Tuesday 07 November 2017 by FIIG Research Company updates

Company updates – Emeco, Frontier, Genworth, IPG, NAB, Rackspace, Transocean, Westpac

This week, credit rating agencies review Emeco and Rackspace, update on IPG call and change of control provisions, 3Q17 results from Frontier Communications, Genworth US and Transocean, Rackspace lender presentation and FY17 results from NAB and Westpac 

Moody’s takes rating action on Emeco Holdings Limited and Emeco Pty Limited

On 2 November 2017, Moody’s Investors Service affirmed Emeco Holdings Limited’s (Emeco) Caa1 corporate family rating and Emeco Pty Limited’s Caa1 backed senior secured debt rating. At the same time, Moody’s has changed the outlook on the ratings to positive from stable.

This follows Emeco's announcement of the acquisition of Force Equipment Pty Ltd on 31 October 2017 for an enterprise value of AUD69.8m. The acquisition will be funded by a fully underwritten equity raise of AUD80m. Emeco stated that Force Equipment's revenue for the fiscal year ended 30 June 2017 totalled around AUD86.1m and its operating EBITDA for the same period was around AUD23.6m.

Emeco's New South Wales and Queensland operations have shown considerable improvement in response to strong coal prices. While Moody's expects that coal prices will likely moderate from their current levels, prices should remain well above the lows seen in 2015.

At the same time, the operating environment for Emeco in Australia appears to have stabilised as market conditions have tightened for the availability of surplus equipment, and commodity producers look to increase capital spending following relatively stable commodity prices.

Frontier Communications – 3Q17 update

Frontier Communications (Frontier) reported 3Q17 results with revenue in line at USD2.25bn and adjusted EBITDA of USD914m. The company continues to stabilise the business through customer experience initiatives reducing churn in both its legacy and Fibre Optics products. As a highlight, the company has achieved pre acquisition level of CTF (California Texas Florida) Fibre Optics broadband gross adds and expects to see net growth in the coming quarters which will begin to offset the decline in legacy revenues. Frontier continues to reiterate its guidance of achieving annual synergies of USD350m by mid 2018.

For more information on Frontier’s 3Q17 earnings, a report is available here.External link - opens in a new window 

Genworth reported positive 3Q17 earnings

On 2 November 2017, Genworth released its 3Q17 Earning Summary Presentation.

Main points:

  • Strong Insurance in Force (policies still in force) growth, loss ratio, and capital levels for US mortgage insurance (MI)
  • US MI's Private Mortgage Insurance Eligibility Requirements (the minimum required by Freddie Mac and Fannie May to private insurers who wish to insure mortgages by these agencies) sufficiency ratio at 122 percent, in excess of USD500m above requirements
  • Strong loss ratio and capital levels for Canada MI
  • Annual review of long term care insurance (LTC) claims reserve completed.  No significant adjustments as aggregate LTC claim experience in line with expectations.  Loss recognition and cash flow testing will be completed with the fourth quarter financial close
  • Net income included USD40m of net investment gains, net of taxes and other adjustments, primarily related to fixed income exchanges and derivative gains
  • Holding company cash and liquid assets of approximately USD830m

However, there has been no further progress made on the Oceanwide merger and, in addition to refiling with the CFIUS, the companies will need to seek approval for extension beyond 30 November from all state regulators that have already approved the deal.

In response to refinancing upcoming maturities, the company said, “Genworth is currently reviewing potential refinancing options to address upcoming debt maturities in the event the transaction with Oceanwide cannot be completed in a timely manner or at all.  Genworth could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with Oceanwide cannot be completed. Genworth is also evaluating options to insulate its U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with Oceanwide cannot be completed.”

The link to Genworth’s results presentation is available here.External link - opens in a new window

IPG call and change of control provisions

On 11 September 2017, Pro-Pac Packaging Limited (PPG) announced its agreement to acquire Integrated Packaging Group (IPG). The merger is funded through a combination of AUD60m PPG shares issued to venders, an AUD54.8m fully underwritten equity raising and AUD70m from a new debt facility. IPG is to be acquired under a standard cash free/debt free mechanism. The indicative timetable below indicates a 6 November 2017 merger close. 

The acquisition of IPG presentation is available here.External link - opens in a new window 

FIIG has received questions of the call and change of control provisions for IPG. Here, given a call is irrevocable; one would assume the company will wait until the transaction settles before issuing such a notice – that is, before 6 November 2017.

In terms of the change of control (COC) provision:

  1. Once a COC event occurs, IPG has 30 days to notify the noteholder
  2. The notification then gives a redemption date between 60 and 90 days from the notice date

IPG must also give 15 days’ notice to redeem the notes. The bond is callable anytime until September 2018 at 102%. The COC is at 101%.

Please call your local dealer if you have more questions. 

NAB – FY17 results

On 2 November 2017, NAB released its full year 2017 results.

Main points:

  • FY17 cash profit of AUD6.64bn was up 2.5% on FY16 (in line with analyst expectation). This was driven by higher net interest income from increased volumes and repricing partially offset by higher operating expenses, which were largely from continued investment in the business net of productivity savings
  • NAB is expecting to deliver an AUD1.5bn increase in investment by the end of FY20 to further improve customer experience, reshape its workforce and grow the bank. Cost savings of greater than AUD1bn are targeted by the end of FY20 (including 4,000 net reduction in headcount) as the bank further simplifies its business
  • Net Interest Income increased 1.8% driven by housing and business lending volume growth, combined with repricing activity. This was partially offset by a lower earnings rate on capital and the impact of the bank levy for the final quarter of the 2017 year
  • Net interest margin of 1.86% was down 3bps as an increase in lending margin was offset by 1bps decrease due to the bank levy, as well as decrease in margin in the treasury income and hedging activities
  • The charge to provide for bad and doubtful debts increased by 1.3% due to higher collective provision charges primarily driven by overlays for the commercial real estate, retail trade and mortgage portfolios. This was partially offset by improvements in credit quality across business lending and the New Zealand dairy portfolio, resulting in a lower level of new impairment activity

For more information, please see these links: ASX results announcement, full results and presentation.External link - opens in a new window

Rackspace lender presentation

On 1 November 2017, Rackspace’s senior unsecured notes received the following ratings actions:

  • S&P’s downgrades bonds to B with outlook stable
  • Moody’s affirms bonds at B3 with outlook to negative from stable
  • Fitch affirms bonds at BB- with outlook stable

On 2 November 2017, Rackspace Hosting Inc (Rackspace) released its lender presentation.

  • On 11 September 2017, Rackspace announced it signed a definitive agreement to acquire Datapipe, Inc. (Datapipe), a leading provider of managed services across public and private clouds, managed hosting and colocation (the “Acquisition”)
  • Rackspace is seeking to upsize its existing USD2,095m senior secured term loan due 2023 (the “TLB”) by USD800m (the “Incremental TLB”) to fund the acquisition
  • Proceeds from the Incremental TLB, together with balance sheet cash, are intended to be used to finance a portion of the acquisition, repay certain of Datapipe’s indebtedness, and pay related fees and expenses
  • ExPro forma for the transaction, net secured leverage and net total leverage are expected be ~2.8x and ~3.9x, respectively, based on last 12 months 30 June 2017 Pro Forma Adjustment. EBITDA4 of USD1,015m
  • Acquisition is anticipated to close on or around 15 November 2017 

Transocean – 3Q17 earnings update

Transocean reported 3Q17 Revenues of USD808m (+7.6% QoQ, -11% YoY), adjusted normalised EBITDA of USD349m* (EBITDA margin of 49%) and adjusted net income was USD64m vs USD1m in previous quarter. These results continue to exemplify the quality of Transocean as a company in its ability to maintain margins through a severe downturn

The acquisition of Songa Offshore will further solidify Transocean’s position as the leading deepwater harsh environment offshore driller. The company’s strategy to divest its Jackup fleet and focus on niche Harsh Environment markets has begun to bear fruit as they have seen dayrates in Harsh Environment contracts increasing 70% from 2016.

Within the ‘new normal’ oil environment, Transocean’s segmentation towards a higher margin product is likely to improve its short term prospects of being awarded new rigs and, in the long term when Deepwater recovers, its ability to command a premium for its rigs.

The full update on Transocean’s 3Q17 earnings is available here.External link - opens in a new window 

Westpac FY17 earnings

On 6 November 2017, Westpac reported solid FY17 earnings with cash profit increasing by 3% to AUD8.1bn.

Main points:

  • Cash earnings growth was mainly driven by a 24% reduction in impairment charges from AUD1.1bn to AUD0.9bn, as well as a 2% increase in net interest income from AUD15.3bn to AUD15.7bn
  • Similar to its peers, Westpac reported a reduction in net interest margin (NIM) due to increased competition in term deposits and wholesale funding, as well as due to wider impact from lower interest rates on hedging and capital. The bank levy contributed to 1bps (AUD95m) reduction in NIM
  • Lending growth was a little below system due to mortgage macro prudential limits. Lending increased 3% with Australian housing the largest contributor, growing 6%. Australian business lending was little changed over the year as growth across small and medium enterprises, and services sector lending was offset by a decline in some lower returning facilities, including commercial property
  • Credit quality improved and stressed exposure, as a proportion of total committed exposure, was low compared to historical experience. The fall in stress was a result of both lower impaired assets and reduction in watchlist and substandard facilities
  • Higher earnings for 2017 were accompanied by a further strengthening of the group’s balance sheet, in particular the CET1 capital ratio increased by more than a full percentage point to 10.56%. This is just above the ‘unquestionably strong’ benchmark set by APRA, in advance of the January 2020 deadline. Liquidity remained sound with a liquidity coverage ratio (LCR) of 124% (above the 100% regulatory minimum) and the Net Stable Funding Ratio (NSFR) finished the year at 109% (above the NSFR threshold of 100% that applies from 1 January 2018)
  • On the funding side, customer deposits increased by 4% compared to AUD20.1bn in FY16. Over FY17, Westpac raised AUD36.6bn in long term wholesale funding. Approximately two thirds of new issuance was issued as senior unsecured bonds, a further 18% as covered bonds, and the balance was issued in capital securities and securitisation, providing a mix of tenor, investor and cost to funding

The link to Westpac’s results announcement is available here.External link - opens in a new window