Acid test ahead for Ardagh Packaging

Cantillon: Paul Coulson’s company may be running out of road

It might be an over statement to say Paul Coulson's Ardagh Packaging Group is running out of road, but the asphalt is certainly getting thinner. The danger of leverage (as many before him have found out to their cost) is that when you lose momentum or things go wrong problems quickly pile up.

Ardagh has hit two speed bumps in recent months. The first is the well publicised delay in completing its debt-financed €1.275 billion acquisition of the Verallia North America. The other – which has only come to light more recently – relates to its European metals (tin cans) business which is seriously under performing. It accounts for about a third of the group.

The consequences of these for cash flow – the life blood of leveraged businesses – has been negative and as a result Moody’s has downgraded it from B2 to B3. The agency also said that the probability of default had increased by a similar quantum.

Its not good news for Ardagh, but the acid test of its significance will be appetite for the $675 million in fresh debt that Ardagh is in the process of raising to refinance $300 million of existing debt.

After that comes Ardagh’s long awaited equity raising which Moody’s sees as a prerequisite if it is to avoid a further downgrade. The others are a successful restructuring of the European metals business and a halt to the company’s debt-fuelled acquisition gallop.

Only the latter is a certainty and it is something of a double-edged sword. Investors will get a chance to understand the company Coulson has built a little better once the accounts are not distorted by large debt-financed acquisitions, but there is no guarantee they will like what they see.

The consequences for Ardagh if it does not deliver on the other two are further downgrades and the unwelcome attentions of hedge funds and various other vultures.

On the positive side the company does not face any significant debt repayments until 2017 and has €168 million in cash and a €233 million credit line.

Ardagh has time to sort out its problems, but thanks to its leverage of more than six and half times’ underlying earnings , not much.