Two months ago, I would have said the chances of an equity raising were slime, less than 20%:
The company exited DH2019 with Net Debt of a little over $710m; on 23 March 2020, its Net Debt was reported to be $773m, and that was after the $265m it laid out for the Pepper European Services (PES) acquisition.
Given the company's ~$150m pa to $200m pa Free Cash Flow generation, less than $800m in Net Debt would ordinarily be eminently bankable and manageable, especially in the context of the prospect of a capital return from PEXA (which could have been close to $100m).
However, fast-forward to today and I think things look a bit different. For starters, I think that any capital return from PEXA, if it happens, will be just a couple of tens of millions of dollars, as opposed to several tens of millions.
And then there is the likely hit to earnings over the coming 6 to 12 months.
Despite a significant proportion of LNK's revenues being granular and recurring, it would be naive to expect there to be no impact on the business.
Which means that the 3.0x pro forma Net Debt-to-EBITDA leverage figure following the PES acquisition, will be closer to 3.5x, I expect.
The company is far from covenant limits, and January 2022 is the earliest refi. date on its facilities, which means it could trade its way out of its leverage position without being forced to add equity capital to the balance sheet.
But there's a difference between not being forced into raising capital and being prudent about it.
The world is a significantly changed compared to just a few weeks ago, and my exhortation to the board now would be to not try to finesse the finances of the company given the prevailing uncertainty which is unlikely to go away soon.
So I've gone from thinking that the balance sheet is a bit tilted, but still manageable; to now thinking there might be a bit too much financial risk in the business (which, I suspect, could be one of the factors weighing on the market value of the company).
I now think there is greater than 50% chance they'll raise equity capital to buttress the balance sheet. It would be a prudent thing to do. (Provided, of course, it is conducted on an entitlement basis, to protect the interests of minority shareholders.)
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