CPI Card Group
Middle Market New Coverage: CPI Card Hires Lazard Amid Industry Headwinds, Liquidity Pressure
Wed 07/18/2018 10:48 AM
Relevant Documents:
10-Q Q1 2018
Earnings Presentation Q1 2018
10-K 2017
CPI Card Group, a provider of credit and debit card production and related services, has retained Lazard as financial advisor, according to sources. A group of the company’s term loan lenders, meanwhile, has looked at bringing on advisors, although no official mandates have been signed as of yet, sources say.
While the company’s nearest-term funded debt maturity is its term loan due 2022, the loan was quoted by a trading desk at 58/62 earlier this week and the company has indicated that deleveraging is a goal. As explained below, CPI is able to make open-market debt repurchases, although its ability to fully draw on its revolver is restricted, its ability to issue new debt is limited and its $20 million of unrestricted cash on the balance sheet as of March 31 would only marginally reduce its leverage.
In addition, given that amendments to the credit agreement’s pro rata sharing provisions require the consent of all affected lenders, CPI would likely be unable to consummate a coercive exchange to afford itself additional flexibility under the credit agreement’s negative covenants. As such, CPI may be looking ahead to 2019, when it hopes the card replacement cycle will boost sales, in order to execute a refinancing or other liability management exercise. The company’s capital structure and liquidity as of March 31 are below:
The move by CPI Card to bring on Lazard also comes as the top line faces pressure amid a soft industry environment with weakened demand and pricing pressures. In the first quarter ended March 31, net sales in the U.S. debit and credit segment, which accounted for about 63% of total net sales, dropped 6.5% to $37.1 million driven by an 8.2% decrease in volumes as well as “lower” average selling prices of chip cards, according to the release. CPI’s first-quarter earnings presentation notes that the Europay, Mastercard and Visa, or EMV, card average selling prices in 2018 are “expected to decline similar to 2017,” while volumes for the year are expected to be “about flat” to 2017. CPI’s volume of EMV cards sold dropped 32.7% in 2017 compared with 2016 and ASPs were down 9.5% year over year, the company’s annual results show.
CPI went public in 2015 and is majority-owned by private equity firm Parallel49, whose managed funds owned about 59% of outstanding common as of April 6, the latest proxy shows. CPI trades on the Nasdaq under the ticker PMTS with a current market capitalization of about $23 million.
For the March 31 last-12-month period, the company’s adjusted EBITDA was $24.3 million, down from $42.3 million for the prior-year LTM period; first-quarter adjusted EBITDA fell 30.8% to $2.7 million, even as net sales increased 5.5% to $59.1 million for the three-month period.
In the third quarter of 2017, CPI discontinued guidance and announced that the company would be “conducting a thorough review of its business strategies and market opportunities.”
According to the company, in 2017 the U.S. market for debit and credit card manufacturing, which is CPI’s largest business, experienced lower levels of demand than anticipated, including from large financial institutions. As these institutions migrated to new EMV chip technologies beginning in 2014 and 2015, they pulled forward card reissuances that would have otherwise occurred in 2017 and 2018, the company said in its second-quarter 2017 report. While the pull-forward likely led to a 72.3% year-over-year increase in net sales for the segment in 2015, CPI has seen decreasing demand in the 2017 and 2018 periods. CPI noted that another factor driving the lower-than-expected EMV demand in 2017 was that a portion of the market extended card expiry dates beyond three years, which decreases the frequency of card reissuance and therefore demand in any given year.
CPI’s net leverage ratio at March 31 based on $24.3 million of reported LTM adjusted EBITDA and $292.3 million of net debt was 12.2x, compared with 6.8x as of the end of the 2017 first quarter. The company’s credit agreement includes a 7x first lien net leverage covenant for the benefit of the revolving lenders that is tested whenever revolving usage exceeds 50%. Thus, with leverage currently above 7x, the company can only access $20 million of its $40 million revolving credit facility.
Cash as of the end of the first quarter was $20.2 million, according to the company’s reports, bringing total liquidity to $40.2 million. The company posted negative $2.95 million of free cash flow in the first quarter (cash flow from operations less capital expenditures) and negative $6.4 million in full-year 2017.
Even with limited revolver access, the company does have some capacity to incur additional debt. According to an analysis by Reorg Covenants, the credit agreement allows CPI to incur $100 million of incremental debt pari with the existing term loan and $15 million of additional secured debt. Further, the company’s nonguarantor restricted subsidiaries can incur $30 million of structurally senior secured debt.
Beyond the amounts noted above, however, CPI’s current 12x LTM leverage and its approximately 1.14x fixed-charge coverage ratio restrict access to all negative covenant baskets that are conditioned on meeting a leverage test, including:
Given current quotes on the term loan, however, placing new debt in primary capital markets transactions is not likely viable. CPI’s senior secured term loan is quoted in the 58/62 context, down from 68.5/70.5 at the end of March, according to a trading desk.
On the company’s third-quarter 2017 earnings call moreover, then-CFO Lillian Etzkorn said that CPI’s intention is to return to “more normalized leverage,” which she said was 3x on a net basis. CPI is likely unable to achieve deleveraging through a coercive exchange, however, given the credit agreement requires consent from all lenders, rather than a simple majority, to amend the pro rata sharing provisions. This requirement blocks CPI’s ability to structure an exchange with a subset of consenting lenders by offering the subset repayment priority.
Historical pricing per Advantage Data is below.
CPI’s credit agreement permits “Affiliated Lenders,” defined to include CPI, Parallel49 and its affiliates, to purchase up to 20% of the original principal amount of term loans (equaling $87 million) on a non-pro-rata basis through Dutch auctions and in the open market. Term loans purchased by or transferred to CPI must be canceled immediately, and term loans held by other affiliated lenders are not counted in any majority lender consent threshold.
CPI announced June 13 the appointment of John Lowe as CFO effective in July, noting that “Mr. Lowe brings over 15 years of executive finance and accounting experience to CPI including most recently serving as CFO of SquareTwo Financial Corporation.” Lowe was SquareTwo’s CFO during its bankruptcy proceedings, which concluded last year with the prepackaged plan going effective June 15, 2017.
The company and Parallel49 did not respond to requests for comment. Lazard declined to comment.
10-Q Q1 2018
Earnings Presentation Q1 2018
10-K 2017
CPI Card Group, a provider of credit and debit card production and related services, has retained Lazard as financial advisor, according to sources. A group of the company’s term loan lenders, meanwhile, has looked at bringing on advisors, although no official mandates have been signed as of yet, sources say.
While the company’s nearest-term funded debt maturity is its term loan due 2022, the loan was quoted by a trading desk at 58/62 earlier this week and the company has indicated that deleveraging is a goal. As explained below, CPI is able to make open-market debt repurchases, although its ability to fully draw on its revolver is restricted, its ability to issue new debt is limited and its $20 million of unrestricted cash on the balance sheet as of March 31 would only marginally reduce its leverage.
In addition, given that amendments to the credit agreement’s pro rata sharing provisions require the consent of all affected lenders, CPI would likely be unable to consummate a coercive exchange to afford itself additional flexibility under the credit agreement’s negative covenants. As such, CPI may be looking ahead to 2019, when it hopes the card replacement cycle will boost sales, in order to execute a refinancing or other liability management exercise. The company’s capital structure and liquidity as of March 31 are below:
The move by CPI Card to bring on Lazard also comes as the top line faces pressure amid a soft industry environment with weakened demand and pricing pressures. In the first quarter ended March 31, net sales in the U.S. debit and credit segment, which accounted for about 63% of total net sales, dropped 6.5% to $37.1 million driven by an 8.2% decrease in volumes as well as “lower” average selling prices of chip cards, according to the release. CPI’s first-quarter earnings presentation notes that the Europay, Mastercard and Visa, or EMV, card average selling prices in 2018 are “expected to decline similar to 2017,” while volumes for the year are expected to be “about flat” to 2017. CPI’s volume of EMV cards sold dropped 32.7% in 2017 compared with 2016 and ASPs were down 9.5% year over year, the company’s annual results show.
CPI went public in 2015 and is majority-owned by private equity firm Parallel49, whose managed funds owned about 59% of outstanding common as of April 6, the latest proxy shows. CPI trades on the Nasdaq under the ticker PMTS with a current market capitalization of about $23 million.
For the March 31 last-12-month period, the company’s adjusted EBITDA was $24.3 million, down from $42.3 million for the prior-year LTM period; first-quarter adjusted EBITDA fell 30.8% to $2.7 million, even as net sales increased 5.5% to $59.1 million for the three-month period.
In the third quarter of 2017, CPI discontinued guidance and announced that the company would be “conducting a thorough review of its business strategies and market opportunities.”
According to the company, in 2017 the U.S. market for debit and credit card manufacturing, which is CPI’s largest business, experienced lower levels of demand than anticipated, including from large financial institutions. As these institutions migrated to new EMV chip technologies beginning in 2014 and 2015, they pulled forward card reissuances that would have otherwise occurred in 2017 and 2018, the company said in its second-quarter 2017 report. While the pull-forward likely led to a 72.3% year-over-year increase in net sales for the segment in 2015, CPI has seen decreasing demand in the 2017 and 2018 periods. CPI noted that another factor driving the lower-than-expected EMV demand in 2017 was that a portion of the market extended card expiry dates beyond three years, which decreases the frequency of card reissuance and therefore demand in any given year.
CPI’s net leverage ratio at March 31 based on $24.3 million of reported LTM adjusted EBITDA and $292.3 million of net debt was 12.2x, compared with 6.8x as of the end of the 2017 first quarter. The company’s credit agreement includes a 7x first lien net leverage covenant for the benefit of the revolving lenders that is tested whenever revolving usage exceeds 50%. Thus, with leverage currently above 7x, the company can only access $20 million of its $40 million revolving credit facility.
Cash as of the end of the first quarter was $20.2 million, according to the company’s reports, bringing total liquidity to $40.2 million. The company posted negative $2.95 million of free cash flow in the first quarter (cash flow from operations less capital expenditures) and negative $6.4 million in full-year 2017.
Even with limited revolver access, the company does have some capacity to incur additional debt. According to an analysis by Reorg Covenants, the credit agreement allows CPI to incur $100 million of incremental debt pari with the existing term loan and $15 million of additional secured debt. Further, the company’s nonguarantor restricted subsidiaries can incur $30 million of structurally senior secured debt.
Beyond the amounts noted above, however, CPI’s current 12x LTM leverage and its approximately 1.14x fixed-charge coverage ratio restrict access to all negative covenant baskets that are conditioned on meeting a leverage test, including:
- Incurring additional leverage-based pari debt (requires meeting a 4.75x first lien leverage ratio),
- Incurring leverage-based junior lien debt (requires meeting a 5.95x secured leverage ratio), and
- Incurring leverage-based unsecured debt (requires meeting a 2x fixed-charge coverage ratio).
Given current quotes on the term loan, however, placing new debt in primary capital markets transactions is not likely viable. CPI’s senior secured term loan is quoted in the 58/62 context, down from 68.5/70.5 at the end of March, according to a trading desk.
On the company’s third-quarter 2017 earnings call moreover, then-CFO Lillian Etzkorn said that CPI’s intention is to return to “more normalized leverage,” which she said was 3x on a net basis. CPI is likely unable to achieve deleveraging through a coercive exchange, however, given the credit agreement requires consent from all lenders, rather than a simple majority, to amend the pro rata sharing provisions. This requirement blocks CPI’s ability to structure an exchange with a subset of consenting lenders by offering the subset repayment priority.
Historical pricing per Advantage Data is below.
CPI’s credit agreement permits “Affiliated Lenders,” defined to include CPI, Parallel49 and its affiliates, to purchase up to 20% of the original principal amount of term loans (equaling $87 million) on a non-pro-rata basis through Dutch auctions and in the open market. Term loans purchased by or transferred to CPI must be canceled immediately, and term loans held by other affiliated lenders are not counted in any majority lender consent threshold.
CPI announced June 13 the appointment of John Lowe as CFO effective in July, noting that “Mr. Lowe brings over 15 years of executive finance and accounting experience to CPI including most recently serving as CFO of SquareTwo Financial Corporation.” Lowe was SquareTwo’s CFO during its bankruptcy proceedings, which concluded last year with the prepackaged plan going effective June 15, 2017.
The company and Parallel49 did not respond to requests for comment. Lazard declined to comment.
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