In our last post about Verallia we flagged financing costs as a key risk. In general, Verallia carries a meaningful amount of debt. Until now, this was not a cause for concern because the company operates in a fairly stable (non-cyclical) industry and because the cost of debt was low.
In 2021 Verallia issued €1.0bn in bonds with an average coupon of 1.75%. These matured in 2028 and 2031. However, the BWGI takeover triggered a change-of-control clause that let holders redeem early. Yesterday, Verallia announced that 830m of those bonds were redeemed—which is a higher share than we had forecast.
This pushes borrowing costs up. Debt that cost 1.7% will be refinanced at today’s market levels, which we expect to be at least 2× that rate, and possibly more. French government yields are roughly 300+ bps above 2021 levels and credit spreads are wider, reflecting ongoing and worsening fiscal concerns. As a result, we are revising our net-income outlook lower to reflect a higher interest bill.
We foresee the hit to net income being between 5% and 10%. For a low-growth company, this is significant. Therefore, we’ll be halving our position down to 8%. We currently have a 14% total return on our average cost basis (mostly from dividends and FX).
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