Trafigura ups Nyrstar stake ahead of looming refinancing
16 September 2015 London
Image: Shutterstock
Oil trader Trafigura upped its stake in Belgium miner Nyrstar [EBR:NYR] to 20.02% on 2 September through its subsidiary Urion Holdings. The latest purchase (View) comes just shy of a year after Trafigura first appeared on the shareholder register. But with a looming maturity at Nyrstar, Trafigura could be in a position to call the shots.
Nyrstar has a EUR 415m, 5.375% bond (View) due May 2016. Refinancing through the high yield bond market may be untenable for a struggling commodity-exposed European company in a potentially rising global interest rate environment. The company refinanced part of its debt in September last year with a EUR 350m, 8.5% 2019 bond, which is currently yielding 10.5% (View).
Refinancing the 2016 bond will increase the company's EUR 87m in annual interest costs. Its trailing free cash flow was EUR 51m and has been declining fast over the last three years. There may not be much headroom for further cash outflows.
The predicament may be exacerbated by Nyrstar's debt covenant. Broker ABN Amro believes more impairments could be ahead, affecting the company's gearing ratio (net debt/equity) by reducing equity. Nyrstar doesn’t disclose its actual covenant level, but ABN estimates impairments “could lead to a covenant breach.” This means that even if Nyrstar could access more debt, it may not be able to without renegotiating its covenants.
Nyrstar would not comment to us on its refinancing plans or covenant pressure. Dealreporter’s view is that a possible financing package could include a convertible. A year ago the zinc miner undertook a EUR 250m rights issue (View) as part of wider refinancing. Nyrstar already has a 4.25%, EUR 125m 2018 convertible with a EUR 3.71 strike, trading at 90.35 (View). The stock, meanwhile, is trading at EUR 2.25. A convertible to cover the full maturity would be eye-watering given that Nyrstar’s market cap is only EUR 800m.
A hybrid convertible, which may qualify for 50% equity accounting, could be another option. But hybrid debt usually costs more than standard convertibles because it is further down the waterfall, thereby intensifying pressure on cash flows. An equity raise is another option and has the benefit of unambiguously improving its gearing ratio. Nyrstar’s credit rating is B- stable/B3 stable.
Trafigura’s latest purchase, two months after Nyrstar hired Bill Scotting as its new CEO (View), may be opportune. Nyrstar will need funds in the coming months and Trafigura could be well placed to dictate how capital is raised and on what terms. All the better for Trafigura if it plans to increase its holding in Nyrstar.
Activist takes stake in Fenner
On 2 September, activist fund RWC Partners increased its stake in UK industrial outfit Fenner [LON:FENR] to above the 3% disclosable threshold. The shareholder increased its stake from 2.88% to 3.24% (View). RWC followed this up with another rise to 4.81% (View) on 8 September.
RWC manages long-only as well as long-short funds. The funds invested in Fenner are the Specialist UK Focus Fund and European Focus Fund, both of which have an activist mandate. RWC’s philosophy is very much a European style of constructive partnership with management to initiate behind-the-scenes catalysts. This is opposed to the more renowned US-style of aggressive public campaigns pitting the activist against company management.
Fenner manufactures conveyor belting for industrials, mining and power generation businesses. Its client roster includes some of the world’s biggest companies but the decline in demand from hydraulic fracturing (fracking) has hurt the company – yet another casualty of the crash in oil prices. Its market cap has dwindled from over GBP 900m in January 2014 to GBP 330m.
What ideas could RWC have up its sleeve? Fenner’s industrial and medical businesses are performing well, and a solution may lie in pivoting the company more towards its growing operations and cut exposure to energy either through disposals or downsizing – a spin-off is unlikely to have the size or ability to stand on its own.
Another more drastic solution is to sell the company. This wouldn’t be wildly unrealistic. Fenner has been tipped as a target on a number of previous occasions, including in 2010 where it was reportedly linked to Melrose [LON:MRO]. The same rumour may re-emerge seeing that Melrose is flush with cash after selling Elster and seeking its next deal (View).
Fenner has an 86% freefloat and its biggest shareholders are all institutional.
Parvus ups William Hill stake amid sector shake-up
Parvus Asset Management, the hedge fund that was spun out of activist TCI, has increased its exposure to William Hill (WMH) [LON:WMH]. The timing is the most intriguing aspect, coming on the back of a wave of consolidation among its betting peers. The Flash has some insight into William Hill’s outlook on the M&A developments.
Dealreporter spoke to a source familiar with William Hill who gave the impression that WMH is in no hurry to jump into a rash deal. Recall that WMH posted an offer for 888 [LON:888] in February and was rebuffed. Since then, 888 lost out to GVC [LON:GVC] in its attempt to buy Bwin.party [LON:BPTY], so could it be a target again for WMH?
The source’s view is that WMH is unlikely to revisit 888 because nothing has really changed since its last approach – Avi Shaked, the 24% shareholder in 888 who reportedly insisted on a higher offer, is still entrenched. BetFred was highlighted in the press as another potential target but the source was clear that WMH wasn’t considering the deal. The source said WMH has enough scale that it doesn’t need to make a big move to stay relevant. Instead, WMH will watch the UK Competition Markets Authority’s (CMA) review of Ladbrokes/Gala Coral closely and may pick up some divested assets selectively. William Hill was not immediately available for comment.
This patient, non-reactive attitude from WMH may be the reason for Parvus’ confidence in WMH in light of the recent industry shake-up. Parvus upped its stake by around 1.6m shares to take its holding to 11.1% (View). The holding is entirely held via an equity swap.
Parvus was founded by former TCI managers in 2006, and seeded by TCI. In contrast to TCI’s activist approach, Parvus appears to be more focussed on long-short opportunities.
The above is an extract from Dealreporter’s Europe Flash, which is published twice weekly on Dealreporter (www.dealreporter.com). The Europe Flash combines proprietary insights and commentary with raw data from stock exchange flings, transcripts, analyst reports and news stories, producing short and long-term actionable pre-event ideas.
Nyrstar has a EUR 415m, 5.375% bond (View) due May 2016. Refinancing through the high yield bond market may be untenable for a struggling commodity-exposed European company in a potentially rising global interest rate environment. The company refinanced part of its debt in September last year with a EUR 350m, 8.5% 2019 bond, which is currently yielding 10.5% (View).
Refinancing the 2016 bond will increase the company's EUR 87m in annual interest costs. Its trailing free cash flow was EUR 51m and has been declining fast over the last three years. There may not be much headroom for further cash outflows.
The predicament may be exacerbated by Nyrstar's debt covenant. Broker ABN Amro believes more impairments could be ahead, affecting the company's gearing ratio (net debt/equity) by reducing equity. Nyrstar doesn’t disclose its actual covenant level, but ABN estimates impairments “could lead to a covenant breach.” This means that even if Nyrstar could access more debt, it may not be able to without renegotiating its covenants.
Nyrstar would not comment to us on its refinancing plans or covenant pressure. Dealreporter’s view is that a possible financing package could include a convertible. A year ago the zinc miner undertook a EUR 250m rights issue (View) as part of wider refinancing. Nyrstar already has a 4.25%, EUR 125m 2018 convertible with a EUR 3.71 strike, trading at 90.35 (View). The stock, meanwhile, is trading at EUR 2.25. A convertible to cover the full maturity would be eye-watering given that Nyrstar’s market cap is only EUR 800m.
A hybrid convertible, which may qualify for 50% equity accounting, could be another option. But hybrid debt usually costs more than standard convertibles because it is further down the waterfall, thereby intensifying pressure on cash flows. An equity raise is another option and has the benefit of unambiguously improving its gearing ratio. Nyrstar’s credit rating is B- stable/B3 stable.
Trafigura’s latest purchase, two months after Nyrstar hired Bill Scotting as its new CEO (View), may be opportune. Nyrstar will need funds in the coming months and Trafigura could be well placed to dictate how capital is raised and on what terms. All the better for Trafigura if it plans to increase its holding in Nyrstar.
Activist takes stake in Fenner
On 2 September, activist fund RWC Partners increased its stake in UK industrial outfit Fenner [LON:FENR] to above the 3% disclosable threshold. The shareholder increased its stake from 2.88% to 3.24% (View). RWC followed this up with another rise to 4.81% (View) on 8 September.
RWC manages long-only as well as long-short funds. The funds invested in Fenner are the Specialist UK Focus Fund and European Focus Fund, both of which have an activist mandate. RWC’s philosophy is very much a European style of constructive partnership with management to initiate behind-the-scenes catalysts. This is opposed to the more renowned US-style of aggressive public campaigns pitting the activist against company management.
Fenner manufactures conveyor belting for industrials, mining and power generation businesses. Its client roster includes some of the world’s biggest companies but the decline in demand from hydraulic fracturing (fracking) has hurt the company – yet another casualty of the crash in oil prices. Its market cap has dwindled from over GBP 900m in January 2014 to GBP 330m.
What ideas could RWC have up its sleeve? Fenner’s industrial and medical businesses are performing well, and a solution may lie in pivoting the company more towards its growing operations and cut exposure to energy either through disposals or downsizing – a spin-off is unlikely to have the size or ability to stand on its own.
Another more drastic solution is to sell the company. This wouldn’t be wildly unrealistic. Fenner has been tipped as a target on a number of previous occasions, including in 2010 where it was reportedly linked to Melrose [LON:MRO]. The same rumour may re-emerge seeing that Melrose is flush with cash after selling Elster and seeking its next deal (View).
Fenner has an 86% freefloat and its biggest shareholders are all institutional.
Parvus ups William Hill stake amid sector shake-up
Parvus Asset Management, the hedge fund that was spun out of activist TCI, has increased its exposure to William Hill (WMH) [LON:WMH]. The timing is the most intriguing aspect, coming on the back of a wave of consolidation among its betting peers. The Flash has some insight into William Hill’s outlook on the M&A developments.
Dealreporter spoke to a source familiar with William Hill who gave the impression that WMH is in no hurry to jump into a rash deal. Recall that WMH posted an offer for 888 [LON:888] in February and was rebuffed. Since then, 888 lost out to GVC [LON:GVC] in its attempt to buy Bwin.party [LON:BPTY], so could it be a target again for WMH?
The source’s view is that WMH is unlikely to revisit 888 because nothing has really changed since its last approach – Avi Shaked, the 24% shareholder in 888 who reportedly insisted on a higher offer, is still entrenched. BetFred was highlighted in the press as another potential target but the source was clear that WMH wasn’t considering the deal. The source said WMH has enough scale that it doesn’t need to make a big move to stay relevant. Instead, WMH will watch the UK Competition Markets Authority’s (CMA) review of Ladbrokes/Gala Coral closely and may pick up some divested assets selectively. William Hill was not immediately available for comment.
This patient, non-reactive attitude from WMH may be the reason for Parvus’ confidence in WMH in light of the recent industry shake-up. Parvus upped its stake by around 1.6m shares to take its holding to 11.1% (View). The holding is entirely held via an equity swap.
Parvus was founded by former TCI managers in 2006, and seeded by TCI. In contrast to TCI’s activist approach, Parvus appears to be more focussed on long-short opportunities.
The above is an extract from Dealreporter’s Europe Flash, which is published twice weekly on Dealreporter (www.dealreporter.com). The Europe Flash combines proprietary insights and commentary with raw data from stock exchange flings, transcripts, analyst reports and news stories, producing short and long-term actionable pre-event ideas.
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