Fedrigoni
Primary Analysis: Investors Consider Fedrigoni’s FCF Generation as Bright Spot in Paper Market Headwinds, €225M FRN 'Flexible’ Covenants May Signal Bain’s ‘Aggressive’ Future Dividend Policy
Wed 02/05/2020 03:30 AM
Relevant Document:
Preliminary OM
Investors are considering investing in Fedrigoni’s 6.5-year €225 million senior secured bond for the Italian company’s specialization and exposure to niche markets, which represents a shelter from falling demand for printing and writing paper and weak market dynamics in paper packaging, sources familiar with the matter told Reorg. Investors pointed out that Fedrigoni’s sponsor, Bain Capital, had brought back covenants for higher flexibility around change of control and dividend capacity, which investors rejected when the borrower printed its 2024 bonds in 2018.
The bond, which has expected ratings of B2/B by Moody’s and S&P, is due to price today, Feb. 5, at the end of a three-day roadshow. Fedrigoni’s new floating rate issuance will also benefit from some CLOs support. Guidance so far has been set at Euribor+450 basis points to E+475 bps. During January, new-issue yields for single-B bonds were at 433 bps, and for leveraged loans at low 400s, Deutsche Bank research data show.
Reorg legal analysis shows that Fedrigoni seeks to create dividend capacity from asset sales, an issuer-friendly innovation with growing popularity over the past few years that seems to be re-emerging.
The Italian paper maker had to strip out the flexibility from its debut bonds in 2018 to convert asset sale proceeds into dividends after pushback from investors, also losing portability. The new deal brings back both of those flexibilities. Some investors wondered whether the credit has improved so much that it can justify covenants that were rejected less than two years ago.
Use of Proceeds and Leverage
Proceeds from the new issuance will be used to fund the €230 million acquisition of Ritrama, an Italian multinational group specializing in self-adhesive products. This is the second debt-funded acquisition of the issuer since being acquired by Bain Capital late 2017.
As per Reorg estimates and following the Ritrama acquisition and the notes issuance, pro forma net leverage based on adjusted EBITDA, but before expected run rate cost savings, will rise from 3.3x to 4.1x. Using reported adjusted EBITDA (including expected cost savings), net leverage grows from 3.1x to 3.9x.
The issuer’s pro forma capital structure is below:
Investors balance the prospect of increased leverage with the company’s free cash flows generation. This contrasts with the negative headlines dominating the paper and paper packaging space.
The issuer’s credit metrics against its peers are summarized in the table below:
Fedrigoni’s free cash flows averaged about €60 million annually between 2014 and 2017, but fell to €2 million in 2018 after incurring transformation costs and its security business lost a customer who decided to insource its paper production. Cash generation has since recovered in 2019, with €42 million of free cash flows in the first nine months of 2019. This was driven by an optimization of working capital, including through the use of a €175 million non-recourse factoring facility contracted in April 2019. The facility provided by Credit Agricole Leasing & Factoring has a duration of five years.
In the medium term, the group targets €10 million of EBITDA improvement from cost savings:
The group is Europe’s largest manufacturer of self-adhesive products for wine bottle labels with a 34% market share. It is also one of the world's leading names in the paper for the banknotes market with a global market share of 20% by volume in the banknote market open to competitive tender. Finally, it has significant operations in the highly margined specialty papers market.
With the Ritrama acquisition, Fedrigoni’s product offering and scale in its PSL segment (Pressure Sensitive Labels) will strengthen in wine/spirits and personal care for instance, but also from a geographic standpoint with exposure to Latin America.
While the self-adhesive products business line will become the primary line of business from a revenue standpoint (49% of sales pro forma for the Ritrama acquisition), “paper and security” segment will remain the main earnings contributor with reportedly 74.6% of adjusted EBITDA derived from the segment.
The “paper and security” segment is a myriad of products, including specialty paper, commodity paper and security products. Their individual EBITDA contribution is undisclosed although the company said that banknotes paper tends to have the highest margins, followed by specialty graphic paper for luxury packaging, paper for artwork and schools. Coated, uncoated and office paper have the lowest margins in the portfolio.
Specialty papers include paper used for the luxury packaging market (stamped and embossed card paper, digital paper and envelopes for digital printing, card for packaging, etc.), as well as drawing and art paper. Security paper includes banknote paper and other valuable paper items such as checkbooks, passports, tickets and meal vouchers. Specialty paper accounts for 23% of pro forma LTM sales, followed by commodity paper (19%) and security paper (9%).
The company was acquired by Bain Capital in December 2017 in a transaction valuing the business at about €630 million. The sponsor now owns 88% of the TopCo with the remaining 12% held by the founding family. Bain Capital contributed €206 million at the time of the acquisition and has since recouped close to €25 million through a €28 million dividend payment.
Background
The group operates 15 “continuous” paper-making machines and seven coating machines in its 16 production facilities (8 in Italy, 2 in Spain, 2 in Brazil and 2 in the U.S.). It also owns 12 retail boutiques across Europe operating under the brand “Fabriano”.
On a LTM basis, it sold approximately 470,000 tons of commodity and specialty paper and 138,000 tons of pressure sensitive products. Following the Ritrama acquisition, the group will operate seven additional production and finishing/distribution facilities with an annual production of approximately 992 million square meters. The Rink family, founders of Ritrama, will maintain ownership of and continue to manage Ritrama’s North American operations.
The transaction agreement for the Ritrama acquisition includes a call option to purchase Ritrama’s North American operations.
After two years of sustained earnings growth, results in 2018 were more mixed with adjusted EBITDA declining by 8% to €137 million. In the security segment, the group suffered from a customer's decision to insource paper production and cancel previously awarded orders. The run rate effect on LTM adjusted EBITDA was €26 million. This was offset by revenue and earnings growth in the paper and converting segments. In the nine months to Sep. 30 2019, excluding acquisitions, earnings trends have been generally supportive, despite lower paper volumes, driven by higher selling prices, lower cost of pulp and improved product mix.
In July 2018, the group acquired Cordenons, an Italian paper producer focused on high-end luxury packaging and premium graphic applications, with annual sales of €89.8 million and €14.6 million of adjusted EBITDA. €2.7 million of the €5.9 million cost savings identified in connection with this acquisition have already been realized with, €1 million expected in 2020 and the remaining €2.2 million later. Cordenons had two production facilities. Transaction price was kept confidential but together with cash on hand, proceeds from €125 million bond issue were used to pay for the acquisition and repay the existing debt.
BNP Paribas is acting as lead left of the new deal, with HSBC, KKR, Nomura, UBI Banca and UniCredit acting as joint bookrunners. The issuer is Fabric BC. The corporate structure appears below from the memorandum:
Preliminary OM
Investors are considering investing in Fedrigoni’s 6.5-year €225 million senior secured bond for the Italian company’s specialization and exposure to niche markets, which represents a shelter from falling demand for printing and writing paper and weak market dynamics in paper packaging, sources familiar with the matter told Reorg. Investors pointed out that Fedrigoni’s sponsor, Bain Capital, had brought back covenants for higher flexibility around change of control and dividend capacity, which investors rejected when the borrower printed its 2024 bonds in 2018.
The bond, which has expected ratings of B2/B by Moody’s and S&P, is due to price today, Feb. 5, at the end of a three-day roadshow. Fedrigoni’s new floating rate issuance will also benefit from some CLOs support. Guidance so far has been set at Euribor+450 basis points to E+475 bps. During January, new-issue yields for single-B bonds were at 433 bps, and for leveraged loans at low 400s, Deutsche Bank research data show.
Reorg legal analysis shows that Fedrigoni seeks to create dividend capacity from asset sales, an issuer-friendly innovation with growing popularity over the past few years that seems to be re-emerging.
The Italian paper maker had to strip out the flexibility from its debut bonds in 2018 to convert asset sale proceeds into dividends after pushback from investors, also losing portability. The new deal brings back both of those flexibilities. Some investors wondered whether the credit has improved so much that it can justify covenants that were rejected less than two years ago.
Debt Explained’s Bond Snapshot for the Fedrigoni new deal is available HERE.
Use of Proceeds and Leverage
Proceeds from the new issuance will be used to fund the €230 million acquisition of Ritrama, an Italian multinational group specializing in self-adhesive products. This is the second debt-funded acquisition of the issuer since being acquired by Bain Capital late 2017.
As per Reorg estimates and following the Ritrama acquisition and the notes issuance, pro forma net leverage based on adjusted EBITDA, but before expected run rate cost savings, will rise from 3.3x to 4.1x. Using reported adjusted EBITDA (including expected cost savings), net leverage grows from 3.1x to 3.9x.
The issuer’s pro forma capital structure is below:
(Click HERE to enlarge.)
Investors balance the prospect of increased leverage with the company’s free cash flows generation. This contrasts with the negative headlines dominating the paper and paper packaging space.
The issuer’s credit metrics against its peers are summarized in the table below:
(Click HERE to enlarge.)
Fedrigoni’s free cash flows averaged about €60 million annually between 2014 and 2017, but fell to €2 million in 2018 after incurring transformation costs and its security business lost a customer who decided to insource its paper production. Cash generation has since recovered in 2019, with €42 million of free cash flows in the first nine months of 2019. This was driven by an optimization of working capital, including through the use of a €175 million non-recourse factoring facility contracted in April 2019. The facility provided by Credit Agricole Leasing & Factoring has a duration of five years.
In the medium term, the group targets €10 million of EBITDA improvement from cost savings:
- €5 million from procurement after aligning the purchase of certain SKUs, including glassine.
- €2 million from the rationalization of Ritrama’s internal functions
- €2 million from reduced costs after the installation of a new adhesive kitchen at one of Ritrama’s production facilities.
- €1 million from the internalization of Ritrama’s paper sourcing to Fedrigoni.
The group is Europe’s largest manufacturer of self-adhesive products for wine bottle labels with a 34% market share. It is also one of the world's leading names in the paper for the banknotes market with a global market share of 20% by volume in the banknote market open to competitive tender. Finally, it has significant operations in the highly margined specialty papers market.
With the Ritrama acquisition, Fedrigoni’s product offering and scale in its PSL segment (Pressure Sensitive Labels) will strengthen in wine/spirits and personal care for instance, but also from a geographic standpoint with exposure to Latin America.
While the self-adhesive products business line will become the primary line of business from a revenue standpoint (49% of sales pro forma for the Ritrama acquisition), “paper and security” segment will remain the main earnings contributor with reportedly 74.6% of adjusted EBITDA derived from the segment.
The “paper and security” segment is a myriad of products, including specialty paper, commodity paper and security products. Their individual EBITDA contribution is undisclosed although the company said that banknotes paper tends to have the highest margins, followed by specialty graphic paper for luxury packaging, paper for artwork and schools. Coated, uncoated and office paper have the lowest margins in the portfolio.
Specialty papers include paper used for the luxury packaging market (stamped and embossed card paper, digital paper and envelopes for digital printing, card for packaging, etc.), as well as drawing and art paper. Security paper includes banknote paper and other valuable paper items such as checkbooks, passports, tickets and meal vouchers. Specialty paper accounts for 23% of pro forma LTM sales, followed by commodity paper (19%) and security paper (9%).
The company was acquired by Bain Capital in December 2017 in a transaction valuing the business at about €630 million. The sponsor now owns 88% of the TopCo with the remaining 12% held by the founding family. Bain Capital contributed €206 million at the time of the acquisition and has since recouped close to €25 million through a €28 million dividend payment.
Background
The group operates 15 “continuous” paper-making machines and seven coating machines in its 16 production facilities (8 in Italy, 2 in Spain, 2 in Brazil and 2 in the U.S.). It also owns 12 retail boutiques across Europe operating under the brand “Fabriano”.
On a LTM basis, it sold approximately 470,000 tons of commodity and specialty paper and 138,000 tons of pressure sensitive products. Following the Ritrama acquisition, the group will operate seven additional production and finishing/distribution facilities with an annual production of approximately 992 million square meters. The Rink family, founders of Ritrama, will maintain ownership of and continue to manage Ritrama’s North American operations.
The transaction agreement for the Ritrama acquisition includes a call option to purchase Ritrama’s North American operations.
After two years of sustained earnings growth, results in 2018 were more mixed with adjusted EBITDA declining by 8% to €137 million. In the security segment, the group suffered from a customer's decision to insource paper production and cancel previously awarded orders. The run rate effect on LTM adjusted EBITDA was €26 million. This was offset by revenue and earnings growth in the paper and converting segments. In the nine months to Sep. 30 2019, excluding acquisitions, earnings trends have been generally supportive, despite lower paper volumes, driven by higher selling prices, lower cost of pulp and improved product mix.
In July 2018, the group acquired Cordenons, an Italian paper producer focused on high-end luxury packaging and premium graphic applications, with annual sales of €89.8 million and €14.6 million of adjusted EBITDA. €2.7 million of the €5.9 million cost savings identified in connection with this acquisition have already been realized with, €1 million expected in 2020 and the remaining €2.2 million later. Cordenons had two production facilities. Transaction price was kept confidential but together with cash on hand, proceeds from €125 million bond issue were used to pay for the acquisition and repay the existing debt.
BNP Paribas is acting as lead left of the new deal, with HSBC, KKR, Nomura, UBI Banca and UniCredit acting as joint bookrunners. The issuer is Fabric BC. The corporate structure appears below from the memorandum:
(Click HERE to enlarge.)
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.