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Beyond Meat: More revenue guidance cuts and cash burn – 2Q23 Credit Report


Beyond Meat (BYND) reported its 2Q23 earnings, which showed familiar themes: a 30% year-over-year (YoY) drop in revenue, a negative adjusted EBITDA of USD 41m, and a continuous decline in consumer demand in the steeply competitive market. BYND also once again cut its full-year 2023 (FY23) guidance to USD 360m-USD 380m, down from USD 375m-USD 415m in its previous quarter.

The company said that it plans to turn things around by distributing new products, marketing the health benefits of its products more heavily, and reducing prices. However, given its poor track record of meeting targets, BYND is seen as being prone to high execution risks. Confidence is extremely low that BYND will be able to achieve its goals, and there is also high uncertainty that its initiatives will materially improve the company’s performance and shift it away from its current trajectory towards more trouble.

BYND has failed to tame its high cash burn, and management has confirmed that it will not achieve its positive cash flow target in 2H23. According to our projections, we estimate that BYND will run out of liquidity by the end of 2Q24.


Competition & Valuation 

In our Comps table, the peer average NTM revenue multiples for large-cap and small-cap companies are 2.3x and 1.1x, respectively, compared to BYND’s higher multiple of 5.0x. BYND’s net leverage of 2.7x is also materially higher than the net leverage of its large-cap and small-cap companies peers (0.5x and 0.3x, respectively). We believe there is a strong downside opportunity for the company as we see it trade away from its current high multiple and towards its peers, especially Oatly, which trades at 1.2x EV/NTME.

Our waterfall valuation uses our base estimate for NTME revenue of USD 343m and EV/sales multiples of 0.1x-2.0x. We found the convertible debt has a recovery rate of 24%, 30% and 36% at the low, base and high case scenarios, respectively. Based on the same multiples, we found the equity valued at 0 compared to its current share price of 12.


Financial Performance

The company reported 2Q23 revenues of USD 102m, a 30.5% decrease YoY compared to USD 147m last year. The decline was driven by a 23.9% decrease in total pounds sold and an 8.6% decrease in net revenue per pound. All markets and channels were negatively impacted by weaker-than-expected demand for BYND category products, in particular the US retail market, which is its largest revenue stream. US retail channel net revenues decreased 38.5% YoY due to a 34.3% decrease in the volume of products sold, primarily reflecting weak category demand and the cycling of significant sell-in of Beyond Meat Jerky in the year-ago period. The 6.3% decrease in net revenue per pound was caused by higher trade discounts and changes in product sales mix, partially offset by increased pricing for certain items resulting from reduced sales to liquidation channels.

Overall US total net revenue fell by 40.1% YoY in 2Q23 to USD 61m, while total international net revenue fell by 8.7% YoY to USD 41m. The US foodservice channel experienced the largest decline, of 45.4%, primarily driven by sales to a large Quick Service Restaurant (QSR) that were not repeated and overall softer demand.

Gross profit was USD 2.3m, a 2.2% margin, from USD negative 6.2m, a negative 4.2% margin, last year. The improvement was impacted by lower materials costs, lower inventory reserves and lower logistics costs per pound. Gross profit and gross margin were partly improved because of a change in the Company’s accounting estimate associated with the estimated useful lives of its large manufacturing equipment made in 1Q23, which reduced COGS depreciation expense by approximately USD 5.1m, or 5.0 bps of gross margin, relative to depreciation expense utilizing the Company’s previous estimated useful lives.

BYND incurred a total operating loss of USD 53.8m, 55.2% margin, this quarter compared to a loss of USD 89.7m, 56.8%, in 2Q22, due to lower expenses from G&A, headcount, marketing and production trials. Total operating expenses decreased by 32% YoY and 12% sequentially to USD 56m. Adjusted EBITDA was negative USD 40.8m, or negative 40% margin in 2Q23 compared to an adjusted EBITDA loss of USD 68.8m, or negative 46.8% margin, in the year-ago period.

As for FY23, the company projects a net revenue range of USD 360m-USD 370m, a 14%-19% decrease YoY. Management also provided the following forecasts for the year:

  • Gross margin, including the positive impact of the Company’s change in accounting estimates for the useful lives of its large manufacturing equipment implemented in the first quarter of 2023, is expected to be in the mid to high single-digit range.
  • Operating expenses are expected to be USD 245m or less.
  • Capital expenditures are expected to range from USD 20m to USD 25m.


Business Overview

Beyond Meat is a plant-based meat provider founded in 2009 in El Segundo, California. The company produces meat substitutes directly from plants, an innovation that enables consumers to experience the taste and texture of meat while enjoying the nutritional benefits of eating plant-based products. The company’s distribution channels are split into two categories: Retail and Restaurant/Foodservice. Flagship products include The Beyond Burger, Beyond Sausage, Beyond Chicken Strips and Beyond Beef Crumbles. As of July 2023, BYND products were available at about 190,000 retail and foodservice outlets in over 75 countries worldwide.


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Camposol 2Q23 Credit Report – Improved present and uncertain future

Camposol’s 2Q23 conference call can be divided into two different segments: present and future. For the present, there was plenty of good news. LTM 2Q23 EBITDA was USD 72m, up from USD 65m during LTM 1Q23 as results for 2Q23 were better than 2Q22 (which was not very high to begin with) (See Figure 1). Additionally, the Peruvian agriculture producer was able to convert USD 30m in short-term debt into medium-term debt, as a sale-leaseback agreement, following the USD 48m already converted earlier in 1H23.

Although it is true that converting short-term debt into medium-term debt doesn’t mean the company will delever, it does allow for some more breathing room. Furthermore, the company mentioned it has USD 115m in uncommitted credit lines. Neither the USD 153m in working capital credit lines (USD 183m reported as of June 2023 minus the USD 30m mentioned above) nor the USD 115m in potential new credit lines have any sort of collateral attached. The USD 80m in sale-leasebacks of course has assets attached to it (See Figures 2 – 3).

The future remains uncertain, but the management aimed to calm investors, who tried to obtain specific guidance on revenues and EBITDA for the blueberry campaign. Most of the analysts that asked questions focused on the YoY comparison for 2H23. Incorrectly, in our view, the management addressed those questions as they were formulated without stressing the fact that if the production curve shifts further into the future (meaning, gets delayed), comparing 3Q22 vs 3Q23, 4Q22 vs 4Q23 or 2H22 vs 2H23 is unfair because all numbers will prove negative. As per the company’s comments, besides a drop in volume, the curve will shift, meaning many thousand tons of fruit will be sold during 1Q24.

In our opinion, the answer should have compared the entire 2023-2024 campaign of blueberries versus the 2022-2023 campaign. Although volumes will certainly be lower, it seems (again, as per the company’s comments) that when comparing the whole campaign, the decline will be smaller and higher prices can somehow offset part of the lower volumes.

Management mentioned that some varieties of blueberries (ie Biloxi) are more resistant to higher temperatures than others (ie Ventura), and that most of Camposol’s production comes from the Biloxi variety. This implies, as we understand it, that many competitors have a higher proportion of their production in the more-affected Ventura variety. We’ll have to wait and see what happens. It would be nice if volumes for Camposol dropped less than for others, and higher prices could compensate for the lower volumes.

The Peruvian company also mentioned that it saw a very small (immaterial, in their words) effect on avocados.

Financial highlights for 2Q23

Although revenues were USD 36m, down 25% YoY, adj. EBITDA was USD 6m, up from USD -2m in the same period of last year. The main drivers were a contribution from blueberries (USD 1m gross profit in 2Q23 vs USD -4m in 2Q22) and a USD 1m difference in avocados. As has been the case in the last few years, the harvesting of avocados and the sale are very different during 2Q (a lot of product, very little sales) (See Figure 4).

Compared to 2Q22, avocado prices for avocados were higher (USD 2.09/kg vs USD 2.03/kg) and costs were lower (USD 1.76/kg vs USD 1.98/kg). If sustained for 3Q23, this will improve the profitability from the meager performance in 2022.

Free cash flow was USD -12m, better than USD -28m in 2Q22, on higher EBITDA and improved working capital management. On this note, days of receivables were just nine, the lowest recorded since at least 4Q19, which means that this probably can’t be sustained, and the company will have incremental working capital needs (See Table 1).

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Braskem-Idesa 2Q23 Credit Report – It’s all down to the WC


Braskem-Idesa (BAKIDE) hasn’t set formal EBITDA guidance for FY23, and even less so for FY24. However, pressured by investor questions during the 2Q23 earnings call, management provided some rough numbers for the potential EBITDA this year and next, as well as for capex in 2024 (for 2023 there is actual guidance for the investments). Amid concerns about the company’s liquidity shown by some of the participants, executives even gave an outlook on the potential cash balance for the end of 2023 and 2024.

Therefore, with a very predictable annual debt service, no tax payments made currently, and an absence of shareholder distributions in the foreseeable future, in the end, it’s all down to the evolution of the working capital (WC) for the company to meet its liquidity outlook for this year and next.

BAKIDE reported an EBITDA of USD 40m in 2Q23, much better than the USD 26m of 1Q23 or the USD -33m of 4Q22, but still below the USD 96m posted in 2Q22, and even farther from the levels achieved prior to that. Management expects 2H23 to at least repeat the 1H23 performance, with a potential FY23 EBITDA of USD 120m-USD 150m. Meanwhile, FY24 could see an increase, with the EBITDA ranging from USD 150m-USD 200m. For our estimates, we’re going to take the middle points, at USD 135m for this year and USD 175m for the next.

As for the capex, BAKIDE has made a very important decision, postponing the first turnaround (major maintenance) of the polyethylene (PE) plant to 2025 from 2024 (to preserve liquidity, it had already postponed it previously for a full year from late 2023 to late 2024). This, along with some additional measures, is slated to slash the USD 63m budgeted operational capex for FY23 by up to 20%. Therefore, as the company already disbursed USD 34m for operational capex in 1H23, there would be USD 16m pending for 2H23. Meanwhile, USD 14m in strategic capex is left for the second half of the year (counting on a successful closing of the project financing for the new ethane import terminal by the end of 3Q23, as planned by the company). As for 2024, the total capex (strategic and operational) has been guided at USD 50m.

With all that, management indicated during the call that the cash balance could fall to USD 220m-USD 250m by year-end (down from USD 307m as of June). Here, again, we’re going to take the middle point, at USD 235m.

BAKIDE needs a minimum cash balance of USD 200m (including a USD 81m debt service reserve account, or DSRA) to operate normally. Therefore, we are calculating how the WC should evolve in the coming quarters for the cash balance to finish the year at the guided level, as well as stay above the minimum threshold at any time during 2024.

As Table 1 shows, BAKIDE can afford WC of USD -15m for each of 3Q23 and 4Q23 and still finish the year with the guided liquidity. In 2024, however, it would need to post a positive contribution of the WC to the free cash flow (FCF) of at least USD 22m to avoid falling below the USD 200m threshold.

Historically, estimating BAKIDE’s WC hasn’t been an easy task, as the contribution of the accounts receivable and accounts payable (also partially affected by the level of prices), on one hand, and inventory (production and sales volumes not always match), on the other, has been very volatile. However, we believe that those minimum required contributions of the WC included in our estimates are feasible. For instance, BAKIDE will no longer need to start building inventory up this year, thanks to the postponement of the turnaround to 2025 (the buildup needs to start a few quarters prior to the actual maintenance period).

Furthermore, the company still can make use of the existing WC facilities if needed (they’re in fact a true sale of accounts receivable, with no recourse to the company, thus removing them from the balance sheet). Obtained in 4Q22, they have a revolving nature during their two-year tenor. However, BAKIDE can only monetize the receivables at the pace it generates them, and as of June it only had some USD 25m on its balance sheet, thus somewhat limiting the size of additional deals (the initial transactions in 4Q22 amounted to a total of at least USD 89m).

The estimates, nevertheless, are also very dependent on the eventual performance of the EBITDA, which is highly affected by the PE and ethane (the main raw material) prices.


Higher production, sales offset PE spread tightening QoQ

Despite a reduction in the price of ethane, the average PE spread for BAKIDE compressed in 2Q23 to USD 800 per ton from USD 841/ton in 1Q23 due to a greater reduction in the price of PE quarter-over-quarter (QoQ). In any case, while still far from the high levels seen until mid-2022, the spread has significantly improved from 3Q22 and 4Q22 (See Figure 1).

During 2Q23, BAKIDE produced 224.6 thousand tons of PE, 20.8% up from 185.6 thousand tons the previous quarter, with the utilization rate increasing to 86% from 72% over the same period (management expects to maintain the 2Q23 level during the rest of the year). Meanwhile, PE sales stood at 211.2 thousand tons (there was some inventory buildup), increasing 8.3% QoQ from 195.1 thousand tons. The higher selling volume helped dilute the fixed costs, with the operating income margin improving to -3.3% in 2Q23 from -10.5% in 1Q23.

Looking ahead, management indicated that PE prices have been trading above USD 900/ton in August in the US (USD 1,000-plus in Asia and Europe) and that a slight increase is expected for 2H23 when compared to 1H23, with a stronger recovery in 2024.

As for the costs, ethane price is now under USD 200/ton, after spiking in July due to some maintenance works in the US, but it usually increases toward the end of the year with the Northern Hemisphere’s winter, they noted. Meanwhile, an accident at a marine platform reduced Pemex’s ethane supply by 10,000-15,000 barrels per day (bpd) during two weeks in July (the Pemex supply, which is the cheapest for BAKIDE, averaged 36,000 bpd in 2Q23).

With all that, an average EBITDA in each of 3Q23 and 4Q23 of USD 35m is feasible, which would be somewhere in between the levels recorded in 1Q23 and 2Q23.


New waiver extension will be needed

BAKIDE announced in early July a nine-month extension (originally it was for six months through the end of June) of a waiver from its creditor banks in relation to a breach of a net leverage ratio covenant. Therefore, the company won’t be forced to comply with the maintenance covenant, which limits the net debt-to-EBITDA ratio to 5.95x, until the end of 2Q24.

Still penalized by the negative EBITDA of 4Q22, it finished 2Q23 with a net leverage ratio above 40x. While the substitution of past poor EBITDA figures with somewhat improved numbers will help to gradually reduce the leverage ratio in the coming quarters (gross debt isn’t expected to change in the immediate future), we are forecasting that it will still widely exceed the covenant limit in March 2024, standing at around 12.5x (See again Table 1).

Therefore, BAKIDE will need to negotiate yet another extension in early 2024, and in that case most likely for at least 12 additional months (we’re estimating leverage still at 11.2x by the end of next year).

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Curo Group Holdings Corp – Sale of Flexiti to provide liquidity support – 2Q23 Credit Report


Curo Group Holdings Corp. (NYSE: CURO) is a non-bank lender. The company offers products and services to consumers in the US and Canada.



Recent Events

On 3 August 2023, CURO released 2Q23 results before market open. Reported revenue of USD 209.2m narrowly missed estimates for USD 209.8m. CURO also announced it has entered into an agreement to sell the Flexiti business and expects to net proceeds in the range of USD 50m to USD 60m from the sale, which is expected to close in September 2023. CURO stock traded down as much as ~12.5% in the 3 August 2023 session and is down ~9% since the release. The company’s 1.5 Lien 7 1/2s of 2028 are also up ~1.5points since the release.



CURO reported revenue of USD 209m for 2Q23, versus USD 304m for 2Q22, a decrease of 31% YoY. Direct Lending revenue was USD 167m for 2Q23, versus USD 281m for 2Q22, a decrease of ~41%.  This segment represented approximately 80% of CURO’s revenue for 2Q23. Consistent with prior period comments, management noted the YoY decline was due to a strategic shift towards a higher mix of longer-term, lower yield and lower risk products in this segment. The small yet growing Canada POS segment posted USD 42m in revenue for 2Q23, versus USD 23m in 2Q22, representing impressive ~82% YoY growth. Overall, management noted that they have not seen any “unusual consumer stress” and feel that the credit environment for their business remains stable.

Operating margin for 2Q23 was 10%, versus 5% in 2Q22. Current provisions were 38% of revenue for 2Q23, below the 43% of revenue level in the prior year period.  Salaries and benefits increased to 29% of revenue in 2Q23 from 27% in 1Q22. CURO reduced advertising spend meaningfully in 2Q23 (USD 2m versus USD 13m in the same period last year), consistent with its pivot to slower more focused growth. The company noted on the 2Q23 call that they expect marketing spend to increase into 2H23.

Adj. EBITDA for 2Q23 was USD 43m versus USD 63m for 2Q22, driven mainly by the absence of various add-backs in 2Q23.  Free cash flow for 2Q23 was USD 44m versus USD 102m in 2Q22, driven by lower receipt of fees and interest payments and flat capex spend YoY.

CURO is significantly levered. Management has set a goal to reduce leverage to the range of 5x to 6x ahead of the August 2027 Term Loan maturity. The company is also pivoting towards longer-duration, lower-rate secured products, for example, loans secured by customer vehicles which management mentioned on the 2Q23 call as forthcoming sometime in FY2023. This should be a less volatile strategy, which should provide comfort to the various lenders. CURO still needs to grow its way into its capital structure over the next several years.

Debtwire’s NTM estimates take into account recent company guidance for gross loan book growth as well our estimates for recent yield and margin trends. We have assumed 8% overall growth in the book and an annual yield of 32%, based on our analysis of CURO’s loan book. Potential drivers of upside from our estimates include higher growth in the loan book, higher yield from the loan book and lower provisions. Potential drivers of downside include lower yield from the loan book as management pivots the business to lower rate products and higher provisions if credit conditions weaken.  Note that our 32% yield is 200bps lower than our estimated 2Q23 levels and reflects our current estimate for impact from the previously mentioned strategic shift.

The following table highlights CURO’s loan book and our analysis of an estimated downside case. While credit quality appears stable based on recent results and comments on the 2Q23 call, we estimate that the company could face a USD 130m+ special provision / charge in a downside scenario, meaningful if only as this would eat up more than 60% of our estimated liquidity as of 30 June 2024, which would remain positive at an estimated USD 87m.  In this analysis we have assumed CURO’s book gets hit on all sides: (i) Charge-Offs / Originations hit 2Q20 levels (recent highs); and (ii) Recoveries / Charge Offs hit 4Q22 levels (recent lows). We are not forecasting this outcome, and instead share the analysis in order to contextualize potential risk in a downside scenario.



CURO is currently trading at an LTM EV/EBITDA multiple of 14.4x, versus a peer average of 12.1x. NTME multiple is 15.9x, versus a peer average of 9.1x. The company’s LTM EV/Revenue multiple is 5.2x versus a peer average of 4.5x. NTME multiple is 5.4x, versus a peer average of 3.4x. Total leverage is 14.6x, and Net leverage is 14.0x versus a peer average of 7.9x and 7.4x. CURO’s Total Leverage based on NTM EBITDA stands at 16.2x versus a peer average of 5.6x. Traditionally we would look to value a financial concern like CURO based on book value. This is not possible given a negative balance.

CURO’s 1.5 lien 7½% Senior Secured Notes and 2nd lien 7½% Senior Secured Notes both trade along with the equity. Based on our liquidation analysis, the 2nd lien paper remains overvalued versus recent prices. The 1.5 lien paper is potentially a more attractive trade. Based on our mid-point liquidation value of 50, current pricing suggests a potential ~47% YTM assuming a liquidation is completed on 1 August 2025. Given recovery expectations, we believe the spread between the 1.5 lien and 2nd lien should also widen, making it potentially compelling to explore a capital structure trade, especially as the two pieces of paper carry the same coupon (the trade then self finances, excluding cost to borrow the 2nd lien paper for the short leg of a trade). The Term Loan is also worth watching if it begins trading as it should be well covered even if the loan book melts down completely. CURO will likely opt for the PIK feature, at least in the near term.

CURO’s equity is also dollar cheap at recent prices (USD 1.46/share) but rich to the comparables on a multiples basis.  The equity represents a tiny sliver in CURO’s USD ~2.8bn capital stack. While it is likely worthless based on our analysis, it is a relatively better bet than the 2nd Lien paper for parties playing contrarian, as the 2nd lien paper should trade at a meaningful spread to the Term Loan and 1.5 lien facility given the most junior priority / lien status.

A high-level liquidation analysis of CURO suggests the company’s 1st Lien debt is well covered.  All else being equal, we believe the loan book (and Equity in VIEs, which is a derivative of the loan book estimate) can be marked down to zero value and the term loan is still covered. Based on our analysis and estimates, the 1.5 lien debt is meaningfully impaired, and the 2nd lien debt looks to be worthless, along with the equity.


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Avianca 2Q23 Credit Report – Change in guidance, but showing improved results

Self-inflicted concentration problem for the regulator

Avianca has desisted from trying to acquire Viva, which until a few months ago was the country’s second largest carrier (tied with LATAM). The Colombian regulator took too long to decide, Viva’s financial situation deteriorated, in March it stopped flying… and the rest is history. In addition, Ultra, an airline owned by Viva founder William Shaw, stopped flying during April.

What was the end of this story? Higher concentration in the market, which of course is very good for the surviving companies. Avianca went from 36% market share in December to 55% in June, LATAM from 17% to 24%, and Wingo from 4% to 7% in the same period. That is, the 82%-83% market share that until February was held by six carriers, is now almost held by just two (Avianca and LATAM) that together have 79% of the market share (See Figure 1).

No more USD 3.4 cents for CASK ex-fuel

During the airline’s 2Q23 conference call, management ended the dream of a CASK ex-fuel target of USD 0.034 cents by year end, and replaced it with a range of USD 0.037-USD 0.038, citing higher inflation pressures. Avianca also said that because these pressures affect the entire industry, that it won’t lose its competitive advantage versus rivals. Given the appreciation of the BRL in the last couple of months, we saw a modest deterioration in the CASK ex-fuel for Azul and Gol, and the same is the case for Volaris (who operates mainly in Mexico, and saw the MXN appreciate versus the USD).

The exception is Avianca, which has been able to improve CASK ex-fuel, although it was flat relative to 1Q23. That is, densification efforts and other recent measures were only good enough to compensate for the deterioration in other areas. Now with the new CASK ex-fuel, clearly the progress in the coming quarters is going to be slower. If Avianca can profit from its increasing dominance in the Colombian market and raise prices, there shouldn’t be many problems (See Figure 2).

Financial highlights for 2Q23: Improving

Numbers seem to be going in the right direction for Avianca. Revenues went up 9% YoY, above inflation, while CASK ex-fuel (in nominal terms) was flat in the same period. As a result, EBITDA was USD 237m, up from USD -13m in 2Q22. On the revenue side, if we separate passenger from cargo, we see an even better performance from the passenger segment. The 9% increase can be broken out between +19% for passenger and -23% for cargo. For cargo, the issue has clearly been shipping rates that must have declined significantly, as the total amount of cargo was down only 2% compared to 2Q22. The +19% increase in revenue in was mostly explained by a 17% increase in the number of passengers (See Table 1).

We calculated free cash flow to be USD 134m, on improved working capital (especially the air traffic liability line which is miles) and the higher EBITDA. As Avianca continues to increase its leasing portfolio (and probably will even more, if it picks up any planes from Viva), it added USD 93m in leasings (See Table 2).

KPIs follow-up

Avianca’s goal was to get to a CASK ex-fuel USD 0.034 cents, which now will be USD 0.037-USD 0.038. For that, Avianca needed to use its planes for more hours per day, which it is doing, getting to approximately 11 hours and 20 minutes in June (11 hours for 2Q23, on average) (See Figure 3). Additionally, it was going to have a more simplified fleet, in terms of the different types of planes it was going to have, and that number reached 4 in June when the last A319-132 left the fleet (See Table 3).

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Mega 2Q23 Credit Report – It’s simple: No new financing? No new loans (Part I)

Operadora Mega usually takes a few days until it releases its management discussion and analysis (MD&A) and holds its earnings call, but given the levels at which the company’s bond is trading, we didn’t want to wait for those before giving our initial takeaways from the 2Q23 results submitted to Mexican stock exchange BIVA. (We will publish Part II of our analysis following the earnings call).

The non-bank financial institution (NBFI) has claimed for several quarters to be on the hunt for new financing to fund its loan origination. While the decision to keep its loan portfolio steady in 2023 came as a relief (See our 4Q22 Credit Report), the company still needs to raise new funding to meet that goal.

Still, Mega hasn’t announced any new deals for a while now. The lack of new financings can also be seen in the debt breakdown included in the BIVA report (apart from the fact that the amounts in MXN of the USD-denominated liabilities have reduced thanks to the appreciation of the Mexican currency).

As such, after suffering a small reduction in 1Q23, the loan portfolio shrunk even further in 2Q23 (See Figure 1). The reason is simple – in the absence of fresh funds, Mega needs to use the cash generated from the loan collections (interest and principal) to service its debt and cover operating costs.

Mega only provides the exact number of the quarterly loan origination at the MD&A (while comments on loan collections usually arise during the earnings call), but the BIVA results also shed light on the reduction in the concession of new lending by Mega. As we have commented in previous reports, clients of the leasing business (the company’s largest segment) put upfront 20% of the market value of the asset that is subject to the lease agreement. The company records those deposits as a liability (the so-called “Sundry creditors for cash collateral received”), and the accounting entry of the respective deposits disappear from the balance sheet (in a non-cash, accounting-only action) all at once at the end of the lease agreement, when the client exercises a de facto free purchase option on the physical asset.

The balance of the sundry creditors for cash collateral received significantly dropped quarter-over-quarter (QoQ) in 2Q23 (See Figure 2). This can only mean that Mega isn’t originating enough leasing loans to replace the ones that are maturing.

NPL ratio keeps growing, but concern about overall portfolio’s health eases

The non-performing loan (NPL) ratio rose for a fifth consecutive quarter, finishing 2Q23 at 3.8%, up from 3.3% three months earlier (See Figure 3). As such, the NPL ratio has increased almost two-fold since the end of 1Q22.

However, beyond this obvious negative trend, there is another angle by which to examine the portfolio’s health, which has eased our concerns somewhat this quarter – the stage 2 segment. As we indicated in the 1Q23 Credit Report, the stage 2 includes loans that have payment delays of more than 30 days but less than 90, and therefore aren’t counted yet as non-performing, despite their deterioration.

We were worried in our previous report about the fact that the size of the stage 2 segment had ballooned compared to the end of 2022, maybe hinting at an overall deterioration of the company’s loan portfolio. Once it is categorized as stage 2, a loan can only evolve in the following ways as time passes by – be transferred to stage 1 (thanks to either a restructuring or to a partial payment that reduces the late payments to no more than 30 days), be fully repaid and thus disappear from the balance sheet, or move to stage 3 if the delays exceed the 90-day threshold and thus it becomes officially non-performing.

Although the breakdown of those movements between stages is only disclosed in the annual reports (so we are only able to see them from December-end to December-end), the BIVA report does include the balance of each of the stages. And we saw a positive change there. While the balance of the stage 3 (i.e. the NPL category) rose MXN 71m, or 12.5%, QoQ to MXN 635m (USD 37m) at the end of 2Q23 from MXN 564m as of 1Q23, the stage 2 reduced by MXN 387m over the same period, to MXN 978m from MXN 1,365m (See Figure 4).

Management told us the previous quarter that three mid-sized clients were struggling with their payments (thus increasing the stage 2 segment), but that the company was in negotiations at least with the largest one to bring it back on track with a payment schedule. Considering the 2Q23 numbers, it seems that those talks may have proved successful. Therefore, while the balance of loans with payment delays of more than 30 days but less than 90 remains well above historical levels, the improvement seen in 2Q23 is clearly a step in the right direction.


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MSU Energy Special Credit Report – Big bond, big potential return

The last two years have not brought the steep delevering that MSU Energy was hoping for, but the Argentine generator has made some progress. Net leverage has remained at 5x over the last two years, but that is because MSU paid down commercial debt. Although net debt only decreased by USD ~40m, commercial debt has been reduced from as high as USD 173m in 4Q20 to USD 26m today. The primary reasons for the slow deleveraging were capital controls, central bank restrictions, unrealized margin on gas procurement which shifted back to Cammesa and lower dispatch associated with higher diesel oil utilization.

MSU Energy had originally guided dispatch rates of 75%. It achieved this in 4Q20 and came close during 1Q21, 2Q21 and 3Q21. Since then, however, it has dropped significantly, to ~50%. Each 1pp of extra dispatch represents USD 0.6m in incremental EBITDA per year. If we add up the totals between 1Q21 and 1Q23, inclusive, we have USD 28m in incremental EBITDA the company didn’t earn.

The lower dispatch doesn’t seem to be MSU’s fault. It resulted from a combination of factors, staring with decreasing natural gas imports from Bolivia making CAMMESA allocate production to other plants. Then, high LNG prices caused higher diesel fuel utilization, and more recently, improved hydroelectric power conditions increased Argentine hydroelectric generation and made imported hydro power from Brazil more affordable.

Our expectation, now that the Vaca Muerta pipeline is close to being completed (at least the first stage, which brings the natural gas from Vaca Muerta, in Neuquen, to Buenos Aires) is that MSU’s, as well as many other plants, will be able to increase dispatch.

In addition, in a previous report, we noted the delays in payment terms by CAMMESA. The government market administrator paid the March invoice with an average term of 83 days, which is a significant improvement from the 102 days it took to pay December’s. That itself represents USD 12m less in working capital needs (See Figure 1).

With MSU’s 2025 bonds yielding over 30% at current prices of around ~70, we will later show that under “reasonable” exit yields, the upside of buying the bonds at this level and participating in an exchange is very high.

Does the company need to keep refinancing maturities in 2023? And in 2024?

If things continue as they are today, we don’t expect MSU Energy to have difficulties servicing the remaining debt maturities in 2023, that is, without the need to refinance them. On the asset side, we have USD 31m in cash as of 1Q21, and, let’s assume, nine months of EBITDA (USD ~120m being conservative), which will be used to repay USD 105m in maturities (USD 25m already paid in May), plus USD ~15m in capex, plus USD 38m in interest expense (USD 8m already paid). So, the company would be basically flat (including improvement in CAMMESA payment terms to 83 days), but if CAMMESA keeps improving its payment terms and dispatch is a little higher, maybe they can pull it off.

For 2024, there is USD 101m in maturities, USD 48m in interest expense and less than USD 10m in capex. These numbers mostly match an annual EBITDA of USD ~160m (again, bearish scenario) (See Table 1).

What to expect in an exchange?

If Argentina’s presidential elections in October-November result in an opposition win, as is widely expected, probably many companies, including MSU Energy, will be able to refinance debt maturities at better rates than today. After the final payment of the secured 2024 bonds in February 2024, the company can probably refinance the USD 600m 2025s into an amortizing 5-6 year bond (later, we’ll try to calculate how fast it could repay it) like most companies are doing. If tailwinds are strong, it could try to keep as much money as possible in case it has attractive project in its pipeline, or even get new money. Below, we present the more bearish scenario, but more benevolent outcomes include the refinancing of part or all of – or even increasing – domestic indebtedness and faster repayment of the international bonds.

MSU Energy will have a very, very tight situation in the next six quarters, with inflows matching outflows almost perfectly.

Although we expect MSU to refinance the 2025 bonds earlier, if it doesn’t, by the end of 2024 we would only have USD 600m of the 2025s and USD 160m in EBITDA (again, under a bearish scenario) for 2025, 2026 and 2027, and then EBITDA would drop to USD 110m starting in 2028, as the first 450MW of PPAs expire.

Under a pessimistic scenario where dispatch continues to be low, as it is today, in which EBITDA is USD 110m after 2027, the company would be debt-free by 2030. If we assume EBITDA levels of USD 180m through 2027 and USD 120m afterwards, MSU Energy could repay it in 2029.

As mentioned above, if domestic debt gets rolled over (entirely or in part), which has a very high probability of occurrence, there would be a cash portion in the exchange and repayment could even arrive early (ie 2028).


We calculated a simple NPV assuming a scenario of 6.875% coupons until February 2025, and then 9% until 2030 (in the bearish EBITDA scenario). The exit yield that would make the trade neutral from current trading prices (of 70) we calculated to be 19%.

In a country with improved prospects and a company with such a simple capital structure and clear prospects, however, we believe 19% is too high and it should probably trade lower. Obviously “lower” is a very ambiguous word, but if the exit yield were to be 15%, the NPV would be 80 (10 points above the current trading price), if it were 12%, we would be at 88 (~18 points above) and if it were 10%, 94. All of these are very attractive scenarios for a potential investor.


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Telesat 1Q23 results meet expectations; financing for LEO remains up in the air – Credit Report

TSAT Investor Presentation December 2021

Overview: Satellite operator Telesat (TSAT) reported 1Q23 results that met expectations with lower revenue and adjusted EBITDA, but the company still generated free cash flow, and left FY23 guidance in place. With direct-to-home (DTH) renewals occurring at lower rates, TSAT is looking at declining FY23 revenue and adjusted EBITDA from its geosynchronous (GEO) satellite services business (15 geostationary satellites), thus making the transition to low earth orbit (LEO) satellites that much more important. Currently, TSAT has been unable to secure financing of its LEO program, called Telesat Lightspeed, partially due to supply chain issues at equipment contractor Thales Alenia Space, and inflation that have raised the cost of the program leading to an expected downsized constellation from the original 298 satellites planned. This delay has placed TSAT behind companies like SpaceX, with its Starlink network of satellites, and OneWeb which already have operating LEO satellites. Even if financing is secured soon, the company would not realize any revenues or cash flows from the program until after the earlier launch date in 2026. With minimal capex spending for the LEO program, during 2Q23 TSAT used cash to repurchase debt in the open market at a substantial discount to par. Due to completing the relocation of customers to free up spectrum, the company is expected to receive USD 260m in clearing payments by October 2023. Thus, we expect the company to make additional debt repurchases during FY23.

The company reports in three segments:

Broadcast (46% of LTM revenue) – Direct-to-home television, video distribution and contribution, and occasional use services. This segment has experienced declining revenues as customers are experiencing lower demand as users switch over to streaming services. Typical customers in North America include Bell TV, Shaw Direct, DISH Network, Bell Media, and NBC Universal.

Enterprise (53% of LTM revenue) – Telecommunication carrier and integrator, government, consumer broadband, resource, maritime and aeronautical, retail, and satellite operator services. Typical customers include Bell Canada, Hughes Network Systems, iForte, Marlink, Viasat, Vodafone, and Xplore.

Consulting (1.5% of LTM revenue) – services related to space and earth segments, government studies, satellite control services, and research and development. Typical customers have included Airbus, EchoStar, Lockheed Martin, Mitsubishi Electric, The Defense Advanced Research Projects Agency (DARPA), and Viasat.

The competitive landscape remains challenging with top rivals being SES SA, Intelsat, Viasat (Inmarsat), SpaceX (Starlink), Eutelsat, OneWeb, and Amazon’s Project Kuiper (planned LEO). Some announced combinations have not occurred, but Viasat and Inmarsat completed their USD 7.3bn merger in May. The combined entity has 19 satellites in orbit including 12 operating in Ka-band.

The satellite business can be quite risky as highlighted recently when a new geostationary Viasat communications satellite (VisSat-3 Americas) launched in April was unable to unfurl its antenna jeopardizing the viability of the satellite. According to a story in Ars Technica, if the satellite is written off as a total loss, it was reported that the USD 420m insurance claim still would not cover the USD 700m cost of the mission. In addition, such a claim could lead some insurers to exit the market. Covenants in TSAT’s debt agreements require the company to maintain insurance on its GEO satellites.

On a valuation basis, we looked at TSAT on a consolidated basis, and excluding its non-guarantor subsidiaries. On a consolidated basis, at our midpoint multiple and adjusted EBITDA estimate, we find that all debt is fully covered with an equity price of CAD 16.81 compared to the current price of CAD 13. When we exclude the non-guarantor subsidiaries, at the mid-point we find all secured debt is fully-covered with the unsecured notes valued at 45%.

Liquidity, Debt and Cash Flow

On 31 March 2023, TSAT had CAD 2bn of liquidity, basically flat with 31 December 2022 liquidity of CAD 1.95bn. Of the CAD 1.7bn in cash, approximately CAD 1bn is held in unrestricted subsidiaries. The company had CAD 3.3bn of secured debt (USD 2.5bn) and CAD 527m of unsecured notes (USD 390m), all denominated in US dollars. At the end of 2022, if the value of the Canadian dollar increased CAD 0.01 against the USD, indebtedness would decrease by CAD 28.4m.

TSAT’s revolver, term loan B, and senior secured notes are secured by substantially all of Telesat Canada’s assets, excluding those in the unrestricted subsidiaries, and are guaranteed by the company and certain of its existing subsidiaries. The obligations are secured by first-priority liens and securities interests in the assets of Telesat and its guarantors. On 31 March 2023, for covenant purposes, Telesat’s total consolidated debt was CAD 3.7bn, and its total secured debt was CAD 3.2bn, both include up to USD 100m of net cash (CAD 135m). There is no amortization of the term loan because TSAT already made repayments through maturity.

TSAT’s board authorized up to CAD 200m in cash for debt repurchases, if and when managemnt determines that repurchases are in the best interest of the company. From 1 April 2023 through 10 May 2023, Telesat repurchased in the open market USD 103.1m of notes for a cost of USD 56m (average price of USD 54). Due to estimated FCF generation, we project that the company will complete CAD 200m in debt repurchases over the NTM period.

On 31 March, TSAT reported LTM adjusted EBITDA of CAD 561m resulting in net secured leverage, net leverage, and total leverage of 2.9x, 3.8x, and 6.8x, respectively. For covenant purposes, Telesat’s LTM consolidated EBITDA was CAD 600m. The revolver was undrawn, but if more than 35% of the revolving credit facility is drawn, Telesat must comply with a first lien net leverage ratio of 5.75x. On 31 March, the first lien leverage ratio for covenant purposes was 5.36x and the total leverage ratio was 6.24x, which was more than the maximum test ratio of 4.5x, which limits any additional debt to the balance sheet.

For 1Q23, cash flow from operations (OCF) was CAD 62.6m compared to CAD 43.4m for 1Q22 and CAD 67.8m for 4Q22. Free cash flow (FCF) was CAD 37.7m, after CAD 25m of spending on property and equipment plus payments to satellite programs, compared to CAD 25.4m for 1Q22 and CAD 49.5m for 4Q22.

For NTME, we project that on a consolidated basis TSAT will generate CAD 277m of free cash flow that includes the company receiving CAD 343m (USD 260m) in C-Band clearing proceeds and allocating CAD 125m of debt repurchases, in addition to the CAD 76m spent from 1 April-10 May.

We further estimate for the NTM period, Telesat, excluding its non-restricted subsidiaries that carry no debt and over CAD 1bn of cash, will burn CAD 15m of cash (including the debt repurchases).

On the FY22 earning call, Daniel S Goldberg, President, and CEO of Telesat, stated that the company could bring back cash from its unrestricted subsidiaries, which would be important when valuing the company. “So – but, yeah, to your point, could we bring cash back? Yeah, we could. There’s nothing – I’m staring at our General Counsel. There’s certainly nothing that prevents us from doing that. We’ll cross that bridge if and when we get there.”

LEO and C-band Spectrum

TSAT secured a license from the Government of Canada (GoC) to launch and operate a low-earth orbit (LEO) satellite constellation using 4 GHz of Ka-bank spectrum for which TSAT has international spectrum rights. Telesat Lightspeed, a proposed constellation of LEO satellites and integrated terrestrial infrastructure to serve the enterprise and government market, has strong support from the GoC that includes an anchor contract that is believed to approximate CAD 1.2bn in revenue over 10 years, that includes CAD 600m from the GoC. The Government of Ontario (GoO) purchased a dedicated Telesat Lightspeed pool to be made available at substantially reduced rates to Canadian Internet services providers, and mobile network operators, which is believed to result in over CAD 200m in revenue over a five-year term, which includes CAD 109m from the GoO.

In 2021, TSAT reached an agreement in principle with the GoC for CAD 1.44bn of long-term funding and entered into a memorandum of understanding (MOU) with the Government of Quebec for an investment of CAD 400m. TSAT has been waiting for export credit agency (ECA) financing of approximately CAD 3bn. The original capex investment cost of TSAT Lightspeed was CAD 6.5bn (USD 5bn) to launch 298 satellites. The company, which thought that it would have more clarity on Lightspeed’s financing by year end 2022, is still in discussions with funding sources to cover the increased cost of the program, with the possibility of equity funding. If TSAT were to secure financing soon, the earliest it could start launching is in 2026.

TSAT has contracted for a LEO 3 satellite as a follow on to the LEO 1 satellite to provide additional capability for in orbit demonstrations in Ka-band and in non-geostationary orbit (NGSO) V-band.

The company also has rights to use C-band spectrum, critical for 5G. This spectrum is subject to regulatory proceedings in the US, where TSAT was awarded USD 344m in accelerated clearing payments, USD 84.8m (CAD 108.5m) of which has already been received. The company completed the requirement for relocating customers six months in advance of the the December 2023 deadline and is expected to receive its second accelerated relocation payment of nearly USD 260m by October 2023.

FY23 Guidance

TSAT provided FY23 guidance for three metrics, as shown below. Approximately 50% of the anticipated decline in revenue and adjusted EBITDA is expected to come from (1) DISH’s Anik F3 renewal affecting the first four months of the year, and (2) the renewal for Bell Canada’s DTH capacity on Nimiq 4, but at a materially lower rate than the current one. The contact expires in October 2023 and was renewed for a two-year term. Of the remaining decline, the DARPA contract (CAD 20m) accounts for another 25% or so.

The company stated that expected FY23 cash flows for investing will be updated once it has greater visibility around the construction and financing of the Telesat Lightspeed program, but the range of CAD 40m-CAD 70m will increase substantially once the program gets fully underway.

Foreign exchange rates will effect TSAT’s reported results. In 2022, 54% or revenue, 37% of operating expenses, 100% of interest expense, and a majority of capex were denominated in US dollars.


On 31 March 2023, TSAT’s contracted revenue backlog was CAD 1.7bn for its GEO business representing 2.2x LTM revenue. This is down from CAD 1.8bn on 31 December 2022 and CAD 2.1bn on 31 December 2021. All of the company’s backlog is non-cancellable or cancellable on economically prohibitive terms, except in the event of a continued period of service interruption. The company expects backlog to be recognized as follows:

Remainder of 2023:    CAD 439m                             2026:                           CAD 197m

2024:                           CAD 388m                             2027:                           CAD 129m

2025:                           CAD 262m                             Thereafter:                  CAD 282m

On the company’s year-end earnings call in March, TSAT said that it had approximately CAD 750m worth of backlog for its Lightspeed (LEO) program.

Valuation for Consolidated Entity

For our valuation scenario, we estimate NTME consolidated adjusted EBITDA of CAD 484m, and a range of EV/adj EBITDA multiples from 3x-7x. At the midpoint, we find that all of the company’s debt is fully covered with an equity price of CAD 16.8 compared to the current stock price of CAD 13. We note that we have assumed that TSAT repurchases approximately CAD 350m of notes at an average price of USD 60.

Valuation for Telesat excluding Non-Guarantor Subsidiaries

Since a significant amount of cash is held in unrestricted subsidiaries, the latter of which generate slightly negative adjusted EBITDA, we have also provided a valuation of TSAT excluding its non-restricted subs. In this valuation, we used a slightly higher EV/EBITDA multiple range, 3.5x-7.5x, and at the midpoint, we find that all secured debt is fully covered, but that the company’s unsecured notes have a 74% recovery. If we include a 5% reorganization fee, the recovery for the unsecured notes drops to 42%.

The Details

For 1Q23, TSAT reported revenue of CAD 183m, down 1.3% YoY, but when adjusting for changes in exchange rates, revenue dropped 5% (CAD 9m). For the quarter, Broadcast revenues fell 11.8% YoY to CAD 85.6m, Enterprise revenue jumped 11.3% YoY to CAD 95.1m, and Consulting revenues dropped 18.5% YoY to CAD 2.8m. Sequentially, total revenue dropped 11.3%, although 4Q22 results benefited from the completion of an equipment sale to DARPA of CAD 20m. Excluding this sale, revenue would have fallen about 1.8% sequentially.

The decline in Broadcast revenue was primarily due to a reduction from DISH due to the renewal on the company’s Anik F3 satellite at a lower rate and less capacity than the previous deal. This renewal will remain a headwind for 1H23. The increase in Enterprise came from higher equipment sales to Canadian government customers combined with increased services provided to aero and maritime customers.

At 31 March 2023, TSAT’s fleet utilization was 88%, down slightly from 89% on 31 December 2022. Utilization included the removal of Anik F2, due to a shortened life, and the inclusion of Anik F4.

On an LTM basis, 80.8% of revenues were from North America with Canada and the US accounting for 44.6% and 36.2%, respectively. EMEA, Latin America, and Asia Pacific accounted for 4.9%, 7.9%, and 6.4%, respectively.

For 2022, TSAT’s top five customers accounted for 60% of revenues, and on 31 December 2022, its top five backlog customers accounted for 81% of backlog. For 2022, approximately 82% of revenues were from North America customers, with 45% of revenue derived from North American DTH television service customers under long-term contracts (15 years).

Reported operating income was CAD 80.2m, a 17.3% YoY increase, which was primarily due to higher non-cash share-based compensation recognized during 1Q22. Excluding this non-cash expense, reported operating income would have fallen 13%. For the quarter, reported operating expenses fell CAD 11m from 1Q22. The reported operating margin increased to 43.7% from 36.8%. Excluding the non-cash shared-based compensation expense during 1Q22, the operating margin would have been 49.8%.

Adjusted EBITDA for 1Q23 was CAD 139m (75.7% margin), which was flat with 4Q22 of CAD 139m (67.2% margin) but lower than CAD 146m (78.4%) for 1Q22.

It is worth noting that as of 31 March 2023, intangibles and goodwill represent 49.2% of consolidated total assets which are supported by the planned Lightspeed constellation. If this program is delayed further or discontinued, TSAT would take a large impairment charge. Furthermore, of the CAD 2bn of assets held in non-guarantor subsidiaries, CAD 1bn is cash and cash equivalents, CAD 469m are satellites, property and equipment, and CAD 526m are intangible assets.

Business Description: Telesat is a leading global satellite operator providing its customers with mission-critical communications services through advanced satellites and ground facilities that provide voice, data, and broadcast communications in the Americas. The company operates a geosynchronous (GEO) satellite services business and has begun the development of advanced constellations of low earth orbit (LEO) satellites that travel around the earth at high velocities with the ability to serve areas at higher latitudes than GEO satellites can service. TSAT’s GEO fleet has a remaining commercial life of about six years and a utilization rate of 88%. The company’s equity ownership on 2 May 2023, according to the company’s proxy and assuming all Class A Units, Class B Units and Class C Units had been exchanged on a one-for-one basis, showed that PSP Investments, MHR/Dr. Mark Rachesky and GAMCO Investors held 36.6%, 36.4%, and 5.6%, respectively.


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Unigel Special Credit Report – Act now or lament it later

After we warned of a challenging environment for Unigel during our 4Q22 Credit Report, management mentioned the possible breaching of the 3.5x net leverage covenant (incurrence with regards to the 2026 bonds and maintenance in the case of the domestic bonds due 2027) last month on its 1Q23 conference call. The price of the 2026 bond went down to the 70s from the 90s.

On 5 June, the Brazilian petrochemical producer said it hired Moelis as financial advisor and Felsberg Advogados as legal advisor. Although Unigel responded to a local press report that banks were worried about a bankruptcy filing by saying “that it does not envision such a possibility,” the market got spooked and the 2026s have since traded anywhere between the mid-20s and low-40s.

On 6 June, Unigel announced an NDA with Petrobras [B3: PTR4] “to analyze joint business involving the development of opportunities in fertilizers, green hydrogen, and low carbon projects.” Of the investors we have spoken with since, the more optimistic say “they are doing a holistic JV regarding agro, so they might be able to renegotiate the natural gas supply contract and obtain lower prices,” while the pessimists say “they’re doing a JV for the green hydrogen project, which is in very early stages, so it’s not really a big deal.”

Ideally, an agreement will encompass both views, but there are some aspects that are easier to get done than others. Therefore, potentially arriving at a holistic solution could take too long, and it might be better to start signing on the things they agree to and move forward. It would be fantastic news if Unigel could give Petrobras a stake in the agro segment (including green hydrogen) in exchange for lower natural gas prices and Petrobras’s commitment to invest the necessary funds to complete the first phase for the green hydrogen project.

Unigel needs to hurry up and start explaining to the market what it wants to achieve and how it plans to achieve it. Prices for their 2026s are at default levels, and the longer the company takes to clarify the situation, the longer it exposes itself to investors potentially amassing a large stake of the bonds and trying to force a default to take control of the company.

International Bonds

Legal and contractual situation

Unigel’s total debt (principal only) as of 1Q23 was USD 711m, with the USD 530m 2026s and the BRL 500m (USD 98m) 2027 debentures accounting for a combined 88% of the total. Then, there are some operating leases (excluding the long-term lease of the agro plants with Petrobras), bank debt and working capital lines amounted a total amount of USD 83m (See Table 1 and Figure 1).

Table 1 Capital Structure (USDm)

Figure 1: Amortization Schedule (USDm) As of 1Q23

As mentioned above and in our previous report, the major problem lies with the debentures. Clause 6.1.2 establishes that an event of default occurs when the company’s net leverage, measured as net debt dividend by adj. EBITDA, surpasses 3.5x.

However, there is a way to prevent a default from being declared. Clause 6.1.4 of the debentures says that the trustee, within two days of becoming aware that an event of default has occurred, has to schedule a meeting so debenture holders can vote on what to do. To obtain a waiver, the company must get two-thirds support from debenture holders (that is two-thirds of the BRL 500m).

Without doing any math, it is clear that unless a super bullish cycle is starting tomorrow similar to that of 2020 -2021 (which doesn’t seem likely), Unigel will probably need a waiver until late 2024, so it would be great if the company could get a six-month waiver and not have the Sword of Damocles over its head every three months. Ideally the waiver would be for much longer, but from the lenders’ point of view, you may want to have optionality, so giving a 12 or 18-month waiver might be asking a little too much.

Management mentioned other types of debt on the 1Q23 call that are constrained by the same net leverage limitations. As those lenders are probably banks and in small quantities, it is logistically easier to obtain a waiver.

If Unigel fails to obtain a waiver, the 2026s have a cross-default clause in excess of USD 25m. That is, if Unigel is in default for a combined amount in excess of USD 25m, then an event of default automatically triggers for the bonds and they are accelerated. If we arrive at that situation, then it’s Armageddon, as the Brazilian company would open the door for some investors to get a sizeable stake in the 2026s and manage their way into getting a big piece of the pie in the petrochemical producer.

The 2026s are not a problem from a financing point of view. As is typical, Unigel has multiple baskets it can tap, in excess of USD 200m plus “Project Finance Indebtedness, which is not guaranteed by any Restricted Subsidiaries at any time.” Our interpretation is that if a subsidiary were to be labeled unrestricted (ie the sulfuric acid plant), it could basically take as much debt as it wants.

Economic and financial situation

The key to getting a sense of the urgency is whether Unigel will breach the 3.5x net leverage covenant when they release 30 June results or when they release 30 September results. As of 1Q23 total debt was USD 755m, the cash balance was USD 135m (plus USD 23m positive result from the swaps) and LTM adj. EBITDA was USD 276m, resulting in a net leverage of 2.2x. Simply speaking, given than adj. EBITDA for 2Q22 was USD 131m, for the company to be within the 3.5x net leverage ratio, that would give the company time to better elaborate a strategy, would be USD 14m (30% below 1Q23 and 90% below 2Q22).

First of all, we have to answer the question “can Unigel post an adj. EBITDA of USD 14m (assuming neutral changes in net debt) to delay breaching the covenant by 30 June and delaying it to 30 September?”

As a reminder, Unigel’s 1Q23 adj. EBITDA was USD 20m, USD 9m coming from agro and the rest from chemicals. From the agro segment, the company mentioned during the 1Q23 conference call (that occurred on 17 May) that it was doing maintenance work in the Sergipe agro plant and also that if prices remained as they were, it was possible that the plant was going to be shut down for all of 2Q23. What we’ve seen is that prices (and therefore spreads) are lower during 2Q23 than in 1Q23 and we also know that volumes will be lower (probably will be above half of 1Q23 in case Unigel had some inventory it could sell).

Now for the chemicals segment. After what appeared to be a bottom in 4Q22 when the segment posted a mere USD 3m, it recovered to USD 13m. Since then, spreads for the main four products are lower in 2Q23 relative to 1Q23. If the chemical segment is able to somewhat recover to somewhere in the USD 20m range or even USD 30m in quarterly EBITDA, then we can bet that the covenant will not be breached with the 2Q23 results, and the problem will be when the company announces 3Q23 results (this is of course assuming no changes in net debt QoQ). If not, the deadline for the waiver will be mid-August. As the situation is today, the USD 83m adj. EBITDA recorded during 3Q22 will be replaced by a much lower number during 3Q23 and most likely we’ll be over the threshold for the net leverage covenant.

Now, can net debt remain unchanged on a QoQ basis? On the capex front, Unigel reduced 2023 guidance from USD 120m to USD 80m (and we wouldn’t be surprised if it’s lower). So, after disbursing USD 40m in 1Q23, the average for the remaining quarters would be USD 13m per quarter (so a USD 27m improvement from 1Q23). On the interest expense front, both the 2026s and the debentures pay coupons during 2Q and 4Q (USD 23m for the 2026s and USD 7m for the debentures). This incremental interest expense more than compensated for the probable improvement in the capex front.

Looking at working capital is a good way to elicit a smile. During 1Q23 Unigel had USD 19m in incremental working capital needs. It is more complicated to manipulate payables (your suppliers will complain you aren’t paying) and receivables (they are going to tell you “I’m not paying cash, so chill out!). However, what is interesting is that the days of inventories, at 61, is the highest ever recorded. If we consider that the agro segment is not producing at full speed, we can very well assume that part of the USD 234m in inventories belong to the agro segment and will be sold during 2Q23 to generate cash and push the date Unigel will have to deal with getting waiver on their debentures (See Figures 2 and 3).

Figure 2: Days of inventories

Figure 3: Change in Finished products vs Monetization of Inventories (USDm)

Path to sustainability

Assuming Unigel can obtain as many waivers as needed from debenture holders (and other lenders), then we should turn to the question of sustainability. Let’s first focus on the cash outflows, which amount to at least USD 140m per year:

  • Interest expense, of USD 75m-USD 80m (USD 46m for the 2026s, USD 16m for the debentures, and the rest corresponds to the interest in the remaining indebtedness the company had as of 1Q23 and the new BRL 200m in took during April)
  • Capex. The company repeatedly said maintenance capex is USD 40m per year
  • Leases for the agro plants amount to USD 25m a year

For the chemicals segment (styrenics plus acrylics) we have a little more history to evaluate trends based on historical figures. Between 1Q18 and 1Q23, the average quarterly adj. EBITDA was USD 33m, making a yearly run-rate of USD ~120m. The best four consecutive quarters were 3Q20 to 2Q21, in which the amount during the 12-month period was USD 219m, and the weakest four consecutive quarters were 3Q19 to 2Q20, when the amount was USD 82m, followed by 4Q19 to 3Q20 with USD 87m, and followed by 2Q22 to 1Q23 with USD 97m. As a result, based solely on these five-plus years of data, we believe that we are closer to the bottom of the cycle than from the highs. As such, it wouldn’t be too crazy to think that we should be trending upwards from where we are (See Figure 4).

Figure 4: LTM ADJ. Ebitda - Chemicals (USDm)

For the agro segment, as we’ve said multiple times, the key is the price the company is paying for its natural gas supply. The problem is the low domestic supply of natural gas that makes “the market” in Brazil operate based on brent prices. We can clearly see that on the way up between early 2020 and end of 2022 the price of the Henry Hub index and brent oil prices had a high correlation, but on the way down since then, they hzve not. From its peak during mid-2022 to today, brent declined 44%, while from its peak in September 2022, the Henry Hub has dropped 58% until today. Because Unigel has its natural gas supply tied to brent, it is experiencing very high production costs versus peers that can use natural gas prices that more closely follow the price of natural gas. The “good” news is that Unigel’s current contracts run until the end of 2024, but the situation as it is right now, with bond prices in the 20s is unsustainable for another 18 months (See Figure 5).

Figure 5: Henry Hubs vs. Brent Oil Prices

When looking at a 10-year series, it doesn’t seem that prices of ammonia and urea are particularly at low levels, so the problem here is clearly on the cost side. The company itself revealed that it considers itself to be in the third or fourth quartile in terms of competitiveness, implying it is not very competitive.

Overall, with USD 120m from chemicals and USD 30m from the sulfuric acid would be sufficient to break even in terms of cash flows, with whatever can come from agro (ammonia, urea and green hydrogen in the future) be a plus. This by no means would be enough to delever the company, nor creating positive buzz for a potential IPO (which was on deck not so long ago), but at least can provide some rough idea of what would be enough to survive.

Conclusion: Focus on what’s urgent, work towards what’s important

If Unigel wants to continue to be a performing company a few months from now, it needs to get a waiver from the debenture holders as soon as possible. Without this, there isn’t much to discuss. After obtaining the waiver, we think the petrochemical producer must focus on getting the funds for the completion of the sulfuric acid plant, as the incremental USD 30m-USD 40m will count towards the total EBITDA and improve the long-term sustainability of the company. Something of similar importance would be to try to get Petrobras to amend the natural gas contract, but that is probably not easy. Finally, once all these necessary conditions for survival occur, the company should see how it can continue with the green hydrogen project.

So far, there is a lot of execution uncertainty, which is reflected by the bond trading in the high 30s. If the company is able to execute (and hopefully their advisors are working towards that), the fair value of the 2026s would be twice what it is today.


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Grupo Idesa 4Q22 Credit Report – keep leaning on Inbursa until Braskem-Idesa distributions improve


Following the completion of a successful bond exchange offerGrupo Idesa finally released its 4Q22 earnings earlier this month. The results were very poor, with EBITDA falling to a mere USD 1m in the quarter, down from USD 10m in 3Q22 (See Table 1). While costs of sales fell 6.4% quarter-over-quarter (QoQ) to USD 131m in 4Q22 from USD 160m in 3Q22, revenue decreased by a larger 13% over the same period, to USD 137m from USD 173m. This resulted in an operating income of USD -1m in 4Q22. For the full year, the company highlighted higher raw material prices and lower sale volumes, which were offset by higher sale prices.


The low EBITDA, alongside higher capex, negative working capital (WC), and the payment of the semi-annual bond coupon on the 2026 notes in November, led to a free cash flow (FCF) of USD -29m in 4Q22, bringing the FY22 FCF to USD -40m.

We had warned in previous reports that Idesa’s strategy of turning to its suppliers to finance itself during 2021 didn’t seem sustainable in the long term, and a worsening of the operating cycle already started to be perceived in 2Q22 and 3Q22. The operating cycle deteriorated further in 4Q22, marking its worst level since 2Q20 (See Table 2). Nevertheless, it now remains at the pre-pandemic levels.


Debt capitalization also complete

However, with almost five and a half months already into the new year, and the conclusion of partial debt capitalization that ran in parallel with the bond exchange, the most interesting thing with the earnings release was getting a peek at how the capital structure looks now. As such, the company provided pro-forma numbers of its debt as of 2 May (See the indebtedness composition table at the beginning of this report).

As the company had previously disclosed the results of the exchange offer, we already knew the size of the new 2028 notes, as well as the 2026 holdouts. Therefore, the attention was on how exactly the capitalization of Inbursa debt for up to USD 310m would affect the different facilities provided by the Mexican bank. The surprise here is that, in addition to the term-loan (USD 263m outstanding as of 31 December 2022, although we estimate that it amounted to around USD 280m by the end of April, thanks to the PIK interest) and the loan granted by the bank to cover the November coupon (USD 14m), Inbursa also capitalized a portion of the facility for the expansion of Idesa’s maritime terminal. As such, the outstanding size of this facility, which has the payments of a client of the storage business as collateral, moved from USD 29m as of the end of 2022 to USD 10m by 2 May 2023. Idesa didn’t specify, however, whether the partial capitalization of the maritime terminal facility changed the final maturity of this debt (originally, a 68.5% final amortization of the USD 33.5m granted was due in September 2024).

The company also indicated that, in early January, it paid down the USD 3m in debt with BBVA that it had left (therefore, also releasing the USD 1m in restricted cash that was linked to that facility), while in the period between the end of 2022 and 2 May 2023 it increased the size of a new WC facility with Inbursa (used to pay down more expensive factoring lines) to USD 41m from USD 26m.

FCF still negative despite LM

At 6.5%, the new 2028 notes and the Inbursa loan used to fund the cash portion of the exchange offer bear an annual interest rate that is much lower than the coupon (cash and PIK) of the 2026s. Meanwhile, beyond the clear benefit of improving the leverage by getting rid of a large portion of debt, the Inbursa capitalization also comes as a relief in terms of interest payments.

However, those benefits mostly affect what would have otherwise been a heavy debt service going forward, but don’t involve extreme changes with respect to the interest payments made over the last few quarters, as the old Inbursa term-loan was still within a period that allowed Idesa for a full PIK payment, and the cash portion of the 2026 notes’ coupon didn’t reach its maximum until November 2022.

On the other hand, the scheduled principal amortizations of the Northgate facility started in September 2022.

Under the new pro-forma capital structure, we estimate that Idesa faces USD 18m in interest payments and USD 7m in principal amortizations in the eight-month period between May and December of this year. Meanwhile, for the next 12 months (NTM) from May we estimate USD 28m and USD 10m, respectively.

During the 4Q22 earnings call, Idesa’s management guided an FY23 EBITDA of USD 35m, with capex and tax payments more or less in line with last year.

Against that backdrop, we expect the company to continue burning cash this year, with an FCF estimate of USD -27m for FY23 and of USD -24m for the post-liability management (LM) period between May and December (See Table 3). In our estimates, we have preferred to err on the cautious side by not including any cash contribution from the joint venture Braskem-Idesa (BAKIDE), as Idesa’s management indicated during the 4Q22 call that it doesn’t expect material contributions from the JV this year.

As such, until the cash distributions from BAKIDE improve – and assuming steady capex, WC contribution and taxes paid, Idesa would need to record a 12-month EBITDA of at least USD 72m to cover the estimated USD 28m in NTM interest payments, and thus break even in terms of FCF (EBITDA of USD 82m would be required in order to also cover the USD 10m in NTM debt



Your main lender and shareholder will always be there for you

Therefore, with a cash position that amounted to only USD 6m as of the end of 2022 (down from USD 12m three months earlier), we expect the company to require additional financing in the upcoming quarters.

In fact, while making a further debt reduction a priority going forward, the Idesa management acknowledged during the earnings call that some additional WC financing may be needed during the year.

In that sense, we have no doubt that Inbursa will again be there for Idesa when needed. As we noted in our Idesa 3Q22 Credit Report, with the debt capitalization the company was set to become Inbursa risk (an investment-grade financial group controlled by one of the richest people in the world). Together with its previous 25.01% stake in Idesa, the capitalization was slated to give Inbursa a controlling position in the company. However, as the capitalization was closed in April, Inbursa’s increased stake in Idesa wasn’t included yet in its 1Q23 earnings, but we will pay attention to the next quarters’ reports to see how the bank consolidates and reports its presence in the petrochemical company (while the capitalization was formally carried out by Capital Inbursa and Promotora Inbursa, the previous 25.01% stake was held by Sinca, the vehicle used by Inbursa for its equity investments).

Also, asked during the 4Q22 earnings call about the possibility of replacing the existing Northgate debt with additional debt from Inbursa, the Idesa management indicated that this is an option the company is reviewing. To us, this is something that makes total sense, since the Northgate debt is expensive and we are sure Inbursa would be able to provide cheaper financing (even acknowledging that Inbursa is a public company and thus it should be an arm’s length transaction).

While the consent solicitation that ran hand-in-hand with the exchange offer involved the removal of all the collateral that previously guaranteed the 2026 notes, we are not sure whether the cash sweep feature is still there (before, if its cash balance exceeded USD 20m at each of the year-end annual test dates, Idesa had to devote 80% of the surplus to repaying the notes). In any case, Idesa has become a master of navigating through very tight liquidity situations, and therefore we don’t expect the company to hold cash positions greater than USD 10m-USD 15m at any time going forward.

As a side note, the FY22 audited financials showed that Idesa sold its 50% stake in Tonalli in August. The transaction didn’t involve a significant cash flow, according to the company. Also, given that this JV (created for the exploration and production of oil in a Mexican block) wasn’t yet contributing to Idesa’s results, we don’t foresee any impact at all on the company’s earnings in the future.


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