Transcom - Altor on hold - Positioning
All,
Please find our updated analysis on Transcom here, following the Q2 results.
The poor Q2 results have resulted in our exiting the name. Although we hadn’t expected a traditional full refinancing, we were expecting an uptick in performance from recent contract wins to provide a tailwind into a potential Amend and Extend. This remains our base case scenario, but the risks to the downside have increased due to the underwhelming results; hence, our decision.
Investment Rationale:
- We are exiting our 4% long position at 78%. We acquired the bonds in two trades: an initial 2% in late September 2024 at 66, followed by a further 2% in late November 2024 at 71. As noted in our previous update, we sized the position below our typical 6% allocation, reflecting the relative risk associated with this name.
- We did not expect Transcom to achieve a refinancing at par. However, given that Q2 revenue and EBITDA came in below our projections, we have decided to exit the position.
- Any refinancing will require Altor, the sponsor, to support the business with an equity injection. There is no certainty that Altor will do so.
- Although EV likely exceeds net debt, we estimate that debt capacity is approximately 80%. The trading level of the bonds will depend on Altor's approach to restructuring.
- Downside risk arises from either an uncommitted or aggressive stance by the sponsor, combined with continued weak operational performance. In such a scenario, we believe the bonds could trade down into the 60s. We view the sponsor's behaviour as the greater risk, as operational performance is expected to remain stable in the short to medium term.
- The company has not grown into its capital structure, and the 6.0x enterprise value to EBITDA multiple Altor paid to acquire the business appears difficult to justify. Comparable listed peers, all of which are larger in scale, currently trade at approximately 4.5x to 5.0x.
- Downside is somewhat mitigated by the limited amount of debt ranking senior to the bonds. A modest equity injection could support an amend and extend process, along with a partial repayment. Based on our projections, a €20m cash injection from Altor would result in a 10% cash repayment, a 15% debt write-off, and a 20% equity stake. Avoiding any debt write-off would require a €50m injection.
- Creditors may agree to extend without a debt write-off and with only a €20m equity injection, but in that case, the extended bonds are unlikely to trade near par.
Q2 Results:
- Management acknowledged the upcoming maturities but, aside from stating that discussions with the sponsor are ongoing, offered no further details on the process. The Q2 results provide no support for these discussions, with further declines in both revenue and EBITDA.
- Management states that recent contract wins in the nearshore and offshore markets will deliver higher margins, but the current ramp-up costs are offsetting any improvements from these new contracts, compared with those that have been lost. Furthermore, the lost contracts are primarily onshore, which will result in additional restructuring costs.
Model Changes:
- We have revised our model primarily to include additional restructuring costs expected over the coming quarters. Historically, these costs have totalled €4m per quarter, and we believe it is prudent to assume the same amount over the next 18 months. This reduces Transcom's debt capacity and, when combined with weaker Q2 results, underpins our decision to exit the position.
- We expect some modest margin improvement in the coming quarters, but the business will still need to refinance before any meaningful turnaround in performance can occur.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk