The Apax-owned asset said the first quarter was ‘was characterized by strong consumer uncertainty due to high inflation and the Ukraine war, resulting in limited traffic volumes across the industry.’ This resulted in an ‘unprecedented increase’ in costs during the quarter.

In an earnings call this afternoon, analysts challenged management on how they intend to deal with a cocktail of macro issues including and not limited to a 25% rise of the minimum wage in Germany (where 80% of staff are based), higher-dollar terms, higher freight costs, higher raw material costs, the war in Ukraine, rising energy costs in Germany and higher lease payments.

Unsurprisingly, management was unable to provide thorough answers to all these existential questions. Surprisingly, no one asked about Takko’s looming maturities and how they intend to refinance their €285m SSNs and €225m FRNs bonds both due Nov 2023 in an increasingly hostile HY market.

Discounted debt

Takko’s €285m SSNs and €225m FRNs bonds due Nov 2023 dropped around four points to 75-mid this morning following the results reveal:

The bonds have taken a beating in recent weeks as investors lose confidence in consumer names against a difficult macroeconomic backdrop and the likelihood of Takko’s ability to refi its notes due Nov 2023 is further called into question given the tough HY market.

Last November in the heady days of the strong primary market, Deutsche Bank sounded out investors for a refi, however they were reportedly put off by renewed Covid restrictions and past interest payment delays. Most market participants now assume that an A&E or soft restructuring is most likely at this stage given the state of the HY market, unless of course private credit comes out to play.

While Takko’s leverage is relatively low at 3.5x as of 30 April, several analysts noted that the business cannot sustain high leverage due to its capex-heavy model and the expectation that it would only attract a valuation multiple of around 5-6x. The heavy use of letters of credit is also a concern - rising to €170m from €81.4m in the prior quarter. At 30 April, net debt amounted to €528.3m and the company met all of its maintenance covenants.

Despite a strong LTM adjusted EBITDA figure of €152m, last year’s stellar Q2 numbers will now drop out, leading to one analyst on the call struggling to see how they would meet the €110m minimum EBITDA covenant for July 2022 (it steps up from €70m in April). Management failed to take up the option of doing the bridge, saying “this is quite a forward-looking question. What I only can say is that the the LTM, as you could see, was €152m as per end of the quarter. And with that we are far over over our covenant.”

Cash slash

Takko’s cash burn is one of the most obvious red flags in the report. 9fin previously reported that liquidity was just £52m last May, but by end Q3 (to end October and around the time of the attempted refi) this leapt to an impressive £242.5m, boosted by increases in payables days negotiated with suppliers during lockdown. This had fallen to £204m by 23 December with management saying that payables should normalise, being Covid-specific, without giving forward guidance. The figure has now fallen to €131.7m at April 30.

Liquidity has historically been an issue for the retailer. In March 2021, the Germany-based discount retailer was fast running out of cash, with talks over a €75m state-guaranteed loan from KfW breaking down, and interest payments temporarily suspended. In mid-March, Takko received €53.6m of new money as the finalisation of its restructuring and refinancing negotiations. The facilities include a €23.5m super senior term facility maturing on 31 May 2022 and a new €30m term loan maturing 15 August 2023, mostly provided by sponsor Apax either directly or reportedly via debt funds in which it invests.

Price crunch

Management warned that tough quarters may be on the horizon as a result of ongoing supply chain challenges, rising utility costs and continuing increase in raw material prices including cotton, which it mainly sources from China. The team added that they intend to address these issues by partial pass-throughs to customers and adjustments in the materials mix.

This useful graph from the presentation illustrates that Takko will increase the price of each piece at an average of 8.9%, significantly less than the rising global cotton prices.

One analyst on the call hinted that Takko’s opex strategy and hesitation to increase product prices in line with commodity price hikes has led to its decrease in its margins and EBITDA compared to pre-Covid levels.

CFO Kurt Rosen commented that they are committing to their goal to stay competitive and do not want to raise prices more than 8.9% despite the huge hikes in cotton prices. As a discount retailer, Takko may struggle to pass on price rises to customers who are likely to be dealing with inflation and rising cost of living struggles. It also has a price guarantee to customers for what it calls ‘staple products’.

It takes two to Takko

Takko failed to shed light today on how it intends to address next year’s maturity wall and repay bondholders. An analyst who has been closely tracking the asset for several years told 9fin that sponsor ‘Apax is playing a game of cat and mouse with bondholders’ while another added that bondholders are uncertain about Apax’s end game.

Several market participants have mused that Apax may look to relinquish control if they cannot agree a refi or an Amend-and-Extend, with one advisor suggesting it could follow the path of peer HEMA and go down the debt-for-equity then accelerated sale route. HEMA’s former CEO Tjeerd Jegen joined as CEO in April.

It is worth noting here that in the initial spring 2020 restructuring talks Apax was willing to hand over the keys, but later backtracked on this after sales rebounded after its stores reopened in April 2020. The sponsor has owned the asset since 2011, has explored at least one sale and an IPO and may look for a ‘dignified’ exit. A source close to the situation suggested that Apax was running out of patience with the asset.