Thu 07/16/2020 13:02 PM
Relevant Documents:
Financial Report 2018
Press Release Blackstone Acquisition
Press Release Celanese Merger

Swiss tobacco filter manufacturing company Cerdia’s loans have been under pressure amid fears the effects of the Covid-19 pandemic could accelerate the structural decline in tobacco use and smoking.

The €350.1 million euro tranche of the group’s $630 million-equivalent term loan B due 2023 is bid at 76 but offered in the high 80s and there hasn’t been much trading in recent weeks on the name.

Investors say many funds are content to stay in the name as it is cash generative, with Moody’s also expecting positive free cash flow to cover all basic cash needs in 2020 and 2021. The company is not facing material near-term maturities, with the term loan expiring in 2023 and the group’s €65 million RCF maturing in 2022. Cerdia drew its RCF fully at the end of the first quarter in response to the pandemic, according to the ratings agency.

Additionally, for many newer funds Cerdia is difficult to buy or hold as the smoking industry does not fit environmental, social and corporate governance (ESG) strategy criteria. This further hampers trading in the name.

Investors say the exit strategy for private equity owner Blackstone is unclear. The business suffers from a structurally declining end market for tobacco, a decline that some people expect to accelerate this year due to the effects of the Covid-19 pandemic. The rising popularity of e-cigarettes in combination with more people giving up smoking drives this trend.

The traditional cigarette market is declining by about 1% to 3% annually and, due to production overcapacity and competition, prices remain under pressure, sources commented. The WHO forecast in late 2019 that by 2020 there will be 10 million fewer tobacco users compared to 2018 and another 27 million fewer by 2025.

Additionally, recent press reports indicated that people smoked less due to lockdowns. Sales volume of cigarette packs in the U.S. fell 11.2% in the month to May 18 according to CNBC. In the U.K., a recent survey found that 7.6% of smokers have quit in the year to June 2020, which is almost a third higher than the average of the previous years. However, in other countries surveys found people smoke more due to lockdown restrictions. A German study found that 43% of smokers used tobacco more during the lockdown period, partly because people felt more stressed.

In some countries, the demand is declining faster than the global average. The U.S. tobacco company Altria said in its fourth-quarter results that it expects the full-year total U.S. cigarette adjusted volume decline rate to be in the range of 4% to 6%. However, Cerdia has confirmed its full-year 2020 budget and is confident that the pandemic will not have a meaningful impact on cigarette demand, according to Moody’s.

The company likely needs to deleverage from its current level of 8x gross Moody’s adjusted leverage to be able to refinance. The company itself calculated its net leverage as about 4.8x to 5x.

Moody’s downgraded the term loans, which were issued by Jade Holdo, to B3 with a stable outlook in May due to the company’s leverage and absent meaningful recovery in filter tow prices.

Sources also said that the company operates in a oligopolistic market structure and Cerdia’s position in the market was weakened when a planned joint venture was blocked by the European Commission due to competition concerns in 2018.

In 2018, Cerdia recorded net sales of $493.8 million and net cash from operating activities amounted to $92.69 million.

The company’s debt includes:

  • A $230.4 million term loan due 2023 paying L+5.5% with a 1% floor

  • A €350 million term loan due 2023 paying E+4.75% with a floor of 1%

  • A €65 million RCF due 2022

Cerdia’s credit agreement contains a springing net leverage covenant of 5.8x first lien net debt to consolidated EBITDA if the RCF is drawn by 35%.

Cerdia, which was known as Rhodia Acetow at the time,was acquired by Blackstone from Solvay in 2017 for about €1 billion. The group operates production sites in Germany, Brazil, France, Russia and the U.S. and produces acetate tow, a derivative of wood pulp that is used in cigarette filters and other products.

Reorg Debt Explained analyzed the group’s legal documentation at the time of the deal. For a copy of the full report click HERE.
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