Debt refinancing is all the rage. The global financial crisis has hit some industries harder than others, and asking for some relief from lenders can become the only option. In recent months, both Blue Star and Geon have revealed financial restructures. But the printing industry is far from alone.
According to property consultants DTZ, Australian property companies will face a debt funding gap of more than US$500m over the next three years. With housing prices stagnating and building approvals down, the property sector will struggle. Last year, Centro Properties Group announced it would refinance and extend the debt of its US business. Now the group has been targeted by the Australian Securities and Investments Commission. ASIC has launched a case against the 2007 board and senior executives of Centro Properties Group, alleging they should have known the company accounts were incorrect. The investigation surrounds $2 billion in debt that Centro and its listed spin-off, Centro Retail Trust, are accused of failing to appropriately classify as current liabilities in 2007 accounts.
Then there’s Colorado, which put up a refinancing plan that included a partial debt-for-equity swap, aimed to keep the retail group afloat. Lenders rejected it and at the end of March, tipped the group into receivership. Colorado, bought by private equity group Affinity Equity Partners in 2006 for $430m, had about 430 stores in Australia and New Zealand.
Last year, Red Group, the private equity owner of Borders, Angus & Robertson and Whitcoulls, announced a refinancing deal. The deal was backed by Bank of Scotland International and new financier Fortress Investment Group. But it wasn’t enough to save it and the group was placed in administration this year.
Bankers and financial experts say that the problem with restructuring deals is that the company is already starting on the back foot. Turnarounds are very difficult to achieve.
Mike Branson, who runs debt advisory at PricewaterhouseCoopers, says part of the problem is that many companies fail to tackle problems ahead of time, expecting they will fix themselves. It is like someone who comes down with a bad cough, refuses to take medicine and ends up in hospital with pneumonia, he says.
Boom years
During the boom years up to 2007, banks were pushing out loans to companies and private equity. It was good business for the banks, which were collecting fees. “There was an element of financiers pushing deals onto clients that were not really sustainable,” adds Branson.
“Everybody was looking at the blue sky and thinking the glass was half full rather than half empty. In the private equity world, it was all done on the basis of ‘here is our growth rate year-on-year and let’s extrapolate from that’. They didn’t take into account the ‘what ifs’.
“Then they all went through problems because they were geared to the gunnels and they weren’t getting the cash flows they were anticipating,” he adds.
The key is to act early. “If borrowers push it too long and too late, they are forced into something more significant. If they had taken some pre-emptive action, they might have preserved some value. It’s then a bit like playing double up catch up.
“What banks generally don’t like is surprises and they don’t like things being left to the last minute. Also, if you leave it longer it may trigger events that cause processes in the bank to be enacted. So it gets taken away from the relationship manager and sent to the ‘bad bank area’ where there is no relationship and where it’s like triage in a waiting room.”
Ideally, companies should sit down with the banks before there is any prospect of refinancing and work out how all the parties can sort through the issues, he says.
Blue Star’s refinancing deal involved bondholders whose debt is subordinated to the banks (in other words, the banks get their money first). But then, the bondholders did not have much choice. Blue Star owes $150m to senior lenders. Its earnings before interest, depreciation and amortisation (EBITDA) for the six months to December 2010 was $25.3m. You don’t have to be a financial genius to see that this leaves lenders totally exposed if things were to go wrong. The bank might get its money back but the bondholders and equity owners would lose everything.
Under the deal, the senior lenders approved an extension of their finance from 2012 for a further three years through to February 2015. That was dependent on owner Champ Private Equity tipping in more cash.
The company’s group managing director, Chris Mitchell, tells ProPrint that Blue Star has three forms of funding: senior debt (provided by big banks), bonds (provided by bondholders) and (shareholder funds provided predominantly by funds managed by Champ).
Much depends on how much momentum Blue Star can generate from new business. On the plus side, it s web division, Webstar, has won ACP’s New Zealand magazine work, previously produced by APN and PMP. The deal should substantially boost its revenues – though Mitchell wouldn’t reveal what the sums involved. Blue Star has also snatched the multimillion-dollar Tabcorp contract from Moore Australasia, which effectively bolstered one struggling company while pushing another closer to the edge.
Mitchell points out that there is plenty of upside, and that the refinancing deal has given it some breathing space. “Blue Star is repositioning to take advantage of new opportunities and align the business with the changing needs of our customers,” Mitchell says. “We continue to invest in the business where there are compelling investment opportunities, such as the new print facility in Auckland to accommodate the ACP contract, which will shortly be fully operational.”
Still, the question remains how much cash Blue Star shareholders are prepared to keep putting in.
Geon’s turnaround
Geon announced a financial restructure in February. The most significant element is a reduction in the loan facility from $243.7m to $80m. Geon had a debt package of A$243.5m and NZ$41.2m on 9 November 2009, with a maturity date of May 2013. This date has now been extended to 30 June 2015 with the debt itself due in one lump sum on that day.
Significantly, the package also includes a “cash sweep” condition, which will see a percentage of Geon’s free cash flow above the minimum operating cash balance going to servicing the debt. The deal with its lenders, Bank of Scotland Interna-tional, extends the loan to June 2015. The company has also been given a reprieve on its interest payments until June next year. Until then, it is paying interest on a “pay if you can” basis. It has also been given an additional working capital facility of $12m. And there is a quid pro quo for the bankers. They have an “exit participation deed” which allow them a share of the profits if the company is sold.
Geon’s story is one of private equity-driven growth.
The company, born out of Pacific Print Group, was tipped for a sharemarket float in 2005, but was sold instead to Gresham Private Equity, part of the Wesfarmers Group. Gresham initially bought a half-share in the company, in a deal valuing the firm at $220m, and later moved to full ownership. Since then, the company pursued aggressive growth, particularly in Australia. It changed its name to Geon in 2007, and last May shifted its headquarters from New Zealand to Australia. It is the largest sheetfed printer in the region but remains burdened by the mountain of debt created in the consolidation days.
In February, as the private company’s 09/10 full-year results were published on ASIC, Geon chief financial officer Ashley Fenton told ProPrint that the arrangements had given company more headroom. “Clearly a reduced debt obligation helps in terms of a lowered interest burden on the business, which will assist in the bottom-line profits going forward,” he said.
While Fenton stresses that “Geon is enjoying revenue and EBITDA growth showing strong improvement from last year’s trading results”, the accounts of both Geon and Blue Star show how precariously the companies were placed. At the end of June last year, Geon had negative equity of $216m, and a note from its auditors stated there was “material uncertainty” as to whether the company would be able to continue as a going concern. Receipts from customers were $220.4m, which was $1.6m lower than the $222m it paid out to suppliers and employees over the year. This means one thing – Geon was losing money.
Blue Star’s EBITDA for the six months to 31 December 2010 was up 3.3% to NZ$25.3m. While this is a positive, the worrying part is the decline in sales. The group reported revenues of NZ$293.3m ($216.1m), a 0.8% year-on-year fall.
Private equity
The deals also tell us something about the prospects of its two private equity owners. With offices in Australia, New Zealand, Singapore and New York, Champ is regarded as a leader in global private equity. Printing is only one troubled sector it is trying to revive. Last December, it bought the British and Australian businesses of the world’s largest wine company, Constellation. Like print, the wine industry was hit hard by the GFC. Meanwhile, Gresham recorded a net loss of $28m for the half year to 31 December 2010, according to Wesfarmers accounts.
David Williams, managing director of investment bank Kidder Williams, says these kinds of restructuring deals might buy companies some time, but not much else. They are up against it because they are in the sheetfed end of the market, with its massive competition. Acquisition sprees in the sheetfed world were always going to be problematic because of the industry’s economics. With the debt levels attached to the industry, they were always going to fail from my perspective.”
He says the companies were clearly in breach of their banking covenants so the bankers, bond holders and private equity owners would have been nervous. “They would hate doing it,” he says.
“They might say ‘we might stay in place and let you live for another day’ and they may well turn this thing around to the extent that it can make its covenants. So we will let you live for another day, mainly because our arses are hanging out the window, but we want you to pay off some of the core debt.”
He says it is close to impossible for aggregators to see returns from consolidation in the sheetfed sector.
“Just about every suburb in the country has their sheetfed mum-and-dad type business with equipment that lasts 100 years. Even when you roll them up, you just can’t get the economies of the scale and you can’t get the small end of the
market out of it. When you talk about aggregation, you have literally thousands of these businesses to aggregate but every time you aggregate one, it opens the door for somebody else.
“[A customer] could go to Blue Star but you are more likely to go to some guy in the local neighbourhood who has equipment that has depreciated over many years. He is just a mum-and-dad operator making a nice living.
“It was always difficult to aggregate the sheetfed industry because there are so many around. And with technology and all the small print shops popping everywhere, you’re always going to have margin limitation and if you have margin limitation, you can’t take on too much debt.”
But what of the superior machinery that Geon and Blue Star would be bringing in? High-end kit should cut costs thanks to higher automation and fewer staff.
Forget the technology. Williams says the big groups have to compete with operators who are still managing to make a decent living. “The local guy in the suburbs has been in the business for 30 years. He bought his equipment secondhand when it was already 20 years old.”
PwC’s Branson says a refinancing package does not have to be extreme. Some have worked quite well and achieved significant turnarounds. But that depends on the management and state of the industry.
“Restructures can be dressed up as all sorts of things. You might just change the financing envelope and put it into something more fit for purpose. It could be that as a consequence of the restructure, equity has to take a haircut or maybe there is a debt-for-equity swap and debt takes a haircut,” he says.
He says there are cases where the banks would look carefully at a printing business and see whether it can continue.
“There may not be a lot of growth but at least things are ticking over, it’s spitting cash out and paying down debt. The alternative is ‘I get nothing’. What are you going to get for a secondhand printing press? If it’s spitting out cash and paying down a little bit of debt, as long as it’s meeting its overheads, that might be a better outcome than turning the lights out.”
But he says smaller SMEs would have difficulty getting refinancing deals, particularly when their house is already mortgaged for the business and other assets are in hock. “Their ability to get private equity in is limited and getting friends and family in is more challenging,” he says.
Branson says that with all roll-ups, it will always come down to one question: what’s the business actually worth? “The question is what is the enterprise value, what is the ability to generate income?”
The answers will determine whether or not the banks and lenders will let the
business live to fight another day with a refinancing package.
Case study: refinancing
Goodman Fielder
From 2009-10, the food group behind brands like Wonder White, White Wings and Meadow Lea refinanced debt of more than $1bn and maintained borrowing facilities of $1.4bn. It successfully extended its debt maturity profile from 1.6 to 4.3 years, lowered its bank debt funding from 100% to 60% and locked in fixed interest rates for repayments over a six-month period.
Pacific Brands
The clothing and homewares giant this year came out in the black after going through a painful debt restructuring process. It closed 10 manufacturing facilities and discontinued or divested under-performing businesses. Brands were reduced from 300 to 100 and debt fell from $811m to $313m. Net debt owing to HSBC Group and Australia’s big four banks was reduced by 39% to $452.8m thanks largely to a deeply discounted equity rights issue that raised $256m in May 2009.
Red Group Retail
In July 2010, the owner of Borders, Angus & Robertson and Whitcoulls warned it was likely to breach its covenants. After talks with financiers, it gained a waiver for the breaches and went on to post a full-year loss of $43m, which was attributed to completing the integration of Borders and inventory write-downs on CDs and DVDs. Refinancing was completed in August, with Bank of Scotland Interna-tional joined by Fortress International in funding senior debt and the December redemption of its $36m of NZX-listed retail notes. None of this helped. In February, the company collapsed.
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