Management were tight lipped on Tuesday’s Q4 earnings call when asked the specifics of the 2024 refinancing.

Nonetheless, bondholders will likely breathe a sigh of relief with a much needed cash boost finally reaching the Restricted Group. On 28 December 2022, the capex intensive rental business was sold to an unrestricted company subsidiary RentCo for a consideration of €29.4m (€18.5m cash contribution to Restricted Group).

As 9fin reported, Schoeller Allibert previously outlined a financial deconsolidation plan which will separate the capex-intensive rental business, placing it outside of the Restricted Group into a new entity called RentCo. Capital investments for the ramp-up of the rental business have largely been funded by sponsor Brookfield in the form of shareholder loans.

RentCo has received €18.5m from the unnamed 'external funding partner' to finance the acquisition of rental assets from the group. The remaining consideration is in the form of previously issued Brookfield shareholder loans — €9.2m of the total €20m is being shifted to RentCo — to buy asset assets from the manufacturing group.

Cash receipts from the sale alongside a €14.6m working capital reversal in Q4 saw elevated inventory levels come down to €45m from €64m in Q3 and a €22.4 repayment towards the May 2024 RCF. 

However, repaying the RCF in full is somewhat surprising given the current cash position (€20.6m). Although the RCF shares the same security as the notes, it ranks super senior in the structure, therefore management may want to deal with RCF lenders before commencing talk over the bond refinancing.

Despite the cash boost from RentCo, refinancing woes are still not settled for the group as the main challenge would be to grow EBITDA and cash flow organically, so it can break-even based on future funding costs, likely to be substantially higher than the 6.375% SSN coupon.

It is also our view that Brookfield has demonstrated an unwillingness to contribute fresh equity to the restricted group by transferring the rental assets and by arranging external financing.

We believe there are three key considerations for Schoeller to grow organically (i) robust demand for buying or renting pallets and containers; (ii) avoiding cannibalisation i.e. a risk that rental revenue could partly replace the manufacturing business revenue; and (iii) selling containers proves more profitable than renting containers (restricted group no longer leasing containers).

As of writing, the €250m SSNs due October 2024 are indicated at 71.8-mid, to yield 31.3%, indicating that the market is pricing in the risk of a haircut. The €30m super senior May 2024 RCF is undrawn (except €3m reserved for contingent liabilities) and set to become current next month.

It is noteworthy that Schoeller has had a record of prior debt restructuring. In September 2009, Schoeller Arca Systems, later merged with Linpac Allibert, underwent a debt restructuring which saw owner One Equity Partner keeping control through a pre-packaged sale, with a €50m equity contribution and a full recovery for senior creditors. However, junior creditor claims were wiped out.

Volumes remain down

Container production requires predominantly two main raw materials – polypropylene copolymer (PPC) and high-density polyethylene (HDPE).

As of Q4, PPC and HDPE prices were ~25% down from those seen in Q2 but they are still well above pre-Covid levels. Management said during the call that 50% of their contracts come with resin price escalator clauses and as a result pass throughs are implemented automatically.

Higher container prices plus customers’ tendency to defer the purchase of containers have hampered volumes particularly for the Pooling segment. 2022 Pooling revenue fell to €138m from €207.6m in 2021, although this was partly offset by growth in industrial end markets which grew to €155m from €97.5m in FY 21.

Management changes announced

After only being sworn in as CEO in Aug 2022, the company has said that Oliver Iltisberger will step down from May 2023 due to ‘personal reasons’. Adrian Letts, MD at Brookfield, will take over the position as an interim CEO as the company finalises a new CEO. And there are more changes in senior management, with CFO Hans Kerkhoven announcing his retirement. He will be replaced by Åke Bengtsson, who recently worked as CFO of Gunneboand and CEO/CFO of Haldex in Sweden.

IFCO, once a client now a comp 

IFCO, the returnable packaging supplier, is the largest client for Schoeller, and is a potential competitor, especially after Schoeller’s introduction of the rental business. Management said today that Schoeller’s contracts with IFCO in Europe and the US expire in November 2024. Discussions are ongoing but it is too early to comment on the renewal and other specifics of the contract, they continued.