Frequently Asked Questions on Capital Structure

Transcription

1 Frequently Asked Questions on Capital Structure 1) How much cash do you have at the PLC level? We currently have almost 80 million of unrestricted cash at the PLC level. 2) How are you able to pay dividends? The first point to make is that the cash lock-up mechanism prioritises deleveraging over cash distribution to the PLC. This means that The Class A Notes only permit the release of cash to pay dividends provided the senior leverage ratio after payment is less than 5.5x and, more obviously, providing there is sufficient excess cash flow to cover the payment. There must also be no Class A trigger event outstanding. The terms of the Class B debt are a little more complex. Dividends would need to be permissible under the restricted payments covenant through either the build-up basket or one of the other permitted payment baskets. The key conditions to using the build-up basket are that: 1) there is no Class B Loan Default, Share Enforcement Event or Class B Loan Event of Default 2) the Fixed Charge Coverage Ratio is at least 2.0x on a pro forma basis 3) the amount of such dividend does not exceed a build-up based on 50% of consolidated net income since 1 May Only when these conditions are met can the cash sitting in the WBS be paid as dividend to the PLC. In FY19 we will be using the funds we have already moved up to the PLC level to pay dividends as we will not meet the 5.5x leverage gating covenant at this low point of our EBITDA expectations. We propose paying 2p per share per annum which amounts to around 12m per annum which is amply covered by cash at the PLC level. We expect to pay dividends at this level until the Board is satisfied that profits and free cash flow enable a more normalised level. Page 1 of 10

2 3) Why not cut dividend payments altogether instead of paying 2p per share per annum? We have decided to keep an annual dividend payment because we can afford to: we expect to generate sufficient excess cash flow to finance operations, invest in growth, cover debt payments and pay a modest dividend. 4) What time periods does the Cash Accumulation Period refer to? As mentioned before, the cash lock-up mechanism prioritises deleveraging over cash distribution to the PLC. So, for the 12 months prior to the Expected Maturity Date for certain of the Class A Notes or the maturity date of the Senior Term Facility, the Company is not able to pay any dividends from the WBS. 5) Does the cash accumulation period impose any operational restrictions on the business? There are no practical operational restrictions during a cash accumulation period and this includes capex. 6) What would be the impact of a downgrade of the Class A notes from BBB- to sub-investment grade on the Company s operations? We do not expect a downgrade given the strong cash generative nature of the business, combined with the delivery of meaningful EBITDA growth. However, should S&P decide to downgrade the AA, there is no impact on our operations. The financial cost and maturities of the Class A and Class B Notes remain unchanged. 7) What would be the impact of a downgrade of the Class A notes from BBB- to sub-investment grade on the Class A and Class B Notes? To reiterate, we believe that there is no reason for a downgrade. However should our Class A rating be below investment grade by the time the Class A Notes come due (and as you are aware the next upcoming maturity is in July 2020 for the A3 Notes), the most obvious risk is a higher coupon on the new notes. And that of course is subject to market conditions at the time of a refinancing. Taking this a little further, should the Class A rating be below investment grade by the time the Class B Notes come due in July 2022, the B2 Notes would have to be refinanced outside of the WBS. Page 2 of 10

3 If they were issued outside of the WBS, debt service for the new debt would need to be funded from outside the WBS, unless the WBS is at that stage able to pay dividends. 8) How does the Company s leverage currently impact the debt covenants? The current leverage does not have a covenant impact as the AA does not have any leverage-based maintenance covenants. However, for as long as the senior by which we mean Class A debt and Senior Term Facility net leverage ratio exceeds 5.5x EBITDA, we are prevented from paying dividends from the WBS. 9) How does the Company s leverage impact its capacity to refinance? The existing leverage does not restrict us from refinancing our existing bonds. To provide some more detail, we can refinance our Class A Notes and the senior term facility regardless of the Class A net leverage ratio. We can also refinance our B Notes without any leverage-related constraints. Incremental financial indebtedness is allowed by the Common Terms Agreement, provided that certain conditions are met. The key condition is that by so doing we do not cause the Class A debt net leverage ratio to exceed 5.5x EBITDA. Additional Class B financial debt would not be restricted by this leverage test, as it does not impact the Class A net leverage ratio. The Class B Loan Agreement also allows additional indebtedness (including either Class A or B) under a ratio test where (1) the Fixed Charge Coverage Ratio is at least 2.0x on a pro forma basis and (2) the total net secured leverage does not exceed 6.5x EBITDA if such indebtedness is secured indebtedness or one of the other baskets in the debt covenant. In raising additional or refinancing debt, both compliance with Common Terms Agreement and the Class B Loan Agreement is required unless the Class B2 Notes are being fully refinanced. Page 3 of 10

4 10) Is the Company considering a refinancing? As discussed before, we are committed to maintaining a disciplined and pro-active approach to the capital structure and continue to monitor debt markets frequently. 11) What are the Class A Notes key maintenance covenants? The important point here is that there is only one maintenance covenant, a Debt Service Coverage Ratio (DSCR). There are two relevant thresholds: If this ratio falls below 1.35x it constitutes a Trigger Event which prohibits the payment of any interest to the B notes. A Trigger Event would also prevent the payment of dividends. A DSCR of less than 1.1x constitutes a Class A Event of Default. This means that, unless we effect an equity cure, if the Class A creditors chose to accelerate the debt, all senior credit facilities are immediately due and payable. It would also allow the Class A creditors to take enforcement action, including appointing an administrative receiver to run the company or conduct a sale. For completeness, note that the Class B debt contains a DSCR maintenance covenant at 1.0x. 12) As maintenance capex is expected to increase to 55m, will this drive the Minimum Capital Maintenance Spend Amount higher for the purpose of the DSCR calculation? No. The Minimum Capital Maintenance Spend Amount is currently 25m for FY18. This is deducted from EBITDA when determining the free cash flow for the Class A and the Class B DSCR ratios. 13) Is there sufficient head room to service debt whilst also investing in business transformation per the strategy presentation? The investments we are making are prerequisites for long-term sustainable growth. The important point here is that even in a year of depressed profitability and significant new investment, we believe that we are capable of comfortably servicing our debt with interest cover of around 2.5 times for FY19, whilst generating positive Page 4 of 10

5 cash. Effectively, based on our last published accounts, Class A FCF would need to more than halve before any breach of our Class A DSCR could occur. 14) How is the Company planning on improving its leverage profile whilst also investing in the business? AA is an inherently cash-generative business and it is the abiding strength of that cash flow which enables the Company to service its operational needs and existing debt and we believe allows us to de-lever over time. 15) Could you provide more information on how you will fund growth of the in-house underwriter? Where will the additional solvency capital come from? As mentioned last week, the business model of our insurer has always been that of a Managing General Agent (MGA), with 80% of the risk reinsured. This will not change and the additional capital requirements are therefore modest: 1) Half of the solvency capital requirement for growth will come from retained profits; and 2) The balance of approximately 20 to 25m will come from cash that is available at the PLC level. We expect to invest this balance over the next 3 years. 16) Is the Company targeting any disposals? If we can crystallise value over and above what we can generate then this is something we would consider as a Board. 17) If your insurance business is so valuable, why not realise value now? This is not something we are envisaging as we feel that we can significantly grow the platform, without the need for external capital. It is a key aspect of our strategy that bond holders and shareholders should be able to benefit from all the upside. Page 5 of 10

6 18) For covenant purposes, what is the difference between Class A Notes Maintenance EBITDA and reported Trading EBITDA? The small difference between the two numbers relates to Insurance Underwriting activities and some Head office costs which sit outside the WBS. To illustrate this, at 31 July 2017 (the last date for which we have published financial statements), on a rolling 12 month basis, Trading EBITDA was 404 million versus Class A Maintenance EBITDA of 406 million. 19) Is there a cross default mechanism in the A Notes as a result of an Event of Default in the B Notes? No. Due to the WBS mechanics, an Event of Default under the terms of the Class B debt (eg failure to pay principal or interest) does not constitute a Cross Default into the Class A debt. This allows the Class A debt to survive even if an Event of Default occurs under the terms of the Class B debt. However, on an Event of Default under the Class B Loan Agreement, a Share Enforcement Event would occur which would allow the Class B creditors to enforce the Topco Share Pledge. This would allow them to force a sale of the WBS group away from AA plc (subject to certain conditions). 20) Please provide additional information on the difference between Expected Maturity Date and Final Maturity Date? The Company s current capital structure has a concept of Expected Maturity Date and Final Maturity Date in relation to both the Class A and Class B Notes. For all practical purposes, the relevant repayment date for all our various debt instruments is their Expected Maturity Date. Page 6 of 10

7 21) Please provide additional information on the extension option out to 2043 for the Class A Notes? While the Class A and B Notes are not legally due and payable until 2043, it is expected that each sub-class of the Class A and B Notes will be repaid at its respective Expected Maturity Date. If it is not, then a Class A Event of Default will occur if it is Class A debt that is not repaid. Likewise a Share Enforcement Event will occur if it is Class B debt that is not repaid. A Class A Event of Default would mean no dividends can be paid, the Class B2 notes cannot be serviced and the Class A creditors would be able to decide whether to demand immediate repayment of their debt or leave their debt on demand. If they choose the latter, all excess cash is required to be used pro-rata to repay the relevant Class A Notes which have passed their Expected Maturity Date and to defease any Class A debt which has not yet passed its Expected Maturity Date. A Class A Payment Event of Default would also be a cross default to the B debt, entitling the Class B creditors to exercise their rights through the Share Enforcement Event mechanism and to force a sale of the group subject to certain conditions. If it is Class B debt which is outstanding and not repaid on its Expected Maturity Date, that constitutes a Share Enforcement Event but does not cross default the Class A debt. 22) Are the Class A notes callable? Each of the Class A Notes are callable subject to payment of a make whole premium. This make whole premium is calculated to reflect future coupons due until the Expected Maturity Date, discounted back to the time of the Call event. A discount is applied at a rate equal to the Gilt rate (YTM) for a similar maturity plus an additional 50bps. Page 7 of 10

8 23) Are the Class B notes callable? Prior to 31 July 2018, the B2 Notes, issued in July 2015 are callable at 100% plus a make whole premium. On or following 31 July 2018, we can elect to prepay the Class B2 Notes, in whole or in part, at the following prepayment prices (expressed as a percentage of par): 1) %, if such prepayment occurs on or after 31 July 2018 but before 31 July ) % if such prepayment occurs on or after 31 July 2019 but before 31 July ) % on or after 31 July 2020 in each case together with accrued and unpaid interest. 24) Can the Company buy back its debt? Yes. Debt purchase transactions are permitted under the current credit agreements. 25) Can the Company issue more equity? As a public company, we have the ability to issue new shares within the limits approved by shareholders. However, we do not currently, or in the foreseeable future, expect to have a need to raise equity to reduce indebtedness. We expect to generate sufficient excess cash flow to finance our operations, invest in the Company s growth and cover debt payments for the foreseeable future. 26) Is there a Change of Control clause in any of the debt instruments? The Class A Notes (and corresponding loans) do not include a change of control prepayment trigger. The senior term bank facility and working capital facility both include a change of control prepayment trigger, exercisable at the option of each lender. The Class B Notes (and corresponding loan) include an obligation on AA Senior Co Limited to offer to purchase the Class B Notes at 101% plus accrued and unpaid interest and additional amounts (if any) upon a change of control. Page 8 of 10

9 27) Is there a structural issue facing the business? No, there are no structural issues for the roadside assistance market utilisation of our services has increased. The business is fundamentally strong. Our strategy is about the evolution of the AA from the strong base we have already built. We have done a great deal of work to stabilize the membership business. It's very easy to forget that three to four years ago, before the company was public, membership was in a state of steady decline. A great deal of work has been done to stabilize membership built on marketing, systems investment, improving retention and driving new sales. We are investing to accelerate the growth of our existing Insurance business. This is a fundamentally strong business with a renowned brand and an established footprint. We're going to broaden our underwriter footprint, we're going to drive more competitive premiums with our existing organization, and we're going to innovate meaningfully in insurance. We have made many of the key investments already to transform our IT base. 28) How beneficial have historical investments been for the AA? We would not be able to deliver on our strategy without having made the investments we have to date. It has improved our capabilities in the following ways: We have improved our core breakdown system this has made it more efficient in responding to calls and in delivering our breakdown service; Our core membership system which we are installing this year will give us enhanced CRM systems, next best action capabilities and enhanced cross-sell opportunities; We have significantly upgraded our pricing sophistication which will help us to improve retention; and The systems investment has allowed us to upgrade our website driving digital sales our app and to take our first steps in Connected Car through Car Genie. Page 9 of 10

10 29) Given the Company s cash generative profile and existing leverage, is it appropriate for it to be entering a new phase of investment instead of running itself like a utility? We believe that this is a real opportunity for all stakeholders to take part in the evolution of the business. We have the foundations for growth in a changing market and the new plans will enable us to take full advantage of the myriad opportunities we have. We are convinced that our investments can drive value for bond holders and shareholders. Disclaimer This presentation contains forward-looking statements which are prospective in nature and are not based on historical facts, but rather on current expectations and projections about future events. Such statements are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of forwardlooking words such as plans, expects or does not expect, is expected, is subject to, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or statements that certain actions, events or results may, could, should, would, might or will be taken, occur or be achieved. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements, including business, economic and regulatory changes as well as the risks set out in the Company s annual report and accounts, which can be found on its website ( Such forward-looking statements should therefore be construed in the light of such factors. Neither the Company, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee that the events expressed or implied in any forward-looking statements in this announcement will actually occur. You are cautioned not to place undue reliance on these forwardlooking statements. Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation, the Listing Rules and the Disclosure Guidance and Transparency Rules), the Company is not under any obligation to update, revise or correct any forward-looking statements, whether as a result of new information, future events or otherwise. No statement in this presentation should be construed as a profit forecast or relied upon as a guide to future performance. Page 10 of 10