Greenyard: A Death Spiral?

Summary

• Greenyard cuts its full-year EBITDA by almost 50%, breaching the already relaxed debt covenants.
• The vegetable producer will have to issue new shares or sell a division to reduce its net debt to bring the debt levels back in line with the covenants.
• The earnings season has started in Europe: some companies performed well, others disappointed (once again).
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Introduction

Welcome to this new edition of Focus on Europe where a Belgian vegetable company sees its share price spiraling down after yet another profit warning. There doesn't seem to be a good solution for the company's issues and it will either have to sell a division or execute on a very dilutive capital raise to satisfy its lenders.

Did you miss the previous edition of Focus on Europe wherein Metro Bank (OTCPK:MBNKF) was discussed? You can re-read that article here.

Greenyard: from 21 EUR to less than 4 EUR in 18 months, what happened?

Greenyard's (EBR:GREEN) share price performance could win a prize for 'worst performing stock of the year'. The company, a family-controlled company focusing on (frozen) vegetables in Europe had to deal with two events that ultimately helped to contribute to a perfect storm.

Source: Yahoo Finance

The initial problems started in July (the first yellow circle) when Greenyard had to confess its Hungarian plant encountered some issues and has been producing frozen vegetables from a listeria-contaminated freeze tunnel. The fall-out was widespread as the company had to recall products with a total of tens of millions euros to be destroyed. Greenyard was insured but would still have to foot a bill of 25-30M EUR after taking the insurance payout into account. On top of that, it had to start working on regaining credibility with its customers, and that also takes time.

Fortunately, the company's lenders understood this was a non-recurring event and continued to support the company. But then, Greenyard was hit by a second (usually non-recurring) problem: the weather.

Europe was hit by extreme drought in the summer of 2018, and this had a negative impact on Greenyard as well, as the company had to deal with 'irregularities' in harvesting, leading to shortages of 30-50%.

After this initial tough period, Greenyard saw its September and October results coming in stronger than anticipated, but this trend was completely reversed in November and December due to a 'competitive landscape' and 'price pressure'.

Sure, that could be true, but it's shocking to see the hefty profit warning. The 4.5% decrease in sales has a huge impact on this low-margin company, and the REBITDA guidance was almost slashed by 50% to 60-65M EUR.

Sure, Greenyard will remain EBITDA positive, but that's where the 'good' news ends. After deducting the interest and tax payments as well as the sustaining capex, the free cash flow result will be very close to zero this year.

Not only does this mean FY 2019 will be a completely lost year for Greenyard, but it also means the banks are getting a bit nervous. After selling the horticulture division to a befriended company, it looked like Greenyard made peace with the banks as the net debt/EBITDA ratio would drop to more comfortable (but still relatively high) levels. With an anticipated REBITDA of 60-65M EUR, even the lower net debt position pushes the debt ratio to in excess of 5.

A first measure to increase the comfort levels of the bank is to not repay the 150M EUR bond in 2019, but either extend it (at a higher interest rate) or refinance the bond with another bond issue. This will cost Greenyard a few million more per year in interest expenses, but it will keep the banks happy/happier as the bank loans and credit lines are senior over the bonds in case of a default. The bonds dropped to 91 cents on the euro (see later), which indicates the market is now expecting a double-digit yield on a Greenyard bond these days.

Any rescue possibility would result in dilution

It's now starting to look like a capital raise cannot be avoided. But this creates new issues as well. Imagine Greenyard is offering a rights issue on a 1:1 basis (each shareholder can purchase 1 new share per 1 existing share) and at a 25% discount (which is actually a relatively low discount for a 1:1 raise). Then Greenyard would be issuing 42.5M new shares at approximately 2.8 EUR. This would raise 136M EUR before expenses (and probably around 119M EUR after legal fees, underwriting fees,…). A decent amount, but even after doing so, it would only reduce the net debt by 1/4th. It would buy Greenyard more time as it would satisfy its lenders, but its share structure would collapse.

In 2017, Greenyard started to repurchase its own shares to hedge itself against a convertible debenture which appeared to be maturing 'in the money'. Back then, I considered this to be a solid move, but a few quarters ago when the listeria issue came to surface I already thought they should just sell those shares and cash up. If it would have sold the 1.75M shares it had at 10 EUR/share (so even after the initial collapse upon the announcement of the listeria problem), Greenyard would have been able to raise 17.5M EUR. That's indeed not much in the greater scheme of things, but still a meaningful amount. Today, those shares are worth less than 6.5M EUR and I bet there's no market anymore to absorb those shares.

There's only one other potential solution. Rather than raising cash through selling more stock, Greenyard could explore selling another division. It already sold its horticulture division in Q4 CY 2018 to raise cash, but the current situation could force the company to find a buyer that's willing to pay an acceptable price for another one of Greenyard's divisions.

The bonds could offer an interesting opportunity

A capital raise or the sale of a division to reduce the net debt to bring the debt level to a lower ratio seems to be inevitable. But the unrest has also spilled over to the bond market. Greenyard has a bond that's expiring later this year (on July 5, 2019) which currently pays a 5% coupon.

Although Greenyard does have the cash on hand to repay this bond, debt investors appear to be preferring to be safe rather than to be sorry and have sent the bond down to just 91 cents on the Euro. This, combined with the remaining interest on the bond (there are 5 months to go until the bond gets repaid which means 5/12 of 5% = 2.08%) that will still be accrued over the next few months indicates a potential return of about 11% in 5 months.

Source: Euronext website

The volume isn't particularly high (a face value of just over 350,000 EUR in the past week since the announcement), and it looks like it's predominantly smaller retail investors that are capitulating. The fear is understandable, and it's better to take a small haircut now rather than having to wait (and hope) for a recapitalization of the company, but let's not forget bond investors will always have seniority over shareholders. So even if Greenyard would have to dilute its share count by 200% to satisfy its banks and lenders, the bondholders should be fine. In fact, the higher the dilution factor on the equity side and the more cash that's being raised, the better for bondholders. As such, I think there may be an opportunity for fixed income investors that are looking for a potential high risk/high reward addition to their portfolios.

Conclusion

Greenyard needs to find a solution, and it needs to find a solution within the next few weeks as it will take time to effectively execute on the sale of a division, or to complete a capital raise. The company's shares are deemed to be toxic by the market, but the bonds that are maturing in five months could be an interesting option to take advantage of the market volatility.

Other newsworthy facts from Europe

Brussels-listed Nyrstar (OTC:NYRSY) continues to surprise in the negative sense. After its H1 results, the company guided for an H2 EBITDA that would be 'materially lower than the 120M EUR EBITDA result in H1'. That wasn't good news, but as Nyrstar is now expecting its full-year EBITDA result to be 110-130M EUR, it now looks like the H2 EBITDA won't be just substantially below the H1 result, but could very well be zero or even slightly negative.

Nyrstar tried to soften the blow by providing an early guidance update for its Australian activities. It expects its Australian processing division to generate an EBITDA of 95M EUR in 2019 and 125M EUR in 2020. That's positive news, but Nyrstar will need more than that to lose its penny stock status. A capital structure review is now underway, and it's not unlikely the zinc smelter may have to raise more capital to reduce its net debt.

In the Netherlands, Telecom group KPN (OTCPK:KKPNF) (OTCPK:KKPNY) was the subject of buyout rumors as Brookfield Asset Management (BAM) is rumored to prepare a bid to acquire the company. This is the first time since a failed buyout by Carlos Slim's America Movil (AMX) in 2013. Back then, KPN swallowed a poison pill to protect itself against the America Movil approach, and it will be interesting if a potential Brookfield bid would be more successful.

Elsewhere in the Netherlands, Signify (OTCPK:PHPPY), the old 'Philips Lighting' reported a disappointing free cash flow outlook. Its EBITA result did meet the average analyst expectations, but the largest producer of lamps in the world (with 71% of its revenue generated by LED lamps) provided a disappointing free cash flow outlook, as it's now aiming to generate '5% of its revenue' in free cash flow. Given the consensus estimate of a 2019 revenue of 6.25B EUR, Signify should still be generating in excess of 300M EUR of free cash flow, which is pretty good for a company with an enterprise value of just over 3B EUR.

Royal Mail (OTCPK:ROYMF) (OTCPK:ROYMY), the British postal service company, published a trading update for the first nine months of its financial year. It expects the full-year performance to be in line with its expectations with an operating profit (before 'transformation' costs) of 500-530M GBP. The total volume of addressed mail will decrease by 7-8%, which means Royal Mail will have to continue to work to mitigate the impact of these lower volumes.

In Spain, banking group BBVA (BBVA) reported a net income of 5.3B EUR, an increase compared to the previous financial year thanks to lower impairment charges and provisions despite a substantially higher impairment charge on its Turkish financial assets. With a fully-loaded CET1 ratio of 11.3%, BBVA meets the capitalization requirements as requested by the European regulators. The company has declared a final dividend of 0.16 EUR, bringing the full-year dividend per share to 0.26 EUR for a current dividend yield of exactly 5%. As BBVA is paying less than 40% of its net income as a dividend, the bank can continue to work on improving its balance sheet.

Analyst’s Disclosure: I am/we are long NYRSY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I also have a long position in Greenyard (unfortunately)