Kem One - Market Forces - Positioning

All,

Please find our model, post Kem One's Q2 results here.

We are writing to inform you that we are covering our short position in Kem One bonds due to the current unavailability of borrow. This decision is not driven by any change in our fundamental view, but rather by the practical constraints in maintaining the position. The outlook for recovery remains extremely limited, and we believe a further restructuring is imminent.

Investment Rationale

- We are closing our 2% short position in Kem One bonds at a level of 28%, driven solely by the lack of borrow in the market.

- In mid-April, we shorted the bond at 65%, based on our analysis indicating a high likelihood that Kem One would be unable to operate over the next 12 months without accessing additional liquidity. That scenario now appears increasingly probable.

- There is little further to add from a valuation perspective. In the cold light of reality, the hockey stick projections historically provided by the Company are fanciful.

- Bondholders are now rueing the decision to allow Apollo to retain equity control and to admit additional liquidity as super senior debt. As a result, full equitisation of the bonds is now a distinct possibility.

Q2 Results

- The second quarter results reinforce our view that another restructuring is imminent. EBITDA for the quarter was €1 million, down sharply from €22 million in the prior year. The Company attributed this decline to a combination of lower demand, elevated energy costs, and delays in ramping up the Fos project.

- More concerning for long-term investors, management indicated that market conditions are unlikely to improve before year-end. The European market is now being affected by the redirection of Asian trade flows from the US to Europe due to tariff-related pressures.

- We noted discrepancies between reported EBITDA and pro forma EBITDA figures in the Company’s presentation. However, the distinction is largely academic, as both sets of figures indicate a deteriorating financial position.

- Liquidity commentary from management provided little reassurance. The Company has secured a new €100 million factoring facility, representing a €40m increase from the previous arrangement, of which €30m has already been drawn down during the quarter.

- Additionally, the CEO announced his departure from the business. While not unexpected, the credibility of leadership was further undermined during the call, where the CEO repeatedly mispronounced the name of the interim CFO.

We have not updated our financial projections for Kem One at this stage. However, given the current state of the business and heightened spread volatility, we acknowledge that our forecasts are likely to deviate from actual outcomes. Management, it appears, faces similar challenges in grasping the scale of the situation.

Happy to discuss. 

Tomás

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