Adler Pelzer Group
Primary Analysis First Take: Buysiders Laud Adler Pelzer Shareholder Support; 12% Yield on 4Y SSNs Offer Adequate Premium for Past Missteps, Weak Cash Flows, JV-Related Value Leakage Concerns
Fri 05/12/2023 08:40 AM
Relevant Documents:
Preliminary OM
Covenant Analysis
Historical Financials on Fundamentals by Reorg
German autoparts supplier Adler Pelzer is marketing €350 million worth of senior secured notes due 2027. Proceeds of the new notes, together with the proceeds from a €120 million subordinated shareholder loan and cash on balance sheet, will be used to redeem the outstanding €425 million existing senior secured notes due 2024 and to repay a €40 million super senior term loan and €10.6 million outstanding under the group’s UniCredit revolving credit facility.
Initial price talk for the new senior secured notes is 9.5% coupon at 92-93 OID, which Reorg calculates would imply a yield to maturity in the 12% area.
The €120 million shareholder loan will be provided by Adler Group SpA, the direct sole shareholder of the company. Management confirmed during the roadshow call that it is a standard equity-like instrument, deeply subordinated. The Scudieri family is the majority owner of Adler Plastic, which owns 71.93% of Adler Group SpA.
Reorg’s cash flow analysis dated July 2022, which included an overview of Adler Pelzer’s business, financial performance and valuation, can be found HERE. Under our base case projections at that time, we had estimated a recovery of 69% on the existing SSNs due 2024, which had led us to think that a company refinancing without any equity support would have been difficult.
The group’s capital structure, pro forma for the refinancing, is below:
The group’s corporate structure is below:
Source: page 41 of OM pdf
As mentioned in the transaction overview, the initial price talk for the new senior secured notes is 9.5% coupon at 92-93 OID, which Reorg calculates would imply a yield to maturity in the 12% area.
Comparable issuances include the euro-denominated senior secured notes of Norwegian autoparts supplier Kongsberg Automotive and Spanish autoparts supplier Grupo Antolin. The initial price talk of Adler Pelzer’s notes is wider than the yield of Antolin’s notes, which yield 10.7% and 11.8%, and Kongsberg’s 8.7%.
Adler Pelzer’s adjusted EBITDA margin of 7.7% (including other income in the denominator) in 2022 is lower than Kongsberg’s 11.3% LTM margin, but higher than Antolin’s 6.4% LTM margin (as shown in the table below) . As shown in the industry peer table in the next section, Adler Pelzer’s margin is below the average margin of European autoparts suppliers of 12.2%.
Adler Pelzer reported lower capital expenditures as a percentage of revenue in 2022 relative to Kongsberg and Antolin, but its cash generation has been negatively impacted by recurring dividends to non-controlling interests, as shown in the Financial Overview. Overall, Adler Pelzer and Kongsberg generated positive unlevered free cash flow in the last 12 months of their reporting periods (as shown in the table below), which was mostly due to net working capital inflows, in contrast to Antolin.
Pro forma for the transaction, Adler Pelzer’s net leverage of 2.4x is above 0.8x for Kongsberg, which has a significant amount of cash on balance sheet, but is below Antolin’s 3.6x.
Recently, Benteler (another auto supplier) priced its new €525 million senior secured notes at 9.375%, which were rated Ba3/BB-. As a first-time bond issuer, Benteler's notes carried a premium compared with the average yield of similarly rated issuances.
Industry Peers
Buysiders are broadly constructive on the deal given the sizable shareholder commitment, with the €120 million liquidity injection via a subordinated shareholder loan exceeding expectations. While that will delever the restricted group to 2.5x on a pre-IFRS 16 basis, headline net leverage is based on FY’22 consolidated EBITDA, which includes a number of JVs. The earnings contribution of the JVs accounts for about 20% of group EBITDA, which means that actual leverage when stripping out the impact of the consolidation is around the 4x level, which is relatively high, some buysiders said. However, most high-yield issuers consolidate earnings, one buysider countered.
Another concern is the group’s weak cash generation. Management guided for around €5 million of free cash flow this year, which is barely above breakeven despite 2023 being a strong year for the auto sector, while some cash is held at JVs. The group has also historically faced large variable working capital swings and had a roughly €42 million inflow last year that was partly driven by stretching payables, so there is some risk of that potentially reversing and being a drain on cash. However, this is mitigated by the provision of a new €55 million super senior RCF, which will boost liquidity and help absorb working capital swings, while the group starts out with a chunky €218 million cash position post transaction, buysiders noted.
Adler Pelzer’s products are fairly commoditized and low value, typically representing around €130 per vehicle. But the value per vehicle is slightly higher for electric vehicles, where Adler Pelzer provides one to two additional parts. And while electric vehicles only represent around 10% to 15% of sales, this should rise to around 30% in the next few years. In addition, Adler Pelzer is the leader in the acoustic and soft trim market, while management has proven to be good negotiators and succeeded in getting input cost pass-throughs with the OEMs, buysiders said.
There is also scope for margin improvement, with management aiming to raise the group’s EBITDA margin to the high 9% level from 7.9% in 2022. That looks conservative given that between 2019 and 2021 the group’s EBITDA margin averaged 11%. It was supply chain issues and raw material inflation during 2022 that derailed the company, and these are abating, another buysider said. Auto volumes are at historical lows and will eventually recover, and Adler Pelzer is more geared toward the luxury car segment, he added.
Adler Pelzer has grown through acquisitions, although these don't seem to have been value-accretive, so further M&A is also a risk. However, management said there would be no more acquisitions for the time being, another buysider said.
The proposed pricing of 9.5% with a 92-93 OID implies a roughly 12% yield, which is compelling, buysiders agreed. Adler Pelzer’s closest comparable, Grupo Antolin, has 2026 and 2028 bonds that have an average yield of 11.3% on the bid side. Since Antolin is around 2.8x levered, roughly 2.5x-levered Adler Pelzer should yield around 10% on an equal-spread-per-turn-of-leverage basis, which suggests the new bond is offering a roughly 200 bps premium, one buysider calculated. While Antolin is significantly larger than Adler Pelzer, it has a lower EBITDA margin at 7% and equally poor cash generation, so it should not be trading tighter based on fundamentals, he added.
The premium is entirely down to Adler Pelzer’s previous missteps, buysiders agreed. The group has come under criticism in the past over poor communication, a lack of transparency and delayed reporting. However, it has made some improvements to its reporting since, one buysider added.
Given the generous pricing, strong shareholder support, and the fact that the group is only looking to raise €350 million of bonds versus €425 million bonds outstanding, the deal should get done, buysiders agreed. Since lead bookrunner BNP has pre-marketed the deal for several months, some of it was also likely preplaced, one buysider added.
Adler Pelzer is a light vehicle automotive tier 1 supplier of acoustic and thermal interior parts serving the European, U.S. and Asian markets. Its top five customers are Stellantis, Volkswagen, Ford, Mercedes-Benz and General Motors, respectively accounting for 22%, 17%, 6%, 5% and 5% of its annual sales, or 55% in aggregate.
In 2022, revenue grew by 41% year over year to €2.1 billion, with half of this growth driven by the acquisitions of Forvia’s Acoustics and Soft Trim, or AST, business and the STS Group.
The group’s revenue from third parties by geographic area and serial sales by product in 2022, is below:
Most of the company’s contracts allow it to pass through raw materials cost increases, which, as a percentage of revenue, decreased to 53% in 2022, from 53.5% in 2020, and 54.9% in 2021. However, the same cannot be said for pass-through of cost of services, which, as a percentage of revenue, has increased to 9.8% in 2022, from 7.7% in 2021, reflecting higher utilities and energy costs.
Overall, in the past two years, adjusted EBITDA margins fell by 2.2 percentage points to 7.9%.
Profitability is also inflated by the consolidation of joint ventures, despite ownership percentages close to 51%. In the roadshow presentation, management said that 20% of group EBITDA is attributable to its JVs.
Historically, the issuer's relatively modest margins and payments to non-controlling interests have translated into modest free cash generation. Assuming a 10% coupon on the new notes, the increase in annual interest payments would be in the €18 million area, as calculated by Reorg.
A summary of the company’s financial performance is below:
Preliminary OM
Covenant Analysis
Historical Financials on Fundamentals by Reorg
Transaction Overview
German autoparts supplier Adler Pelzer is marketing €350 million worth of senior secured notes due 2027. Proceeds of the new notes, together with the proceeds from a €120 million subordinated shareholder loan and cash on balance sheet, will be used to redeem the outstanding €425 million existing senior secured notes due 2024 and to repay a €40 million super senior term loan and €10.6 million outstanding under the group’s UniCredit revolving credit facility.
Initial price talk for the new senior secured notes is 9.5% coupon at 92-93 OID, which Reorg calculates would imply a yield to maturity in the 12% area.
The €120 million shareholder loan will be provided by Adler Group SpA, the direct sole shareholder of the company. Management confirmed during the roadshow call that it is a standard equity-like instrument, deeply subordinated. The Scudieri family is the majority owner of Adler Plastic, which owns 71.93% of Adler Group SpA.
Reorg’s cash flow analysis dated July 2022, which included an overview of Adler Pelzer’s business, financial performance and valuation, can be found HERE. Under our base case projections at that time, we had estimated a recovery of 69% on the existing SSNs due 2024, which had led us to think that a company refinancing without any equity support would have been difficult.
The group’s capital structure, pro forma for the refinancing, is below:
The group’s corporate structure is below:
Source: page 41 of OM pdf
Key Credit Considerations
- Weak cash flow generation track record: The issuer’s ability to generate cash flow has been historically constrained by weak margins of about 10%, compared with a peer average of 12%. Cash conversion has also been relatively modest, averaging about 20% from 2018 to 2022. With interest payments expected to rise to €35 million following the refinancing transaction, Reorg estimates that the minimum cash EBITDA to breakeven is €152 million. This is assuming neutral working capital, capex of 2.7% of sales, leases payments of €32 million and tax payments of €28 million per year. However, this excludes payments to non-controlling interests, which have averaged €16 million a year in the 2020 to 2022 period.
- High swings in working capital historically, mitigated by the new €55 million RCF and non-recourse factoring: The issuer typically experiences a working capital net outflow over the first three quarters of the year, followed by a significant inflow in the fourth quarter. After a strong inflow in 2022, partly driven by stretching payables, a reversal is likely in upcoming periods. The new €55 million RCF should nonetheless support liquidity and management of working capital swings.
- Earnings inflated by the full consolidation of joint ventures, value leakage through dividends to non-controlling interests: Unlike peers, Adler Pelzer fully consolidates its joint ventures, presumably because of its 51% ownership in these entities. The JVs’ contribution to consolidated EBITDA is about 20%, while dividends to non-controlling interests amounted to €12.5 million in 2020, €7.3 million in 2021, and €27.8 million in 2022. According to Fitch, around €35 million of cash is not available for debt repayment due to lack of full ownership of certain subsidiaries. Stripping out non-controlling interests (10% of EBITDA), Reorg calculates gross and net leverage of 4.1x and 2.7x, respectively.
- Exposure to cyclical automotive markets but sound geographic diversification of earnings: Global automotive production is characterized by a high level of cyclicality. Also, original equipment manufacturers generally do not commit to purchasing minimum quantities from their suppliers, contributing to demand fluctuations. This is somewhat mitigated by the company’s geographic diversification with EMEA, Nafta, Asia and Mercosur accounting for 61%, 17%, 15% and 7%, respectively, in 2022.
- Supportive industry outlook: In 2023, global production and sales are both expected to rise from their low base thanks to a demand backlog, reduced supply chain constraints and a gradual improvement in delivery times. This is despite weaker macroeconomics, sticky inflation, and high interest rates. According to Global Data, the global light vehicle market is expected to grow by 6% to 85.5 million units, driven by growth in North America and Europe, while China is also expected to grow, but at a slower mid-single-digit rate. Longer term, S&P Global Mobility (formerly known as IHS Markit) expects global light vehicle, or LV, production to grow by a CAGR of 2.1% between 2022 and 2030.
- Ability to pass through material costs increases: A large proportion of the group’s sales contracts allow it to pass through cost increases associated with specific materials, though with delays because of quarterly or half-yearly adjustments. These pass-through mechanisms have historically not concerned energy, logistics and personnel wage increases.
- Relatively small supplier in a competitive industry: The group has a leading market position in acoustic and thermal components, however, the market is competitive and fragmented, with some competitors being affiliates of OEMs. The resulting pricing pressure acts as a headwind to the company’s ability to sustainably improve its margins.
- Shareholder support: The €120 million subordinated shareholder loan to support the refinancing demonstrates a strong commitment by both the Scudieri family and Hayashi Telempu Corp. This is the main driver of the net leverage drop, pro forma for the transaction, to 2.4x from 3.1x.
- Good revenue visibility via sizable order book: The group’s order book has grown to €10.9 billion in 2021 and to €12.088 billion in 2022, from €6.7 billion in 2020, providing good revenue visibility for the upcoming 10 years. The group’s backlog is also supported by long-term supply contracts, which generally provide for pre-agreed volumes with a clause for price adjustments if yearly volumes increase or decrease by a certain percentage, typically 15%.
- Long-lasting relationships with key clients: The group has long-lasting relationships of at least 30 years with six of its key clients in terms of serial sales (General Motors, Mercedes-Benz, BMW, Ford, Volkswagen Group, and Stellantis).
- Conservative covenant package. The proposed covenant package for the new senior secured notes due 2027 is more conservative than the terms under its existing notes due 2024, which will be redeemed with proceeds from the new notes. The proposed covenant terms are also more conservative compared with deals seen in the market. This is reflected by the “Day 1” capacities being well below the last four-quarter market average for senior secured notes. Reorg’s covenant analysis can be found HERE.
Comparable Bonds
As mentioned in the transaction overview, the initial price talk for the new senior secured notes is 9.5% coupon at 92-93 OID, which Reorg calculates would imply a yield to maturity in the 12% area.
Comparable issuances include the euro-denominated senior secured notes of Norwegian autoparts supplier Kongsberg Automotive and Spanish autoparts supplier Grupo Antolin. The initial price talk of Adler Pelzer’s notes is wider than the yield of Antolin’s notes, which yield 10.7% and 11.8%, and Kongsberg’s 8.7%.
Adler Pelzer’s adjusted EBITDA margin of 7.7% (including other income in the denominator) in 2022 is lower than Kongsberg’s 11.3% LTM margin, but higher than Antolin’s 6.4% LTM margin (as shown in the table below) . As shown in the industry peer table in the next section, Adler Pelzer’s margin is below the average margin of European autoparts suppliers of 12.2%.
Adler Pelzer reported lower capital expenditures as a percentage of revenue in 2022 relative to Kongsberg and Antolin, but its cash generation has been negatively impacted by recurring dividends to non-controlling interests, as shown in the Financial Overview. Overall, Adler Pelzer and Kongsberg generated positive unlevered free cash flow in the last 12 months of their reporting periods (as shown in the table below), which was mostly due to net working capital inflows, in contrast to Antolin.
Pro forma for the transaction, Adler Pelzer’s net leverage of 2.4x is above 0.8x for Kongsberg, which has a significant amount of cash on balance sheet, but is below Antolin’s 3.6x.
Recently, Benteler (another auto supplier) priced its new €525 million senior secured notes at 9.375%, which were rated Ba3/BB-. As a first-time bond issuer, Benteler's notes carried a premium compared with the average yield of similarly rated issuances.
Industry Peers
(Click HERE to enlarge)
Market Commentary
Buysiders are broadly constructive on the deal given the sizable shareholder commitment, with the €120 million liquidity injection via a subordinated shareholder loan exceeding expectations. While that will delever the restricted group to 2.5x on a pre-IFRS 16 basis, headline net leverage is based on FY’22 consolidated EBITDA, which includes a number of JVs. The earnings contribution of the JVs accounts for about 20% of group EBITDA, which means that actual leverage when stripping out the impact of the consolidation is around the 4x level, which is relatively high, some buysiders said. However, most high-yield issuers consolidate earnings, one buysider countered.
Another concern is the group’s weak cash generation. Management guided for around €5 million of free cash flow this year, which is barely above breakeven despite 2023 being a strong year for the auto sector, while some cash is held at JVs. The group has also historically faced large variable working capital swings and had a roughly €42 million inflow last year that was partly driven by stretching payables, so there is some risk of that potentially reversing and being a drain on cash. However, this is mitigated by the provision of a new €55 million super senior RCF, which will boost liquidity and help absorb working capital swings, while the group starts out with a chunky €218 million cash position post transaction, buysiders noted.
Adler Pelzer’s products are fairly commoditized and low value, typically representing around €130 per vehicle. But the value per vehicle is slightly higher for electric vehicles, where Adler Pelzer provides one to two additional parts. And while electric vehicles only represent around 10% to 15% of sales, this should rise to around 30% in the next few years. In addition, Adler Pelzer is the leader in the acoustic and soft trim market, while management has proven to be good negotiators and succeeded in getting input cost pass-throughs with the OEMs, buysiders said.
There is also scope for margin improvement, with management aiming to raise the group’s EBITDA margin to the high 9% level from 7.9% in 2022. That looks conservative given that between 2019 and 2021 the group’s EBITDA margin averaged 11%. It was supply chain issues and raw material inflation during 2022 that derailed the company, and these are abating, another buysider said. Auto volumes are at historical lows and will eventually recover, and Adler Pelzer is more geared toward the luxury car segment, he added.
Adler Pelzer has grown through acquisitions, although these don't seem to have been value-accretive, so further M&A is also a risk. However, management said there would be no more acquisitions for the time being, another buysider said.
The proposed pricing of 9.5% with a 92-93 OID implies a roughly 12% yield, which is compelling, buysiders agreed. Adler Pelzer’s closest comparable, Grupo Antolin, has 2026 and 2028 bonds that have an average yield of 11.3% on the bid side. Since Antolin is around 2.8x levered, roughly 2.5x-levered Adler Pelzer should yield around 10% on an equal-spread-per-turn-of-leverage basis, which suggests the new bond is offering a roughly 200 bps premium, one buysider calculated. While Antolin is significantly larger than Adler Pelzer, it has a lower EBITDA margin at 7% and equally poor cash generation, so it should not be trading tighter based on fundamentals, he added.
The premium is entirely down to Adler Pelzer’s previous missteps, buysiders agreed. The group has come under criticism in the past over poor communication, a lack of transparency and delayed reporting. However, it has made some improvements to its reporting since, one buysider added.
Given the generous pricing, strong shareholder support, and the fact that the group is only looking to raise €350 million of bonds versus €425 million bonds outstanding, the deal should get done, buysiders agreed. Since lead bookrunner BNP has pre-marketed the deal for several months, some of it was also likely preplaced, one buysider added.
Financial Overview
Adler Pelzer is a light vehicle automotive tier 1 supplier of acoustic and thermal interior parts serving the European, U.S. and Asian markets. Its top five customers are Stellantis, Volkswagen, Ford, Mercedes-Benz and General Motors, respectively accounting for 22%, 17%, 6%, 5% and 5% of its annual sales, or 55% in aggregate.
In 2022, revenue grew by 41% year over year to €2.1 billion, with half of this growth driven by the acquisitions of Forvia’s Acoustics and Soft Trim, or AST, business and the STS Group.
The group’s revenue from third parties by geographic area and serial sales by product in 2022, is below:
Most of the company’s contracts allow it to pass through raw materials cost increases, which, as a percentage of revenue, decreased to 53% in 2022, from 53.5% in 2020, and 54.9% in 2021. However, the same cannot be said for pass-through of cost of services, which, as a percentage of revenue, has increased to 9.8% in 2022, from 7.7% in 2021, reflecting higher utilities and energy costs.
Overall, in the past two years, adjusted EBITDA margins fell by 2.2 percentage points to 7.9%.
Profitability is also inflated by the consolidation of joint ventures, despite ownership percentages close to 51%. In the roadshow presentation, management said that 20% of group EBITDA is attributable to its JVs.
Historically, the issuer's relatively modest margins and payments to non-controlling interests have translated into modest free cash generation. Assuming a 10% coupon on the new notes, the increase in annual interest payments would be in the €18 million area, as calculated by Reorg.
A summary of the company’s financial performance is below:
(Click HERE to enlarge)
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