High Yield Bond Issued By Savcio Into The European Investor Markets
Savcio: strong response from investors sees book several times subscribed
The upcoming EUR 125m 7-year NC4 senior secured note issue from South African electrical maintenance and repair services company Savcio Holdings (Pty) Ltd (Savcio) has gone down well with investors consulted by this news service.
Those that said they won't play cited geographical issues or concerns with the relatively small size of the deal, but those that have done the work are generally very positive, with what criticism there was largely aimed at the marketing process rather than credit specific. Price talk on the B2/B+ rated issue was announced by sole bookrunner Barclays at 8% area last week (vs 8.25% pro forma) alongside a EUR 10m upsize to EUR 125m. It is understood the book is in excess of five times subscribed, primarily by long only accounts. Pricing is scheduled for tomorrow morning.
Investors pointed to the company's ability to generate cash, experienced management team, leading market positions, brand recognition, strong and diverse customer relationships (including South African government, Anglo-American, Mittal Steel, Sasol, Petronas, Sappi and Mondi), relatively high barriers to entry, and, critically, its black economic empowerment (BEE) accreditation.
"It's a good business that throws off cash and 8% is about right for this credit so it ticks all the boxes," said one investor. "I like the company, the management and the structure of the deal," echoed a second, while others noted the recent success of fellow South African issuer Reclamation Group is contributing to positive sentiment.
Savcio is the largest privately-owned provider of maintenance and repair services for rotating electrical equipment and transformers in Africa. Formerly the repairs and services and replacement parts businesses of Delta Electrical Industries (Delta), the company's primary business is the provision of maintenance and repair services for a motors and transformers (50% of 2004 revenues), the manufacture and distribution of input materials to electrical manufacturing and repair industries (28%), and distribution of replacement parts for earth-moving equipment and heavy trucks used in the construction, mining and trucking industries (22%). Pro forma net debt to EBITDA is 4.5x, according to the source close to the deal.
"It's a compelling business," said a hedge fund investor. "It has a visible and predictive revenue stream, low capex requirements and cash flow is strong," he continued. A second noted that "the business already throws off a fair bit of free cash without a private equity-style growth model implied into it.
A third singled out management for praise, "Management is long standing and experienced. The one on one was really good - both management and the sponsor were really open." Almost every investor consulted referred to Savcio's BEE credentials, believing it key to future success.
Savcio's major shareholders include two BEE entities - Aka Capital and Sphere, each of which control 12.35% of the company's voting rights. "The BEE accreditation is key to getting new business - it's a competitive advantage," said one investor. "Close links with the BEE groups provides added political and competitive advantage and opens up a new network of business opportunities," said a second.
BEE credentials are important for winning contracts from public and private sector customers in South Africa, and one of Savcio's key growth strategies is to target specific infrastructure opportunities such as rail transportation upgrades and the reorganisation of power distribution in South Africa.
Savcio is optimistic that much of the resulting maintenance work will be out-sourced and that its BEE credentials will increase its chances of winning contracts, investors said. "The PE growth model in this case is to take business from in-house operations that are at full capacity," noted one.
A number of buysiders noted that the business has been well-invested in the past which has helped give it a competitive advantage and build up barriers to entry.
"Barriers to entry are high so Savcio gets lots of repeat business, thus cash flows are fairly stable and even on a flat cash flow it washes its face," observed one investor. "Savcio has a good proprietary database of machinery, power plants and tracks the maintenance schedule closely making it well placed to anticipate repairs and pitch for the work ahead of time," noted another.
Over the past five years Savcio has invested heavily in its facilities and technical capabilities and since 2000 revenue and EBITDA have grown at a compound annual rate of 14% and 20.3% respectively.
The company has built a service history database of both standard and custom-made electric motors and transformers installed in South Africa which enables it to reduce maintenance and repair lead times by manufacturing and sourcing critical components required for repairs in advance of receiving failed equipment at its workshops, as well as to more accurately price contracts.