidance was not raised. Volumes were down 5% (Europe -3%, America -8%). AMP raised its volume growth forecast to 3% - 4% and its EBITDA forecast by $20m to $695m - $720m.
The restructuring of Ardagh Group (AG) is finally nearing completion. It is largely as we expected at the beginning of the process, with the SSNs remaining whole and the SUNs being equitized. The transaction has a large stick for dissenting SSN holders, and we expect the 90% support rate to be reached. The SUNs get 92% of the AG equity, and the shareholders of Yeoman get $300m plus 8% of the AG equity.
Management reiterated that it expected a mid-single growth in 2025 adjusted EBITDA. The US business is focusing on efficiency and profitability over volumes (hence the plant closures. In Europe/Africa, there is still the expectation that volumes will return as electricity prices fall (eventually).
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055