I have been doing a little research on the banking covenant side of things & would welcome some help / commentary / ideas.
The below is from slide 15 of the HY Results presentation released 24-Feb & is fairly informative as they provide details about the specific banking covenants & the actual achieved ratios (along with the Net Debt Figure used - 175.5m)
During the 6 months to 31 December 2014;
• Net debt reduced to $175.5 million
• Leverage ratio reduced to 2.33x following asset sales and solid underlying cash flows during the period and is expected to be further improved at 30 June 2015
• McAleese Group remains in compliance with all of its banking covenants
Column 1 Column 2 Column 3 Column 4 0 Financial undertakings 31 Dec 14 MCS target range Banking Covenants 1 Net debt/ EBITDA 2.33x (i) 1.75 - 2.25x < 2.75x 2 Interest cover 5.5x > 5.0x > 3.0x 3 Gearing ratio 31.9% < 45% < 55.0% 4 (i) Banking covenants are calculated biannually and continue to reflect weak trading and EBITDA in the Jan – Mar quarter 2014
Now - the release today highlights the following:
- 30 June Net Debt expected to be $160m-$165m (including a $10m bulk reduction from an asset sales which should occur "on or before 30 June 2015")
- EBITDA is expected to be $70m
The Net Debt/EBITDA covenant is interesting here as on these numbers, it spits out at 2.36x (165m / 70m). However, if the asset sales do not eventuate & I have my doubts given their wording, the ratio becomes 2.5x (175m/70m).
The covenant is breached if EBITDA drops below 63.63m (175m / 63.63 = 2.75x).
That does not leave a lot of room for error with their forecast of revised EBITDA & also to remain within their covenants. From what I have seen, typically company's revise down earnings more than once as their earnings picture becomes clearer.
Interest Coverage also becomes interesting, especially if they increase their Interest Expense due to a reduction in cash receipts. From the same presentation, they had paid $9.1m in Interest Expense (1H - so $18.2m annually) & they are saying their IC ratio was received at 5.5x which implies an earnings figure of $50m (1H - EBITDA of 49.5m - so ok due to rounding). For the IC covenant to be ok, EBITDA needs to remain above 54.6m annually (Covenant is 3x - 54.6 / 18.2 = 3)
I would like to invest in this stock, however need to tick off the following items in my mind & would welcome commentary / help:
- How achievable is the $70m EBITDA Guidance?
- What are the chances of a further earnings downgrade?
- How easy would it be to change the covenant levels?
- If the covenants were to be breached, what would the bank do? (Would that be all she wrote, or would they carry the business?)
Thanks in advanced!
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