Financier Paul Coulson, perhaps Ireland's biggest darling of global "junk-bond" debt markets as he built up his Ardagh Group, is finding public equity investors an altogether testier bunch.
Ardagh accumulated an $8.3 billion (€7.1 billion) debt pile of mainly high-cost bonds in the past two decades, transforming the once lowly Irish Glass Bottle Company in Ringsend in Dublin into one of the world’s largest metal and glass packaging groups.
His timing has typically been perfect. Last January, the Dubliner ventured into the market to sell $350 million of the riskiest type of debt out there (payment-in-kind notes, where interest costs are rolled up and repaid at the same time as the principal) – just weeks before global financial markets went into meltdown. The money was raised through a holding company within the group to make a special payment to long-standing shareholders in the business.
In September 2016, Ardagh sold $1.72 billion of bonds to refinance some higher-cost loans and return €270 million to shareholders. But within 24 hours of the deal being priced, bond markets took a temporary turn for the worse, prompting a slew of other companies to call off fund-raisings.
‘Junk bonds’
All told, Ardagh has raised almost $10 billion selling “junk bonds” – notes that are classified by credit ratings firms as below investment grade – in six deals in a little over two years.
Much of the money has been used to retire higher-cost borrowings, saving tens of millions of euro of interest cost in the process. A chunk of the funds financed Coulson’s $3.2 billion purchase in 2016 of a beverage cans business from US rival Ball and the UK’s Rexam as they were forced to sell assets to appease competition authorities as part of their own merger.
The transaction paved the way for the businessman to float Ardagh Group on the New York Stock Exchange in March last year, raising $350 million through the sale of an 8 per cent stake in the operating company to fresh investors. (Legacy shareholders in the business, including Coulson, company managers and high-net-worth individuals, have remained locked in, for the moment at least, as their investment is held through a holding vehicle above the listed company.)
Debt burden
Debt investors that have bought into Coulson’s plan have been duly rewarded, especially those, for example, who received coupons of up to 11.1 per cent on payment-in-kind notes issued in 2014. The company has also been true to its word in easing its debt burden, if only gradually, from 5.7 times earnings before interest, tax, depreciation and amortisation (ebitda) two years ago to 5.3 times ebitda for the last 12 months.
However, equity investors, who paid $19 a share in last year’s initial public offering (IPO) have been less fortunate.
Shares in the company fell by as much as 11.6 per cent on Thursday to a record low of €14.77, as the group unveiled a weak set of second-quarter figures and lowered its full-year ebitda forecast, to $1.5 billion from $1.6 billion. The alert followed on from two similar warnings last year after the IPO.
The latest downgrade was prompted by ongoing problems with the group’s North American glass division, where ebitda slumped by a third to $70 million in the first half – hit by the triple whammy of weak US food, wine and beer markets, cheap glass imports flooding the market from China and Mexico, and soaring freight costs.
Currencies front
It more than offset decent growth across the other three divisions: metal packaging units in Europe and America, and the European glass business.
Ardagh has also been unfortunate on the currencies front. The two profit warnings last year were fuelled by dollar weakness as the company reported figures in euros. The company moved in February to change the currency in which it report to dollar. Problem is, the greenback has rallied strongly against the euro this year, resulting in a translation drag on European revenues and earnings.
Coulson came out on Thursday to back US president Donald Trump’s plans to slap tariffs on “effectively subsidised” Chinese glass imports. The financier also signalled on a call with analysts that he could close further US factors, having shuttered a beer bottle manufacturing plant in Milford, Massachusetts in March with the loss of about 250 jobs. Workers at the company’s plant in Ruston, Louisiana must surely be worried after Ardagh suspended production there this month.
Transport costs
The Ardagh chairman and chief executive also said that the company was working on cutting costs across the North American glass business, and looking at ways to pass on rising transport costs to customers.
“These and other initiatives are expected to improve operational and financial performance in glass packaging North America, although they will take longer than we previously expected to have meaningful effect,” Coulson said. “And whilst in the short term they will lead to some increased costs and disruption, we are very clear that these are the right initiatives to pursue and that they should be implemented without delay.”
With equity investors’ hopes of earnings growth this year having all but evaporated in recent days, Coulson is now pitching 2018 as a “transitional year” in which the group will begin the process of rebuilding the North American glass unit’s profitability to “appropriate levels”.
Market conditions
He has insisted, however, a plan outlined in February to “materially” increase the amount of tradable stock – by giving investors in the unlisted holding company direct stock in the publicly-quoted business – remains intact.
“It’s pretty much 18 months away at a minimum. And we always said it will be subject to market conditions,” he said.
Having seen the value of his indirect stake fall from a peak of $1.87 billion shortly after the IPO last year to $1.25 billion, currently, no one is hoping for a turnaround in Ardagh’s fortunes more than the 66-year-old known to his friends as “the Cooler”.
