New Coverage: Investment Funds Short Kudelski Group CHF Bonds Ahead of August 2022 Maturities; Company Confident Regarding Continued Positive Cash Generation

Relevant Documents:
2020 Annual Report
2020 Financial Statement

Some investment funds are shorting the bonds of the Swiss digital security products provider Kudelski Group as they believe the publicly listed company may struggle to refinance its 200 million Swiss franc notes maturing in August 2022, sources told Reorg. Continue reading for our EMEA Core Credit team's reporting on Kudelski Group and request a trial for access to our coverage of thousands of other high-yield, stressed, and distressed debt situations as well as access to the linked documents.

As of Dec. 31, 2020, Kudelski had cash and cash equivalents of $152.6 million. In 2020, the company delivered EBITDA of $64.3 million, up 58.5% year over year, and generated $132.6 million cash flow from operating activities, up from $34.2 million a year earlier.

The cash generation of the group was mainly due to a $92.4 million working capital contribution. In particular, the group generated $64.8 million of cash flow from the reduction of accounts receivable and contract assets. Capital expenditure amounted to $10.7 million while lease payments consumed additional $16.7 million and non-controlling interest dividends $10.2 million.

The company told Reorg that it anticipates continued positive cash generation as the primary means to address its 2022 notes, highlighting that it can also count on undrawn facilities to boost its liquidity. It added that it has no plans to approach equity markets to address the maturity. The group added that cash generation was currently “in line with expectations” for 2021.

In its 2020 annual report, Kedelski said there was a risk the group “may not generate enough cash to repay such debt and may not be able to raise sufficient funds to refinance such debt.”

Kudelski has $48.2 million in outstanding short-term debt and $439.2 million in long-term debt, including the CHF 200 million bond maturing on Aug. 12, 2022, and a CHF 150 million bond maturing on Sept. 27, 2024.

The CHF 150 million bond is quoted at 85 and the CHF 200 million bond at 97, according to sources. The group’s stock price - currently at CHF 4.03 per share - rose considerably to CHF 5.18 by Jan. 25 from CHF 3.84 on Jan. 20 - following a business update which demonstrated better-than-expected resilience to the Covid-19 pandemic.

The 2022 CHF 200 million bond was issued in 2015 with a subscription price of 100% and an annual interest rate of 1.875%. The additional CHF 150 million bond was issued in 2016 at a subscription price of 100% with an annual interest rate of 1.5%.

Kudelski, in its 2020 annual report, said it forecasts that the uncertainty caused by the Covid-19 pandemic will extend throughout 2021. The group’s public access segment - the most vulnerable unit to Covid-19 disruption in 2020 - is anticipated to remain particularly volatile. Measures introduced in 2020 to improve profitability and cash flow generation of the segment such as tighter integration of entities controlled by control systems and parking management subsidiary SKIDATA, will continue throughout 2021, the company added.

However, the group is expecting a robust recovery in its SKIDATA customers and digital TV solutions offerings. Kudelski’s forecasts meant the group’s board of directors approved a CHF 0.10 cash distribution per bearer share, which was paid April 22. Kudelski is anticipating a year over year improvement in EBITDA across the group in 2021.

The group’s capital structure is below:

For 2020, revenue fell 10.4% year over year to $741.5 million, while net income was negative $17.9 million versus negative $38.5 million a year earlier. Group EBITDA rose 58.5% to $64.3 million in 2020, with the second half of the year predominantly responsible for the growth. Operating income increased to $16.1 million after a $15.3 million outflow in 2019.

In 2020, the group obtained $29.9 million in Covid-19 related loans which secured its liquidity for 2021 and beyond, the company said.

About 47% of the group’s revenue was generated in its digital TV segment while 40% was generated in the public access segment. Cybersecurity made up 12% of the company’s material output. The group’s public access segment, which has about 7,300 customers, has been exposed to the Covid-19 crisis and is expected to “remain volatile” throughout the pandemic, according to the company. Revenue from the segment declined 13.1% to $299.3 million in 2020, with revenue from Europe declining 7.5% to $175.8 million and Americas recording a 9.6% drop to $83.3 million. Asia and Africa revenue for the public access segment declined 36.6% to $36 million.

Digital TV produced revenue of $353.1 million in 2020, a 10.2% drop from $393.5 million the previous year, but EBITDA from the segment rose by $5.9 million to $96.9 million. The segment has been impacted by Covid-19 related restrictions on sports content and reduced television advertising revenue, according to the group. However, the group expects the segment to perform strongly in terms of revenue and profitability in 2021. Revenue from the group’s cybersecurity segment, which has around 900 customers, was flat for the year at $85.2 million.

The company’s shareholding structure is below:

Kudelski Group designs and manufactures digital security products for digital television operators and content providers, electronic voting and health cards, smart cards for e-commerce, encryption technology for digital television, software for pay-per-view and video-on-demand television, digital recorders, and ticketing and access systems. The group is headquartered in Cheseaux-sur-Lausanne, Switzerland, and Phoenix, the capital of the U.S. state of Arizona, and has offices in 32 countries.

--Thomas Baker, Luca Rossi