New Coverage: Investors Monitoring Adler Pelzer Bonds After S&P Downgrade; Focus on €100M Liquidity at April-End, Automotive Market Downturn, State Support; 2024 Notes at 42

Relevant Documents:
April 27 Release
2018 Report
Q3 2019 Report
Bond OM
Adler Plastic 2018 Report
FSI Purchase Release

Investors are looking closely at German auto-supplier Adler Pelzer after S&P downgraded the company and its senior secured bonds to CCC+ on tough market conditions and liquidity risk, sources familiar with the matter told Reorg.

The company, which designs and manufactures acoustic and thermal components for the automotive sector, should be able to cover its cash needs in the next year despite facing tough market conditions and significant uncertainties regarding the auto-market recovery, sources told Reorg.

According to the European Automobile Manufacturers Association, or ACEA, registrations of new passenger cars in the European Union dropped 76.3% year over year in April 2020, the biggest monthly drop in car demand since records began. From January to April 2020, the European demand for new passenger cars fell by 38.5%.

Adler Pelzer’s €350 million 2024 bonds are stable at 42, sources said. At the end of February, the notes were quoted at around 90.

About 28% of the company’s equity is held by state-backed private equity fund Fondo Strategico Italiano, or FSI, which is majority-owned by Italian state lender Cassa Depositi e Prestiti. FSI acquired a 28% stake in the company in April 2018 for €45 million, and invested an extra €31 million for a capital increase, according to holding company Adler Plastic’s 2018 report. The remaining equity is held by Adler Plastic, which is owned by the Scudieri family. According to the terms of the deal, FSI may invest up to a total of €200 million in order to further strengthen the competitive position of the group.

FSI’s strategy at that time was to implement a series of acquisitions and eventually IPO the business, sources close said. Based on an enterprise value of about €591 million as at the end of March 2018, FSI valued the company at around 4.4x EBITDA at the time, according to Reorg’s calculations. This is calculated as follows: (€322.9 net debt at March 31, 2018 + €268 implied equity value) divided by LTM EBITDA to March 31, 2018 of €134 million.

FSI previously implemented a capital increase in Italian biopharmaceutical company Kedrion, of which it was a minority shareholder, in November 2019, as reported.

As a consequence of the global economic downturn, S&P forecasts an 18% to 20% drop of Adler’s topline in 2020, with EBITDA falling 40% and a free operating cash outflow of €10 million to €30 million. The agency said the group’s leverage should be between 6.8x and 7.3x in 2020.

On the other hand, holding company Adler Plastic has obtained commitments for up to €40 million of additional bank lines, which would be available to support Adler Pelzer. These lines are guaranteed by the Italian government as part of the measures outlined in its liquidity decree in April and could be used by Adler Pelzer if necessary, possibly in the form of a shareholder loan, sources close told Reorg.

Adler Pelzer is also trying to obtain up to €70 million of facilities guaranteed by the German government through its development bank KfW to further bolster its liquidity. These credit lines would be 80% state-guaranteed and provided by two different banks. The company aims to receive the money between the end of May and the beginning of June, sources close said.

S&P said in its report that Adler had about €100 million of accessible cash at April 30, 2020. “Together with our forecast about €20 million-€30 million of funds from operations (FFO), and the new funding from the parent company, this sufficiently covers our estimated liquidity uses of about €25 million of maintenance capex, €15 million-€25 million of short-term debt maturities, and potential peak intra year working capital needs of up to €50 million in the next 12 months,” the agency added.

At the end of the third quarter, the company had cash and cash equivalents of €114.9 million, according to its third-quarter presentation. At the end of 2019, the group’s liquidity improved compared with the third quarter, sources said.

Adler Pelzer's capital structure is below:
 
On April 27, Adler Pelzer delayed the publication of its full-year 2019 results and said they were expected to be released around June 30. The postponement was due the Covid-19 outbreak, which caused 62 out of the company’s 67 plants to temporarily close. At the end of April, the group said some of its plants had already restarted operations.

At the time of its announcement, the company expected a 15% reduction in first-quarter revenue compared with the same quarter the previous year, and an EBITDA margin in line with the same quarter the previous year due to a series of cost-cutting measures. The group defined its liquidity situation as “adequate.”

According to the company’s third-quarter presentation, the latest available, sales during the first nine months of 2019 dropped 2% year over year to €1.1 billion, with a strong decrease (14.2%) in Asia. EBITDA fell 19.2% year over year to €78.1 million.
Net debt for the first nine months of 2019 was €351.3 million, an increase of €11.6 million compared with 2018 due to changes in the group’s cash position driven by intermediary working capital changes. Leverage amounted to 3.1x compared with 2.6x as at the end of 2018.

Over the first nine months of the year, cash flow from operations increased to €51.3 million from €23.6 million one year earlier.

-- Luca Rossi