UPDATE 1: Standard Profil Bondholders Appoint Milbank as Legal Advisor

Fri Nov 15, 2024 04:29 AM ET: A group of Standard Profil’s senior secured bondholders have engaged Milbank as legal advisors, sources told Octus, formerly Reorg.

The bondholder group includes Alcentra, Tresidor, Schonfeld and Millennium, the sources added.

Original Story 4:17 a.m. UTC on Nov. 14, 2024

Standard Profil Bondholders Organize, Prepare to Hear Legal Advisory Pitches Next Week; Cross Ocean Buys Into RCF

Standard Profil’s senior secured noteholders have formed an ad hoc group and will hear legal advisors’ pitches next week after the German automotive supplier retained Herter & Co., part of Teneo, as its financial advisor to deal with its debt stack and potential financing, sources familiar with the matter told Octus. The bondholder group includes Alcentra, Tresidor and Millennium, the sources added.

Last week, Octus reported that Standard Profil is working to raise some subordinated capital, possibly in the form of preferred equity or mezzanine debt, to delever its capital structure and potentially facilitate a refinancing of its €275 million senior secured notes due April 2026.

The idea behind the potential deal would be to raise some subordinated debt sitting outside the restricted group, at the holdco or LuxCo level, and use it to delever the restricted group itself. As a result, the group’s debt might be easier to refinance or extend, sources commented.

According to sources, this potential new capital would be provided by a third-party investor and not by the company’s sponsor, the Turkish financial firm Actera. However, some sources expressed skepticism around the viability of such a deal without an equity contribution from the sponsor.

A plan B for the company could involve an extension of the full capital structure in order to provide the business with more time to improve its performance, sources commented. This would be coupled by a modest new money injection by the sponsor and interest on the extended debt expressed both in cash and PIK terms in order to contain interest costs, sources speculated. This plan would not contemplate raising any form of subordinated debt

Standard Profil’s €275 million senior secured notes only pay 6.250%. This compares to 10.375% paid by peer Grupo Antolin’s €250 million 2030 bonds and 9.5% paid by Adler Pelzer’s €400 million 2027 notes.

Standard Profil also has a €30 million super senior RCF due April 2025, which was originally provided by Credit Suisse but was bought recently by Cross Ocean Partners. The RCF was €27 million drawn as of June 30 and is subject to a covenant test when 30% or more of it is drawn. According to the 2022 annual report, the company needs to comply with a minimum liquidity requirement as well as a defined 12-months EBITDA, but the specific covenant limits have not been disclosed.

Earlier in the year, Standard Profil tried to pursue a private credit deal involving a refinancing of its bonds and no new money contribution from Actera. The deal did not fly, also due to the opposition of its creditors.

Standard Profil’s bonds were quoted as high as 94 in mid-July, with market participants viewing favorably the improvement in the company’s credit metrics between early 2023 and the first quarter of 2024. Since then, they have dropped by over 20 points, quoted around 69-71, according to Solve.

On top of the depressed bond pricing, the industry environment and the company’s performance have steadily deteriorated over recent months, making the credit profile unattractive for a debt capital markets transaction, in Octus’ view.

In July, the company downgraded its full-year guidance as it faced headwinds resulting from the recent slowdown in battery electric vehicle, or BEV, sales by certain key OEM customers and in some key markets.

In the last results release for the second quarter of 2024, Standard Profil said it experienced reduced call-offs from customers and postponed start of productions as OEMs were reconsidering their mid-to-long-term strategies with the EV transition being slower than expected. This slowdown has been driven by end customers putting big-ticket purchases on hold, uncertainty in relation to changes in government policies affecting BEVs, as well as concerns around driving ranges and a shortage of rapid-charging stations.

The decline led to a 7% year-over-year decrease in the group’s revenue and a 14% drop in EBITDA in the second quarter, with margins falling to 15%, its lowest level since the first quarter of 2023.

Standard Profil is now guiding to full-year revenue of about €485 million, compared with more than €500 million previously, and about €80 million EBITDA. It was previously guiding to EBITDA of between €87 million and €92 million.

The group’s financial performance has mostly fallen short of expectations since the bonds were issued. Across the 2018-2023 period, even before financing costs, the group has burnt, or barely generated any, free cash flows in most years, constrained by high capital expenditure and despite relatively healthy adjusted EBITDA margins averaging 17%.

Even when considering the more benign business environment from early 2023 to early 2024, the group only generated €36 million of unlevered free cash flow, which barely covered the €33 million of interest payments.

Additionally, Standard Profil’s downward leverage trend observed for most of 2023 until the beginning of 2024 has now ended. Net leverage was at 3.4x at the end of June but is expected to rise as earnings suffer from the anticipated drop in vehicle production.

The overall automotive production across the globe, and more acutely in Europe, is expected to remain under pressure in the next couple of years. Automotive data provider S&P Mobility (fka IHS Automotive) for instance said it expects global automotive production to fall by about 2% in 2024, with a 5% decline in Europe. Similarly, German tire manufacturer Continental said it expects 2024 car production to drop by 4% to 6% in Europe.