Aryzta €600m refinancing ‘more difficult’ after profit warning

Aryzta’s need to refinance €600 million of debt in the next year has become more difficult in the wake of the latest profit warning this week from the Swiss-Irish food company, according to analysts at two of the world’s most influential banks.

"We see the ongoing refinancing of circa €600 million of debt incrementally more difficult post the profit warning and interest costs may not be as favourable," said John Ennis, an analyst at Wall Street giant Goldman Sachs, which has pulled the stock out of its Pan-European Buy List and downgraded it to "neutral".

UBS analyst Joern Iffert, who also lowered his recommendation on the stock to "neutral", said Aryzta faced higher interest rates when refinancing the debt with its banks before it is due in February, as declining earnings will push its debt burden close to what's allowed under its banking covenants.

Shares in Aryzta have plunged more than 36 per cent over the past two days, after the company warned its earnings could drop 20 per cent. This has resulted from chief executive of 14 years Owen Killian's team misjudging the impact of its cookies and muffins unit Otis Spunkmeyer attempting to retail its brands directly. This has put it into direct competition with clients, who had outsourced baking to the company – prompting many to pull contracts.

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Aryzta has issued a number of profit warnings in recent years, prompting Mr Killian to tell analysts on an at times fraught conference call on Tuesday to concede that it has its work cut out to “re-establish investor confidence”.

The company’s net debt is likely to be 3.4 times the size of its earnings before interest, tax, depreciation and amortisation in 2018, close to its covenant limit of 3.5 times agreed with its banks, according to Mr Iffert at UBS.

While Mr Killian said the group is looking at ways to refinance the €600 million of loans, he said and his team “don’t anticipate” it will have to raise equity from shareholders.

Investor confidence

“To restore investors’ confidence, Aryzta might need to strengthen management capabilities, stabilise organic growth/ margins and review its current 49 per cent investment in Picard,” said Mr Iffert, referring to a French frozen foods company in which it bought a minority stake in 2015 for almost €450 million.

Meanwhile, the group’s new chairman, Gary McGann, will begin to canvass major shareholders on what it should do with joint venture investments, including the Picard stake.

“The Picard investment, as you know, has been contentious with shareholders,” Mr Killian told analysts. “If we didn’t announce that the board will prepare to consider our strategy in relation to this joint venture, then I think we’d be failing in the expectations of our shareholders.”

Analysts are reading this as a clear sign that Ayrzta will put the stake, which it has an option to increase in the coming years, on the market. The company’s chief financial officer, Patrick McEniff, said it would be “highly speculative” to comment on a valuation for the stake, when asked on the call whether it would be worth more than €500 million.