Cerba - Next steps

All,

Please find our updated model post Q2 results here.

Following the Q2 results, we are maintaining our short position in the Cerba Senior Secured Bond, even as our initial view had been to close out, given the lack of movement in the last couple of weeks. We still anticipate a liquidity crunch within the next 18 months. With a likely restructuring ahead, Senior Secured holders may not recover full value. There is still value in staying short on this name. 

Investment Rationale:

- We are maintaining our 4% short position in Cerba Senior Secured Bonds, initiated in early May at 75%. The core thesis remains unchanged: Cerba is likely to face a liquidity shortfall within the next 18 months.

- The company has fully drawn down its revolving credit facility and deferred interest payments on both the RCF and term loans from monthly to semi-annual, effective 26 August, reducing interest outflows for the rest of the year.

- While we have modestly increased our projections, mainly through cost reductions, Cerba remains roughly free cash flow neutral after interest in FY26. We have increased our earnings before interest, tax, depreciation and amortisation margin assumptions from 21.7% in FY24 to 24% in FY25 and 26% in FY26.

- Our updated discounted cash flow model now implies a 9.8x valuation, down slightly from 10.1x in May, compared to the current 8.1x implied by the senior debt trading at 70%. Despite this technical coverage, based on a 1.5x fixed charge coverage ratio and 8% coupon, Cerba’s FY26 debt capacity suggests only about 55% of the senior debt could realistically be reinstated.

- We previously covered our short in the subordinated bonds due to borrowing constraints, but our view remains that the downside is total loss. At current prices of around 10%, we see no credible recovery path for subordinated bondholders.

- The upside on senior secured bonds is capped at approximately 15% yield, or 10 points of price upside, due to Cerba’s excessive leverage and ongoing concerns, including persistent rumours of a liability management exercise, which we view with scepticism. Near-term downside risk is about 10 points to 60% as yields widen and uncertainty lingers. Medium-term fair value for the bonds sits in the mid-60s, depending on how restructuring unfolds.

Next Steps:

- Cerba management has now fully drawn down the revolving credit facility, maximising liquidity ahead of any restructuring. While we initially expected no major moves in FY25 due to the lack of near-term maturities, we now anticipate negotiations will begin soon, given the tightening cash position.

- Asset Sales: With unadjusted leverage at 12.4x, accretive asset sales are highly unlikely. Even a sale of 25% of the business, assumed at €100 million earnings before interest, tax, depreciation and amortisation, at an aggressive 14x multiple—well above precedent transactions—would only reduce leverage to 11.9x assuming all proceeds go to senior debt repayment. This scenario is unrealistic.

- Amend and Extend: A&E would require a meaningful coupon reduction and maturity extension. However, Cerba has little to offer in return beyond the threat of entering sauvegarde. As such, amend and extend is only marginally better than formal proceedings and unlikely to deliver a sustainable solution.

- Sauvegarde: The French sauvegarde accélérée process prioritises employment protection and enforces absolute priority. A restructuring via sauvegarde would likely mirror our debt capacity calculations, favouring senior secured holders and any new money providers. This outcome would be materially negative for the sponsor unless it injects fresh capital.

- EQT and the sponsors have no incentive to proactively inject equity at this stage. To make Sauvegarde a credible threat and bring stakeholders to the table, conditions must deteriorate further. We believe the likely endgame is amend and extend or liability management exercise—but only after a near crisis inflection point.

Q2 Results and Model Updates:

- Headline Q2 results were better than expected in terms of cost control, even if slightly soft on revenue. Earnings before interest, tax, depreciation and amortisation outperformed by around €10 million or 10% as the company cut personnel and other operating expenses, leading to free cash flow before interest €20 million, ahead of our forecasts.

- Despite the better performance, the chief financial officer still drew down the remaining €70 million of the revolving credit facility, leaving a cash balance of only around €50 million—underlining the underlying liquidity stress.

- Our revised projections reflect minor top-line reductions and lower personnel expense assumptions, improving FY25 and FY26 earnings before interest, tax, depreciation and amortisation margins by 150 basis points. However, the changes are largely cosmetic and do not affect the broader outlook.

Reality Check:

- Ultimately, our updated model does little to change the core conclusion: Cerba’s capital structure is unsustainable. A conventional amend and extend is unlikely to be viable, especially given weak interest coverage and the large collateralised loan obligation exposure in the senior secured bonds.

- Even under a more generous 5% coupon scenario, Cerba could reinstate about 85% of the debt—but even then, the bonds would likely trade at a significant discount to par.

- The real question is whether creditors will commit to a full restructuring or simply apply a temporary fix and hope for operational improvement. At this point, the latter seems increasingly untenable.

Happy to discuss. 

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk