RSJ recently did a writeup on Syniverse's capital structure a few weeks ago (https://www.valueinvestorsclub.com/idea/Syniverse_/139128) - this article focuses on the exchange offer launched on Decemer 9 which we think is extremely attractive for current 2019 noteholders.
Apologies but I couldn't get all of the images through in the writeup
Bondholders who elect to participate will receive new 9.125% senior unsecured notes due 2022 issued by Syniverse Foreign Holdings Corporation (“SFHC”) in the amount of $950 per $1,000 in face value held and an up-front early redemption payment equating to $50 per $1,000 in face value held or 5% of face value.
The maximum amount of new 2022 notes that will be issued is $364 million which would equate to an exchange of $384 million in face value (81% of the outstanding face value of $475 million) and a cash payment of $19 million.
Bondholders who tender before the Early Tender Deadline (5pm New York time on December 21st) will receive $950 per $1,000 in face value held of new notes and the early redemption payment. Bondholders who miss the Early Tender Deadline and tender their notes before 12am on January 6, 2017 will receive will receive $950 in face value of the new 2022 notes but will forego the $50 early redemption payment.
Since the announcement of the offer, the senior unsecured notes rallied from 75 to 85 but we think there is still a lot of upside for noteholders who exchange into the new notes.
Why we like the new notes
On a consolidated basis, Syniverse has around $2 billion of debt ($1.5 billion of term loans due April 2019 and $475 million of senior unsecured notes due Jan 2019) and an undrawn revolver of $150 million.The Company has 7.0x net leverage on LTM EBITDA of $276 million (cap table below). It is worth mentioning that the term loan has a springing maturity feature if the senior unsecured notes are not refinanced in Q3 2018.
Syniverse's business model is currently in transition from the decline of North American CDMA revenues and pricing pressure in GSM/messaging with the growth businesses (LTE/IPX/enterprise) not fully ramped yet. With the modest deleveraging expected from free cash flows and if top line growth resumes by 2018, Syniverse may be able to refinance the term loans but there is still the risk that the Company may be unable to do so.
Currently, there is no debt issued at SFHC and the assets and earnings of Syniverse’s foreign subsidiaries are unencumbered (foreign subsidiaries are non-guarantor subs). SFHC accounted for approximately 21% of Syniverse’s total revenues and 27% of EBITDA during 9M 2016.
For the same coupon, holders of the new senior unsecured notes due 2022 would have the closest claim on SFHC ahead of the term loan and the senior unsecured notes due 2019 and have notes in an entity with much lower leverage. .
This would significantly enhance recoveries if a potential restructuring event takes place in 2018 versus not participating in the exchange offer and potentially dilute recoveries for the term loan.
SFHC's summary financials are shown below (from the 8K filing). SFHC will generate approx. $70 million in EBITDA in 2016, $33 million of interest expense (pro forma), and has capex of $12 million.
With $364 million of debt at SFHC, the entity would have 5.2x gross and 4.9x net leverage, respectively (pro forma cash balance of $18 million after $35 million is repatriated to Syniverse at the end of the year). .
Conservatively applying a 5.0x EV/EBITDA multiple to a 2018E EBITDA range of $60-80 million gives us an Enterprise Value of $300-$400 million for SFHC which implies 90-100% coverage for the 2022 notes. Similar businesses have commanded higher multiples in the past due to the recurring nature of their revenues, high margins and high free cash flow conversion (Carlyle paid around 9x for Syniverse back in 2011).
We think the new 2022 notes are extremely well covered and could eventually command a higher rating and trade above par given the chunky coupon of 9.125% and the improved recovery prospects versus the existing 2019 notes.
We estimate annualised IRR of the trade for 2019 noteholders would be in the range of 50-60% if they exchange and the new 2022 notes trade at par or better by middle of next year – 95 pts in new notes, 4pts in semi-annual interest, and 5pts in early redemption payment against an investment cost of 85pts today.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.