SML - Synlait Milk Ltd

[BlackPeter]

For the bond holders it really isnt that bad, because at its worse if Synlait were to be sold for scrapes theres enough to pay back the debt, so the fear driving this is giving any buyers a very large premium for what is relatively moderate risk.

Are you sure the bonds are secured? Haven't checked (don't hold them), but I heard they are not ...

[GTM 3442]

SML
29/11/2019 09:45
OFFER
PRICE SENSITIVE
REL: 0945 HRS Synlait Milk Limited (NS)

OFFER: SML: Synlait lodges PDS and announces indicative margin

Synlait Milk Limited (Synlait) is making an offer of up to $150 million of
five-year unsecured subordinated fixed rate bonds (with the ability to accept
up to $50 million of oversubscriptions at Synlait's discretion) maturing on
17 December 2024 to New Zealand institutional and retail investors (the
Offer).

The Offer is expected to open on 9 December 2019 and close on 13 December
2019, with the bonds quoted on the NZX Debt Market.

[Lego_Man]

Are you sure the bonds are secured? Haven't checked (don't hold them), but I heard they are not ...

They're not secured. But if the company got in a position where they couldn't repay it and went into administration, there's enough asset backing to pay all the debt ahead of the subordinated notes, and then repay them in full.

[Balance]

SML
29/11/2019 09:45
OFFER
PRICE SENSITIVE
REL: 0945 HRS Synlait Milk Limited (NS)

OFFER: SML: Synlait lodges PDS and announces indicative margin

Synlait Milk Limited (Synlait) is making an offer of up to $150 million of
five-year unsecured subordinated fixed rate bonds (with the ability to accept
up to $50 million of oversubscriptions at Synlait's discretion) maturing on
17 December 2024 to New Zealand institutional and retail investors (the
Offer).

The Offer is expected to open on 9 December 2019 and close on 13 December
2019, with the bonds quoted on the NZX Debt Market.

Unsecured.

Subordinated.

Scary words when a company is nearing breach of its secured banking covenants.

[Snoopy]

They're not secured. But if the company got in a position where they couldn't repay it and went into administration, there's enough asset backing to pay all the debt ahead of the subordinated notes, and then repay them in full.

You think that if there was a distressed sale of assets, presumably due to a downturn in demand for the product that assets were producing, those assets would sell at asset backing?

SNOOPY

[Lego_Man]

You think that if there was a distressed sale of assets, presumably due to a downturn in demand for the product that assets were producing, those assets would sell at asset backing?

SNOOPY

I think the capital markets will support Synlait before we get into this hypothetical situation. Despite the company's protestations, i think the outcome will be a deep discount capital raise that pays off most of the senior debt.

[Balance]

Unsecured.

Subordinated.

Scary words when a company is nearing breach of its secured banking covenants.

Synlait currently has four syndicated bank facilities in place with ANZ and BNZ:
1. A secured working capital facility of NZD $250m (with a temporary increase to
NZD $330m) maturing 1 October 2023.
2. A secured revolving credit facility (Facility A) of NZD $66.7m with NZD $33m amortising
31 July 2023, and the remainder maturing 1 October 2023.
3. A secured ESG-linked revolving credit facility (Facility B) of NZD $50m maturing
1 October 2023.
4. A secured ESG-linked revolving credit facility (Facility C) of NZD $50m maturing
1 October 2023.

Key financial covenants imposed by the syndicate for FY 23:
1. Total shareholder funds of no less than $600m at all times.
2. Working capital ratio of no less than 1.5x at all times.
3. Interest cover ratio of no less than 3.0x at all times.
4. Leverage ratio of no greater than 4.0x at 31 July 2023.
5. Senior leverage ratio of no greater than 3.0x at 31 July 2023

As previously indicated, Synlait is currently undertaking a review of its capital strategy, which is
progressing well. The focus of this review is primarily on debt. It expects to provide an update on
8 May 2023 at the Investor Day.


No update on capital strategy review and with ALL BANKING FACILITIES maturing and due for repayment in October 2023.

No wonder the bonds are trading at 15.25% pa!

[BlackPeter]

They're not secured. But if the company got in a position where they couldn't repay it and went into administration, there's enough asset backing to pay all the debt ahead of the subordinated notes, and then repay them in full.

Hmm - I guess the thing with their assets is - how much would all that stainless steel really be worth if a receiver wants to sell (and they always do)? Might be (significantly) less than book value ;

Remember - receivers have no interest to optimise the financial outcomes for creditors, the only thing they are incentivised to do is sell the stuff fast and make sure their fees are covered in full.

Chris Lee wrote an interesting (though hard to read) book describing how receivers (and yes, politicians) destroyed 1 billion dollars give or take in the South Canterbury Finance receivership (The one billion dollar bonfire). Sure - different industry, though Scales was one of the companies the receivers gave away in that story for a song - ignoring the value of the company and shafting the creditors. Sure - in that case taxpayer was happy to help out - might not work out the same way with Synlait.

Always bad to hold unsecured debts when a company looks at risk.

[silverblizzard888]

First you have to consider their top 2 shareholders, Bright Dairy (39%) and A2 Milk (19.8%) , before its sold off for scrapes, these two have a huge incentive to come in and purchase part of the business or help it refinance than to let it fail. The way I'd rank the solutions to their problem:

1. Restructuring existing debt with current banks
2. Find new banks to refinance
3. Do a partial asset sale
4. Capital raising
5. Administration

Until they have exhausted these options they are still alright.

[BlackPeter]

First you have to consider their top 2 shareholders, Bright Dairy (39%) and A2 Milk (19.8%) , before its sold off for scrapes, these two have a huge incentive to come in and purchase part of the business or help it refinance than to let it fail. The way I'd rank the solutions to their problem:

1. Restructuring existing debt with current banks
2. Find new banks to refinance
3. Do a partial asset sale
4. Capital raising
5. Administration

Until they have exhausted these options they are still alright.

Great advertisement for the unsecured bonds ... wonder whether they put it in these words into their prospectus?

All good - just buy them and who knows, maybe you even get your capital back ...