Sectors > Top Reports > Algeco Memo 280420

Algeco Memo 280420

Algeco. Contracted Revenue, Credit Insurance, Cost & Capex Flexibility & Liquidity Levers (Partly) Mitigate Coronavirus Damage. SSNs Well Structured With Resilient Recovery – Hold. Avoid SNs & CDS
PUBLISHED: 28 April 2020
SUBMARKET: Algeco, Top Reports, Top Reports,


Why Read?

  • Understand how Algeco’s liquidity holds up in a scenario in which Q2 20 units on rent are down 40% yoy (vs -30% during 2008/09 crisis), taking into account cost variability before and after staff furloughing, as well as key liquidity uncertainties
  • Understand which additional liquidity levers Algeco has to manage through the coronavirus downturn
  • Understand the likely contractual and behavioural run-off profiles of Algeco’s contracts in force at FY 19, taking into account Algeco’s geographic and end client revenue mix
  • Understand why Algeco’s Senior Secured Notes (SSNs) have a better security and guarantees package than the ABL (and strong outright), why SSNs priming / collateral dilution potential is limited in practice in our view and why the SSNs recovery is resilient (mostly c. 100%, hard to see < 60%) both to Algeco’s plausible range of EBITDA trajectories and the drawn amount under the ABL
  • Understand how Algeco’s Senior Notes (SNs) recovery is highly sensitive in particular to Algeco’s plausible range of EBITDA trajectories and how recovery could be in the 0-16% range (though our base case is that they are also substantially covered)

What’s New?

  • Benchmarking Algeco’s potential coronavirus-impacted decline in organic units on rent against 2008/9 and what its geographic and end client revenue mix and likely contractual and behavioural contract run-off profiles imply for Q2 and Q3 20
  • Detailed coronavirus-impacted financial projections (including liquidity) and valuation 
  • SSNs vs ABL deep structural analysis – security and guarantee package comparison; analysis of potential for SSNs priming / collateral dilution; application to SSNs (and SNs) recovery analysis and sensitivity 

Questions Answered

  • Could we see a 30% yoy or greater decline in Algeco’s organic units on rent in Q2 / Q3 20 given Algeco’s contracted revenue carried over from FY 19 and its geographic and end client revenue mix?
  • How flexible is Algeco’s cost base, before and after furloughing?
  • How much total liquidity could Algeco amass and is it enough to withstand a 30% decline in units on rent (as per 2008/9) as management claims (though does not expect)?
  • How important (for liquidity) is the shape of Algeco’s recovery in units on rent from any Q2 / Q3 20 coronavirus low point?
  • Is the EUR 103m cash at Algeco Investments 1 S.a.r.l. (outside the Restricted Group) “repayable on demand”?
  • What are the key unknowns on Algeco’s credit insurance against non-public sector clients if receivables payment deteriorates?
  • How much can Algeco’s acquisitions (Buko, Malthus, NET, Altempo and Balat) support Adj EBITDA in FY 20 and what is their potential for revenue synergies from integrating Algeco’s VAPS into their offering?
  • Would Algeco be “refinanceable” given the net leverage trajectory we project for it following the coronavirus downturn?
  • How should we think about the SSNs vs ABL security packages and what scope is there for SSNs priming / collateral dilution?
  • How sensitive is recovery on Algeco’s SSNs and SNs to the EBITDA trajectory and extent of ABL (or replacement facility) drawing? 
  • What is Algeco’s equity value – multiples and DCF approaches?
  • How much of a risk is posed by Algeco’s next borrowing base re-determination?
  • What does Algeco’s disclosure on Q1 20 liquidity and other aspects imply for Q1 20 Adj FCF going into the likely key Q2 20 period in terms of coronavirus impact?

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