Tue 04/19/2022 11:36 AM
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Cupa Primary Preview from Reorg's EMEA Core Credit Team.

Cupa is the clear market leader in the European slate roofing segment, where it has a commanding share of both the premium slate market and the supply of high-quality slate. While volumes have been largely stagnant and are unlikely to pick up, the group benefits from a high level of recurring sales and the ability to push through price increases, generating strong interest in its €480 million seven-year sustainability-linked term loan B, sources told Reorg.

The term loan backs Brookfield Asset Management’s buyout of the group for €835 million, which is 8.35x the group’s 2021 pro forma EBITDA of €100 million. As part of the deal, the sponsor and management are contributing about €345 million of equity, which represents 42% of the pro forma net capitalization and leaves the group 4.8x net levered post-transaction.

The term loan is subject to a +/- 7.5 bps annual ESG-linked ratchet, tested by reference to compliance with certain KPIs. The financing includes a €100 million 6.5-year RCF and Cupa will have €25 million of cash on balance sheet at close.

Cupa comprises three divisions. Its core division Cupa Slate consists of the vertically integrated premium slate business and accounts for 72% of total 2021 adjusted EBITDA. Burtons Roofing is a U.K. roofing distributor, accounting for 19% of adjusted EBITDA, while Cupa Stone is a European natural stone distributor and accounts for 6% of adjusted EBITDA.

The group generated €415 million of revenue in 2021 with a 24% EBITDA margin. The U.K. accounted for 41% of EBITDA, France 31%, Germany 7%, Belgium and Spain 5% each, the U.S. 2% and the rest of the world 8%. Cupa has a commanding 47% global share in premium roofing slate, and a 22% share in U.K. roofing distribution.

While natural slate roofing has several advantages over competing products such as clay, concrete or cement tiles - including much better insulation, a longer lifespan and a far more environmentally friendly production process - it is also typically twice the cost of alternatives. This means that it only has a low share of the new build market, which accounts for 23% of earnings, while renovations account for 77%, sources noted.

The group’s position in the renovations segment is protected by strict regulations stipulating the use of slate in around 80% of renovations, while aesthetics and high switching costs mean that 98% of customers with slate roofs stick to the material. That provides Cupa with a high degree of revenue visibility, sources said. The group may also benefit from increasing regulation, with France implementing new rules this year limiting the life cycles of building materials with the requirement of reducing material and construction emissions by 30%.

Crucially, Cupa is vertically integrated and benefits from control over 60% of global premium slate reserves through 20 quarries in Spain, with more than 75 years of reserve life and no concession renewal risk, underpinning its dominance of the market, sources noted. There is also little risk from imports, as the quality of Brazilian and Chinese slate is inferior, and Canadian slate is too expensive to ship, one source added.

Given the relatively straightforward process of mining slate, the group is less exposed to the surge in raw material inflation affecting most industries at the moment, with fuel and energy accounting for just 15% of Cupa’s input costs, sources said. Clay and concrete tile producers are pushing through double-digit price increases, leaving Cupa in a strong position to enact further price increases as well and providing scope for EBITDA growth, sources noted. However, the Burton Roofing distribution business outperformed during 2021 as general supply shortages in the sector drove up margins, which could normalize again, resulting in some EBITDA reversal, one source cautioned.

Initial price talk for the B2/B rated term loan was in the range of 98 to 98.5 with a Euribor+475 bps margin, which was in line with recent deals like Element Materials and the euro tranches on the recent crossborder deals, the sources noted. However, the leads have tightened price talk to E+450 bps and a 98.5 OID earlier today, and updated the documentation.

Given that Cupa is still a relatively small company, investors deserve some premium for that, one source added.

The issuance will have an ESG-linked margin ratchet, as reported.

Commitments are due tomorrow, April 20, at noon London time.

EMEA Covenants has reviewed the documentation for Cupa. To see the covenant analysis or to talk to one of our legal analysts, click HERE. You can get access to this analysis if you have a copy of the term sheet or the facilities agreement.

Cupa’s capital structure is below:
















































































































































Cupa


04/14/2022

EBITDA Multiple

(EUR in Millions)

Amount

Price

Mkt. Val.

Maturity

Rate

Yield

Book

Market


€100M RCF

-


-

2028



Sustainability-linked Term Loan B

480.0


480.0

2028



Other Debt 1

21.0


21.0




Total Total Debt

501.0

501.0

5.0x

5.0x

Total Debt

501.0

501.0

5.0x

5.0x

Less: Cash and Equivalents

(25.0)

(25.0)

Net Debt

476.0

476.0

4.8x

4.8x

Operating Metrics

LTM Revenue

415.0

LTM Reported EBITDA

100.0


Liquidity

RCF Commitments

100.0

Plus: Cash and Equivalents

25.0

Total Liquidity

125.0

Credit Metrics

Gross Leverage

5.0x

Net Leverage

4.8x

Notes:
Based on 2021 Pro Forma EBITDA and Revenues
1. Includes €17M of recourse factoring and €4M of leases



– Robert Schach
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