Hibu – going concern....

Taking a look through hibu’s latest accounts for y/e 31-Mar-2012. I see that the auditors have reported an “Emphasis of matter – Going concern” that “There is a risk that the Group may breach the financial covenants with its lenders.” Under a breach, creditors would be able demand immediate repayment.

There are some interesting comments in note 16 on “Risk management” on page 85 which details the cash and debt cover ratios.

Note 19 on page 94 lists out loans, other borrowings and net debt. “The Group’s financing facilities primarily comprise a series of term notes in pounds sterling, euros and US dollars”. About half of it is in USD, and the rest split evenly between GPB and EUR.

It doesn’t look like the debt is tradeable, but is a bank loan, which is a pity, because the debt is almost certainly worth something, as far as I can see. Hibu lists the total loans and borrowings as 2335m GBP. In its latest finals, it reported 507, GBP in operating cash flows (assuming it’s not jiggling that figures). Taxation doesn’t amount to much, which might suggest that the company’s profits aren’t real. Interest payments would be largely irrelevant under a D4E swap. It’s interesting, because I would ask myself if I had 2335m, would I like to get my hands on 507m of annual cashflow? The answer is “yes” – that’d be a good deal. Now, Hibu is having trading problems at the moment, so the cashflows are very likely to reduce in the future.

It’s a very very interesting story, and unfortunately I have no experience of this to know how it is going to work out. Perhaps some informed reader can explain the likely scenarios. Do the banks want a breach (given my argument about access to cashflow), are they likely to be selling off the debts to specialist debt investors, and are the banks quite cute when it comes to negotiating such a trade? The chances are that I will never get to find out the answer.

I had previously said that at an EV/EBITDA of 13 was way too high a valuation for the company. OTOH, if you assumed a D4E in which current equity is wiped out, then maybe you could get a free-cashflow-yield of 10% fairly comfortably, which is actually quite reasonable. Where am I getting 10% from? Well, net debt is 2200m. So I’m implying a free cashflow of 220m. In the latest reported results, there’s operating cashflow of 507m. Lop off 0 for interest as opposed to the reported 135m last year, because interest payments will disappear under D4E, assume corporation taxes of 122m (24%) and capex of 60m. That would give freecashflow of 325m. That cashflow will likely deteriorate, of course, but that’s quite a way above the 220m. Under this scenario, it’s not even clear that debtors would expect a haircut.

Interesting.

Anyone with any clear insights on this?