Astaldi - more negative news - gamble or opportunity?

A company which is currently being battered by negative news is Astaldi.

Astaldi, which is an Italian global player in the infrastructure and construction sector has recently been downgraded by all the three major credit rating agencies. S&P (from CCC to CCC-), Moody’s (from Caa1 to Caa2) and Fitch (from B to CCC-).


What was the rationale of this downgrade?

Last year, the company had to write off around €230 million euros on its exposure to Venezuela and has since embarked on a capital re-financing plan. The programme comprised a share capital increase of approximately EUR 200 million and the issue of additional financial instruments totaling approximately EUR 200 million which had to go to consolidate the Company's financial structure.

The company had planned to sell its stake in the Third Bosphorus Bridge in Turkey to generate the much-desired capital which until now has not yet materialised due to political and economic events which affected Turkey this year.

The ratings downgrade reflects increasing likelihood of a default primarily owing to further delays in the sale of this concession, which is the key milestone triggering a number of planned financial strengthening measures to an inadequate liquidity profile with sizeable debt maturities in the coming months.

Astaldi's liquidity is also currently inadequate. Moody's estimates that the company's own liquidity sources, including EUR355 million of cash and cash equivalents (as of 31 March 2018) are currently not sufficient to cover expected negative free cash flow generation and its short-term debt maturities (EUR865 million as of 31 March 2018).

In addition, Moody's believes that the banks may become increasingly reluctant to renew the company's uncommitted credit lines in a scenario that the company fails to execute the planned EUR300 million rights issue.


What is the outlook of the company?

S&P and Fitch have placed Astaldi with a ‘developing outlook’ and this because in the event that the Company is unable to refinance its bank-lending maturities, the ratings could be lowered further; should the Company be successful in selling its stake in the Third Bosphorus Bridge, and subsequently issuing equity, substantially improving liquidity, positive rating action is likely.

Moody’s on the other hand is more aggressive with a negative outlook view that the Group might not be able to execute the envisaged plan on a timely manner or with an outcome that will be below original expectation. According to Moody’s, a deterioration of the credit quality of the Government of Turkey (Ba3, Negative) and Turkish lira weakness, which creates pressure on the valuation of Turkish assets, further adds to the uncertainty regarding the success of the envisaged plan.


Is this a gamble or an opportunity? Should you consider the bond or the stock?

Due to all of this turmoil, the company’s senior bond Astaldi 7.125% 01/12/2020 has seen its price dropping sharply. As we can see from the chart, the bond price has dropped by 65% over a year and is now trading at €37. This means that in two years’ time, should the bond redeem as planned the investor would receive a yield to maturity of more than 73%!

Looking at the financials (see attached), the company is losing a lot of money and with a situation bleak as it is, share price will continue to face more downward pressure. Over a one year period, the stock price lost 83% in value!.

Furthermore, just this morning, the company filed for a composition with creditors agreement “with reservation” following the delay in the process to sell it's stake in the Third Bosphorus bridge. It said the targets in its 2018-2022 plan were no longer achievable. Today’s filing might be seen as the first preparatory step towards insolvency.

Looking at all this negative news, investing in this company seems to be highly risky at the moment. One might give it a thought however if this would form part of a very small portion of your overall portfolio due to very high rewards.

When it comes to the bond as we said there is more potential however we need to keep in mind though that the minimum order quantity for the bond is €100,000.

For the stock I would only go short due to the heavy uncertainties surrounding the company although at the moment there does not seem to be counterparties available to do such position.

What do you think about a spread trade between bond & equity? Buying the bond and short the stock?

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