By Tom Winnifrith, The Sheriff of AIM | Friday 29 July 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Moody's has downgraded its ratings on the junk bonds of Avanti Communications warning bond holders that they would probably get just 35-65% of their cash back. In that case the equity is worthless - note the explicit warning that Avanti will face a cash crisis potentially within weeks. Moody's states viz a viz the bonds " Moody's sees a default by Avanti over the next 6-12 months as almost inevitable." On that basis the target price for Avanti shares has to be ZERO. Sell while you can.
Moody's Investors Service ("Moody's") has downgraded the Corporate Family Rating ("CFR") and the senior secured bond ratings of Avanti Communications Group plc ("Avanti") to Ca from Caa1 as well as its Probability of Default Rating ("PDR") to Ca-PD from B3-PD. The outlook on all ratings is negative.
"The ratings downgrade reflects Avanti's significantly deteriorated liquidity and reduced EBITDA which result in a lower enterprise valuation. As a result, the risk of default over the next 6-12 months is very high and the Ca rating is consistent with a recovery in the 35%-65% range at default," says Alejandro Nuñez, a Moody's Vice President -- Senior Analyst and lead analyst for Avanti.
The rating action principally reflects the company's deteriorating liquidity resulting from lower than anticipated cash earnings and a higher than expected working capital outflow over the past two quarters.
The company's expected revenue and earnings for its fiscal year ended 30 June 2016 (FY16), of USD83 million and USD8 million respectively, are markedly lower than Moody's previous expectations and the company's previous guidance. Moody's expects that Avanti will generate limited cash EBITDA growth over the coming fiscal year and, as a result, Avanti's leverage will rise rather than decline over the course of FY17.
Set against a cash balance of USD57 million as of 30 June 2016, approximately USD60 million in milestone payments related to HYLAS-3 and HYLAS-4 due over the next two quarters to its suppliers (principally satellite construction, launch and insurance companies) and an interest payment of USD32.25 million due on 1 October 2016, Avanti will face a liquidity shortfall within this period unless it is able to secure additional external capital in a timely fashion.
As mentioned in its trading update, full access to an Export Credit Agency Facility currently under negotiation has now become subject to the condition that Avanti raises at least USD50 million in equity capital. Moody's acknowledges that Avanti is currently in discussions not only with investors with regard to an equity raise but also with potential strategic investors for a corporate transaction such as a merger with or offer for the company by a third party or a sale of its businesses.
The company has a successful record of raising additional funding on multiple occasions in the past but the lack of earnings growth in FY16 casts significant doubt on its growth prospects and ability to raise further funding in a way which preserves full recovery for lenders.
While any of the strategic options under review by Avanti may eventually materialize, there is no clear visibility on their certainty or timing. As a result, Moody's sees a default by Avanti over the next 6-12 months as almost inevitable, which is consistent with a PDR of Ca-PD.
However, given the tangible asset value in Avanti's comparatively young, well-invested high-throughput satellite fleet and the fact that Avanti's capital structure is dominated by its USD 645 million of senior secured notes which contain no financial covenants, Moody's deems the likely recovery rate for Avanti's senior secured notes to be in the 35%-65% range in an event of default which is consistent with a CFR of Ca and a Ca rating for the senior secured notes.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects a high likelihood of a default in the near term with the attendant uncertainty for liquidity and recovery prospects as well as our expectation that Avanti's liquidity situation may not improve without timely access (September 2016) to sufficient external funding sourced from either equity markets or third-party investors. It also reflects the increasingly challenging market and operating outlook facing the company over the next two to three years.
WHAT COULD CHANGE THE RATING UP/DOWN
Negative pressure on the ratings could be exerted if Avanti's liquidity situation deteriorated further beyond that presently anticipated. In addition, the ratings could be downgraded if Moody's were to lower its recovery expectations for Avanti's bondholders.
Positive rating pressure could develop if Avanti were able to access external funding sufficient for it to meet its commitments due by October 2016 and to also fund itself adequately over at least the next 18 months. Upward pressure on the rating would also require a recovery in EBITDA and/or significant debt reduction to a level which would make the company's capital structure more sustainable or a higher assessment of potential recoveries for bondholders than the currently assumed range of 35%-65%.
If you own the shares sell while you can as the end is imminent. The shares really should be suspended NOW pending clarification. The target price is 0p.
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