Key points
- Ausdrill has announced a further non-cash goodwill impairment charge of AUD $60m to $90m will be taken in the FY14 results.
- The announcement is not a surprise and we have not changed our credit view on the news.
- The impairment announcement coincided with a sell-off in global risk assets over the past week as the geopolitical landscape has increased nervousness and volatility in global markets. This has created some weakness in the price which is viewed as a buying opportunity.
4. The Ausdrill Finance Pty Ltd 6.875% 1-Nov-19 USD DirectBond is indicatively offered at a price of circa USD $93.25, which equates to an annual return (or yield to maturity) in USD of approximately 8.5% and over 10% if swapped back into AUD.
Last week Ausdrill Limited (Ausdrill) announced a further non-cash goodwill impairment charge will be taken in the FY14 results.
The key details of the announcement were as follows:
- $60m-$90m impairment (pre-tax) which is predominantly goodwill
- $2.7m provision for tax on the Mali operation due to a change in tax treatment
- Exact figures will be detailed when the FY14 results are released on 28 August 2014
The company also made the following statement:
“Impairment Implications
The impairment expense is a non-cash item and:
- does not have any impact on cash-flow;
- will not have an impact on operations; and
- will not have a material impact on banking covenants with the principal covenant affected being the gearing ratio which would increase by approximately 2%, which is well within the required limit allowing the Company to maintain a significant level of headroom under its gearing covenant test.
Further details on the impairment expense will be provided in the Company’s financial statements for FY2014.
The Board remains focussed on improving the Company’s performance and applying the free cash-flow generated to reduce debt, with the Company remaining on track with its previously stated strategy of de-leveraging the business over the next 12 months.”
Relative value summary
While the goodwill impairment charge is not positive news, it was broadly expected given the downturn in the mining sector. The announcement has not changed our credit view, notwithstanding the circa 10% fall in the share price that followed and we note that the share price is back to levels of just a few weeks prior.
From a cashflow perspective, which should be the focus of debtholders, the impairment charge is non-cash and should have very limited impact on the company, operations and covenants, as detailed above.
We also point to the statement that: “The Board remains focussed on improving the Company’s performance and applying the free cash-flow generated to reduce debt, with the Company remaining on track with its previously stated strategy of de-leveraging the business over the next 12 months.” This is a positive statement for debtholders and demonstrates that the company is focused on deleveraging and not on growth.
As we know, revenue and growth conditions are weak in the mining services sector at present, however, Ausdrill has the ability to deleverage fairly quickly via a significant reduction in capex (i.e. stop buying new equipment) and where possible selling off excess equipment. This will be the focus of our credit assessment over the coming 12 – 18 months and to assess the extent of cashflow generation and deleveraging that occurs while the company rides out the bottom of the mining cycle.
The impairment announcement coincided with a sell-off in global risk assets over the past week as the geopolitical landscape has increased nervousness and volatility in global markets. This has seen some weakness in the price of the Ausdrill Finance Pty Ltd 6.875% 1-Nov-19 USD DirectBond which is viewed as a buying opportunity given our credit view has not changed.
The Ausdrill Finance Pty Ltd 6.875% 1-Nov-19 USD DirectBond is indicatively offered at a price of circa USD $93.25, which equates to an annual return (or yield to maturity) in USD of approximately 8.5% and over 10% if swapped back into AUD.
Investors are reminded that the Ausdrill USD bonds (rated BB-/B1) are viewed as relatively high risk but come with a high return to compensate.
Ausdrill Finance Pty Ltd 6.875% 1-Nov-19 USD DirectBond is available to wholesale investors only in minimum (face value) parcel sizes of USD $200,000.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.