Graanul - No Deal to '27 - Model Update

All,

Please find our updated analysis on Graanul here, following the Company’s latest refinancing attempt.

Note: Beta testers can check Graanul on the portal here.

The fundamental picture has not changed materially since our last update. Graanul has secured further volumes for FY27, but has provided little visibility on pricing. Apollo and management have also tested the market for a full refinancing, but ultimately did not proceed given the coupon required by investors. With the refinancing no longer progressing, we expect all stakeholders to wait for greater clarity on FY27 volumes and, more importantly, pricing. We are therefore less negative on the bonds at current levels, but still do not see sufficient compensation to take a long position.

Investment Rationale

  • We are no longer as inclined to short Graanul’s amended Notes, which mature in October 2029, but we are also not prepared to take a long position at current levels. The refinancing attempts have failed to progress, removing some of the technical support we previously identified, but the bonds continue to pay 8.5% cash plus 2.5% PIK. At par, the carry provides meaningful downside protection while the 2029 maturity gives Apollo time to wait and see how the business develops.

  • The A and E completed last year pushed the maturity wall out to 2029, beyond the key FY27 period. The underlying risks remain unchanged. Graanul is securing more replacement volumes, with FY27 contractedness now at 62% and management targeting 75–80% by year-end, but has provided little detail on pricing. The key question is therefore whether these new contracts can maintain the profitability of the legacy contracts as they roll off.

  • Apollo has attempted to refinance the bonds several times, but the latest process did not proceed as investors required a double-digit coupon. Bondholders have little incentive to engage while they continue to receive 8.5% cash plus 2.5% PIK and retain a 2029 maturity. The most likely outcome is therefore for Apollo to wait and see, allowing the business to generate cash while assessing the sustainability of earnings beyond FY27.

  • Ultimately, bond investors are financing a transition in Graanul’s business mix at a time when the economics of the wider pellet market remain uncertain. At c.12% yield and c.5.0x leverage, the bonds offer attractive carry, but we do not believe this is sufficient compensation to take the fundamental risk. Conversely, the high cash generation, limited debt ranking ahead of the Notes, and 2029 maturity make the short less compelling than previously. We therefore remain on the sidelines.

Recent Results

  • Graanul’s latest quarterly results have little impact on our view. The Company remains cash generative and has secured additional FY27 volumes, but the key issue remains the profitability of those volumes rather than the ability to secure them.

  • FY27 contractedness has increased from 53% to 62%, with management targeting 75–80% by year-end. However, the Company continues to provide limited visibility on pricing, leaving us unable to establish whether the additional volumes will generate attractive returns.

  • We have never questioned Graanul’s ability to secure volumes beyond 2027. Our concern has always been the impact of the changing market on pricing and EBITDA as higher-priced legacy contracts roll off. That view remains unchanged.

Refinancing & Key Issues

  • Apollo and management have tested the market for a full refinancing, but ultimately did not proceed as the coupon required by investors was considered too high. The refinancing therefore does not appear to be happening at this stage, leaving all stakeholders waiting for FY27 and greater clarity on volumes and, more importantly, pricing.

  • Graanul is successfully replacing lost volumes, but there remains limited visibility on the pricing of these contracts. Drax risk is less acute than previously, but the reduction in its external pellet demand still creates additional supply in the European market and increases the importance of Graanul securing profitable replacement volumes. The wider industry also remains dependent on government support, particularly in the Heat and Power markets.

  • With the bonds trading around par, upside is effectively limited to the 8.5% cash coupon plus 2.5% PIK. Conversely, a poor pricing environment in FY27 could see the bonds trade down 10–15 points and restart discussions between Apollo and bondholders, this time centred on the requirement for fresh capital.

  • At current levels, we therefore see a relatively balanced risk/reward. The bonds are supported by strong cash generation, the 2029 maturity and the 8.5% cash plus 2.5% PIK coupon, but we see limited fundamental upside without greater visibility on post-FY27 pricing. We remain on the sidelines rather than taking either a long or short position.

Happy to discuss

Tomas

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

Tomás MannionGRAANUL