■ Move to amend covenants a prudent one, rather than a portent that EBITDA will collapse.
■ PACRA’s interest cover passes our stress test but high debt service cover is a concern.
■ Stock is trading c.40% below liquidation value; financial risks are mispriced.
Seeking to amend the covenant of its S$100m 4.3% note due 2018
● PACRA is seeking bondholders’ approval to amend the terms of its interest coverage (EBITDA-to-interest-expense) covenant of 3x. In the event that interest coverage falls between 1x and 3x, it should not be considered a breach of covenant, provided that PACRA immediately deposits the interest payable for one fixed interest period into a reserve account.
● In the event that the interest coverage is less than 1x, PACRA has to deposit two successive interest payable into the reserve account.
● We understand that the other financial covenants of the bond are that
1) total equity shall not be less than US$250m (1H15 total equity: US$418m), and
2) net gearing shall not be higher than 2.5x (1H15 net gearing: 0.8x).
● Given precedence, we believe that PACRA should be successful in seeking bondholders’ approval.
Marco Polo Marine recently amended the financial covenants of its S$50m 5.75% note due 2016, allowing for
1) total equity required to be at least S$100m (instead of S$175m),
2) net gearing limit of 2.5x (instead of 2x), and
3) interest coverage to be not less than 2.5x (instead of 4x), subject to certain conditions.
A prudent move, rather than an ominous warning
● We read the move to amend covenants as a prudent one, rather than a portent that EBITDA will collapse. Annualising 1H15 numbers, PACRA’s interest coverage is 3.9x. In the event of a macro black swan event, there is a possibility that PACRA could breach the covenant. Based on 1H15 numbers, PACRA’s EBITDA has to fall by c.25% for its interest coverage to fall to 3x.
● In our recent note (‘Extend and pretend II’, 12 Oct 2015), we highlighted that PACRA’s high debt service cover of 9.9x for FY15F (FY14: 3.9x) was a concern. However, it should be able to cover its interest payments comfortably, with a projected interest cover of 4x.
● As PACRA gets its newbuilds to work, we expect its interest cover to improve to 6.3x for FY16. In our stress test scenario for PACRA, where we apply downward pressures to its OSV utilisation, day rates and margins, implying that we are modeling in a weaker 2016 (base case: expect some improvement across its operating metrics vs. 2015), we project its interest cover to drop to 3.9x.
Financial risks are mispriced
● The stock is trading c.40% below our estimate of its liquidation value (S$0.62/share) and we believe that financial risks are mispriced. Furthermore, we gain comfort from our RNAV calculations as PACRA has one of the cleanest balance sheets in the sector and its fleet of vessels is young, mainly shallow-water and diversified. Hence, we believe it is relatively more relisable.
● We retain our Add call and target price, based on 1x CY15 P/BV. Stronger earnings could catalyse the stock. (Read Report)
Read Related Report
1) Pacific Radiance - Heightened Credit Risks; D/G SELL by Maybank Kim Eng Research, published on 29 October 2015
Source : CIMB Research