Graanul - Still no clarity - Model Update
All,
Please find our updated analysis on Graanul here.
Graanul reported its Q3 results recently, but given that the majority of FY25 and FY26 production is already contracted, the figures were broadly predictable. The conference call highlighted two clear themes: management expressed confidence that a deal with Drax will be achieved, but declined to provide any details; and the Company is increasing its efforts to secure new customers and develop new markets on the expectation that volumes from existing customers will decline materially.
The key issue for Graanul is that while the business can manage fluctuations in volume, EBITDA sensitivity is lower than previously assumed. However, given the current leverage, the Company has limited headroom to absorb a price change, or more precisely margin. With volumes expected to decline from its established customer base, it is difficult to envisage margins remaining stable.
Investment Considerations:
- Following the results, we are not taking a position in Graanul’s outstanding bonds. The amend and extend has pushed the maturity wall to 2029, beyond the key 2027 period. However, the underlying risks in 2027 are unchanged. The market is shifting, and with volumes likely to fall, Graanul’s EBITDA remains vulnerable. The larger concern is a scenario where both volumes and prices decline, resulting in a significant drop in EBITDA.
- The business was unable to refinance due to regulatory uncertainty and broader structural shifts in the wood pellet market.
- At current levels, the bonds remain in no-man’s land. We continue to see greater risks to the downside and would consider establishing a short position if the bonds move higher in the coming weeks.
- Upside for the bonds, given the prevailing uncertainty, is capped at around 95% or a 10% yield. While an agreement with Drax appears likely, the details will be critical. The contract structure, combined with other long-term customer agreements, will have broad implications for the wider market. Graanul may be able to mitigate lower demand by adding new customers, but the impact of price adjustments will be the primary driver of bond performance.
- The downside case, driven by weaker prices, is severe, and we see scope for as much as 20pts of downside. With no near-term maturities, there is no immediate catalyst, and as such, we are remaining on the sidelines.
Results:
- Graanul reported its Q3 results, which were broadly in line with expectations. Demand for wood pellets has strengthened since the start of FY25, although uncertainty remains across Europe. Geopolitical tension continues, with the United States imposing tariffs on wood pellets from Vietnam, Canada and the European Union, leaving the global market uncertain.
- In Europe, uncertainty persists regarding the United Kingdom’s post-2027 biomass subsidy framework. The new Drax CfD, agreed with the UK government earlier this month, should encourage discussions between utilities and suppliers on long-term offtake agreements beyond 2027. For now, bond investors remain in limbo as the outcome of these negotiations is unclear. However, we expect negotiations to take place during 2026, as the current deal expires in December 2026.
The Amend & Extend:
- The Amend & Extend deal struck in the summer was broadly in line with our expectations, but bondholders may live to regret not pushing for a token equity contribution.
- The A&E has kicked the potential restructuring to FY28, with clarity on the changing landscape visible by then. If gross margins don’t contract, bondholders will likely see a normal refinancing. If margins do contract, bondholders are facing an insolvency with Apollo having provided no fresh cash for the extension option.
- Absent any information from Drax et al., neither shareholders nor creditors were going to give up any position. Graanul has proposed an amend and extend transaction where the bondholders cave and Apollo, the sponsor, retains 100% of the equity.
- The deal involves a partial paydown (c.9%) from cash on the balance sheet, coupled with a 3-year extension. The coupon will improve to 8.5% with enhanced call protection. Notably, the transaction does not include any new equity injection. Leverage remains unchanged, as the partial repayment is balance sheet-funded, and the higher coupon will weigh on credit metrics.
Next Steps:
- The Company is not due to report FY25 numbers until April, leaving a vacuum in the next couple of months. Drax is due to report its FY25 numbers on 26th February, and therefore, we expect both Drax and Graanul to update the market on or before this date.
- A confirmation of a deal may result in the bonds trading up as it removes some uncertainty. However, volumes will definitely be lower than historic levels, and therefore, a deal isn’t a panacea for Graanul. What is more important is the impact the wider lower demand from electricity producers will have on the margin for wood pellet producers.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk