Ardagh Group Faces Seemingly Limited Options to Tackle Upcoming 2026/2027 Maturity Wall Totaling $4.8B After Utilizing Last Material Unencumbered Asset to Retire 2025 SSNs

Relevant Document:
Q2 2024 Financial Report
 
When Ardagh Group SA released its second-quarter 2024 earnings last month, the company reported $205 million of adjusted EBITDA for the glass business, down 11.6% from $232 million in the prior-year period, and lowered its EBITDA guidance for the full year. This came as the company faces $2.5 billion in secured debt coming due in 2026 and $2.3 billion in unsecured debt due in 2027.

While the company was able to borrow funds from Apollo earlier this year to repay its 2025 maturities, that financing came at the cost of granting a security interest on the company’s stake in Ardagh Metal Packaging, or AMP. While current trading prices indicate that the market may be open for refinancing the 2026 senior secured paper, lenders may wish to see a more holistic solution from Ardagh including resolution of the 2027 unsecured maturities before extending additional credit.

Ardagh Group’s original EBITDA guidance, given in February, was for adjusted EBITDA for the segment ranging from $750 million to $780 million, or $765 million at the midpoint. The company revised its guidance down to $680 million at the midpoint, or by about 11%. Glass business EBITDA totaled $325 million in the first half of 2024.
 
During Ardagh’s second-quarter earnings call, Chairman Herman Troskie explained why the company cut its guidance, saying, “The trajectory, unfortunately, of the business, [] remains unclear.” In 2023, Ardagh also materially cut its then current-year EBITDA guidance for the glass business. In July 2023, the company reiterated its EBITDA guidance of $850 million for the year, prior to reducing it to $700 million that October. As shown above, the glass segment’s 2023 reported adjusted EBITDA was in line with the revised guidance at $699 million.

Capital Structure

Ardagh Group’s capital structure, as of June 30, is shown below:
    Limited Options to Tackle $2.5B 2026 Maturity Stack

Having solved its most recent capital structure challenge, which involved redeeming its $700 million of 5.25% senior secured notes due April 2025, we expect that the company’s interest will now turn to its $2.531 billion of notes due August 2026. The notes, which were issued in multiple tranches in both dollars and euros, have coupon rates ranging from 2.125% to 4.125%. They are currently trading, however, at approximately 85, yielding 11.25% to 12.25%.

Ardagh’s options to deal with the 2026s appear to be limited. In order to secure the financing to redeem the 2025 notes, Ardagh entered into an agreement with Apollo for a €790 million, or approximately $840 million, term loan, which was borrowed by an Ardagh subsidiary and is secured by Ardagh’s 76% common equity and 100% preferred equity stake in Ardagh Metal Packaging. Reorg discussed the transaction and its impacts in more detail HERE.

We believe that this transaction left Ardagh with few apparent options for the 2026s other than to attempt to refinance them. Given current market yields and Ardagh Group’s cash flow, this would seem difficult. Additionally, we expect that this would drive an increase in cash interest that would likely overwhelm the company’s free cash flow, as we anticipate that Ardagh Group’s current borrowing costs for secured debt are likely in the 12% area. Cash flow before working capital has been negative each of the past three years, although it improved in 2023.

Reorg estimates that the cash interest on the three series of notes due 2026 is about $78.1 million per year, using the USD-equivalent balance for the euro-denominated notes as of June 30. Assuming that the notes due 2026 were refinanced at current market yields, in this case around 12%, annual interest would be approximately $303.7 million, an increase of $225.6 million in cash expenses.
 
Ardagh Group’s glass business’ historical cash flows are shown below:
 
Solving 2026s in Isolation From 2027s Does Not Fix Balance Sheet; Limited Asset Sale Options

Further complicating the refinancing is the looming maturity of the 2027 unsecureds. Ardagh has a further $2.3 billion USD-equivalent of notes coming due in July and August 2027. At current prices, the various 2027 notes are yielding 20% to 24%, rendering the unsecured notes functionally not refinanceable.

This may lead the market to question what may be needed to entice prospective holders of new secured notes to refinance the 2026 secured notes. Existing 2026 holders will likely be looking at how the company can avoid a bankruptcy or similar restructuring to deal with the 2027 unsecured notes. Secured holders, which are already at the top of the capital structure with respect to Ardagh Group, would likely be concerned about any LME to deal with the 2027 unsecured debt as it would likely include collateral leakage while creditors are not likely to provide financing, which is potentially subject to a near-term bankruptcy.

Asset sales may provide a bit of flexibility for the company. Any sales of assets owned by the restricted group, however, would be required to be used to repay secured debt or to invest in replacement assets or acquisition of similar businesses. Additionally, it is unclear if the company has any easily monetizable assets that would allow it to make a meaningful dent in these maturities.

As Reorg has previously discussed, Ardagh owns a 42% stake in a joint venture, Trivium, that earlier this year was reported to potentially be on the market by Ardagh and its majority owner. While it appears that its stake in Trivium would be excluded from the asset sale covenant of the secured notes, Reorg estimates that Ardagh’s equity stake could be worth approximately $241 million, which while helpful to liquidity is a fraction of the company’s upcoming maturities.

Turning finally to Ardagh’s Africa assets, Reorg believes that these assets may not be encumbered, though the Africa subsidiaries are part of the Ardagh restricted group. However, it is unknown if South African exchange controls may preclude that subsidiary from either pledging assets to the secured notes or issuing any kind of guarantee to the existing secured notes.

Also, Reorg estimates that the value attributable to the African assets may be 20% to 25% lower than when Ardagh purchased it, possibly having a current enterprise value of $750 million to $800 million. Ardagh reported $444 million USD-equivalent of borrowings under its South Africa facilities as of June 30, implying an equity value of potentially $330 million at the midpoint.