Graanul - How Many Non-Deal Roadshows To Do A Deal? - Model Update
All,
Please find our updated analysis on Graanul here, following its second non-deal roadshow in six months.
Apollo and the management team believe the current market offers an opportunity to refinance the bonds and have launched a second non-deal roadshow this week to test investor appetite. The Company attempted a refinancing earlier this year and now pursues a transaction following some increased visibility on volumes beyond FY26. We remain sceptical about Graanul’s medium-term earnings potential, which we discuss in more detail below.
Investment Rationale:
- Fundamentally, we should be taking a short position in the Graanul’s amended Notes, which mature in October 2029. However, with the sponsors pushing hard on a refinance of the bonds, there is technical support for the bonds. While Graanul actively seeks to refinance the bonds, we are not willing to short at this stage. The bonds now pay 8.5% or Euribor plus 6.2%, alongside 2.5% PIK, which makes the position expensive to short. Currently, the yield to worst is 12.5% at 99%. If the Company fails to refinance this summer, we expect the bonds to trade in the low 90s.
- The A and E completed last year pushed the maturity wall out to 2029, beyond the key 2027 period. However, the risks expected in 2027 remain unchanged. The market is shifting, and volumes are likely to decline, leaving Graanul’s EBITDA exposed. A more severe downside scenario would involve a simultaneous decline in both volumes and prices, which would materially reduce EBITDA.
- The upside case for the bonds is a near-term refinancing at par, which explains our reluctance to short.
- Ultimately, bond investors are financing a transition in the business mix. This transition relies heavily on political support to stimulate new demand. Bondholders currently earn c.12% yield for a company with c.5.0x leverage. Apollo did not inject additional equity as part of the A and E transaction completed in the summer of 2025. With limited debt ranking ahead of the bonds, recoveries would likely prove high in a distressed scenario. However, we believe c.12% yield does not adequately compensate investors for the risks, and we therefore remain on the sidelines.
Recent Results:
- Graanul’s Q1 financial results broadly met expectations, although production volumes exceeded our forecasts. Leverage stands at c.5.4x and we expect this to decline toward c.5.0x over the coming quarters as earnings improve.
- Graanul’s bonds rallied by c.5 points following the Q1 conference call, as investors welcomed announcements of new contracts extending beyond 2027. The company did not disclose pricing, volumes, or contractual terms related to these agreements. Despite this lack of detail, the bonds have rallied into the mid to high 90s and now trade at a yield to maturity c. 12%.
- We have never questioned Graanul’s ability to secure volumes beyond 2027. We have instead focused on the potential impact that the loss of a large customer could have on industry-wide profitability. That view remains unchanged. In the absence of pricing disclosure, we see no fundamental basis for the recent bond price appreciation. While Graanul referenced ongoing negotiations that could further extend volumes beyond 2027, the lack of pricing transparency leaves us sceptical about the durability of the rally.
- Separately, Graanul’s CEO has retired from his role and will continue to support Apollo in an advisory capacity.
Roadshow Snippets:
- We have expanded on the topics below, but the underlying risks remain unchanged. Management expects an oversupply in FY27. While factors such as coal phase-outs and Net Zero targets could stimulate demand, the timing and coordination of these drivers remain uncertain. Graanul expects Heat and Energy, which currently accounts for c.90% of its customer base, to decline to c.50% over time.
- The roadshow presentation does not address concerns around wood pellets as a renewable biofuel. The EU currently classifies wood pellets as a 100% renewable energy source, but political and social sentiment continues to shift in countries such as the Netherlands and Denmark. Dutch authorities have signalled plans to phase out subsidies for low-value biomass use, such as basic power generation, and redirect support toward higher-value or more sustainable applications. We acknowledge that under current geopolitical conditions, wood pellets play an important role in Europe’s energy security and resilience.
- Management highlighted growth opportunities outside Power and Heat end markets. Graanul targets the emerging Industrial segment, where heavy industries transition away from fossil fuels. Management cited Thyssenkrupp’s partnership as a working example. Graanul also explores opportunities in Sustainable Aviation Fuel, hydrogen, and green metals. This strategy underpins our main concern. Graanul expects Heat and Energy, including UK Utilities, European Utilities, and European Heating, to decline from 87% of sales in FY26 to c.50%.
- Global pellet supply and demand forecasts suggest a broadly balanced market with potential oversupply of c.0.3mT in 2026, rising to c.2.4mT in 2027. Management acknowledged a risk of significant oversupply in 2027. These statements represent direct quotes from the roadshow.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk