We upgrade GLYHO 21s to Buy. The US$250mn bonds due November 2021 lost nearly half of their value as Covid-19 shut cruise ports and reduced through-put of commercial cargo. Under normal conditions, GPH is a business with valuable and highly profitable assets. The company finished Q1 20 with enough cash to support its operations in the coming months, when its business activity is expected to reach a nadir. However, with little visibility on tourism in the post-pandemic world, the sustainability of GPH’s cash flows is uncertain and the restructuring of US$250mn bonds seems likely. We believe that, if cruise ports show signs of recovery by end-21, the bonds will be refinanced/restructured, with investors realising significant gains to the current indicative mid-price. However, if cruises are gone for good, the recovery value could fall short of the level implied by the mid-price. Having considered 3 scenarios of future restructuring outcomes, we estimate the recovery value at 59-75 and upgrade GLYHO 21s to Buy.
When the dust settles, GPH will still have highly cash-generative ports. Temporary closure of the Mediterranean and Caribbean cruise ports brings commercial port Akdeniz to the forefront as the main source of cash flow and the key element of any refinancing/restructuring outcome in the next 12-18 months. Once the business overcomes short-term operating challenges, even if it takes longer than management estimates suggest, we expect GPH to restructure debt without causing bondholders any more pain (loss of NPV) than they have already seen. In 2019, GPH earned US$118mn in revenues and US$77mn in adjusted EBITDA, both split c54%:46% between the cruise and commercial ports. Operating cash flows before changes in working capital came to US$65mn.
Scenario 1: Akdeniz is sold by end-20; recovery 76-89. Management is looking to sell Akdeniz and has entered into exclusive negotiations with a potential buyer that will continue until Q3 20. Because the sale of Akdeniz will cause GPH to lose cUS$40mn in EBITDA, we estimate that the minimum valuation that will enable the company to partially repay debt and refinance the rest should be north of US$160mn. A lower price could prevent GPH from reducing debt enough to keep leverage unchanged, which could complicate refinancing. We estimate the probability of disposal is relatively low. For more details, see page 2 of the downloadable PDF.
Scenario 2: Business gains momentum in H2 21; recovery 65-84. This scenario is roughly based on the management stress case, which implies that cruise ports will remain closed in 2020. We take this assumption further, expecting the recovery in cruise operations to be delayed until H2 21. Commercial ports alone may struggle to generate enough cash to help GPH meet all liquidity requirements. However, when cash flows from cruise and commercial ports begin to recover, debt restructuring could be agreed. We assign 60% probability to this outcome. For more details, see page 3.
Scenario 3: Worst case and the least likely; recovery 36-45. What if cruises never come back? In this case, debt repayments will largely depend on Akdeniz. With Akdeniz’s concession expiring in 2028, there is not enough time to return money to the creditors, assuming the port’s EBITDA recovers to 2018-19 levels. For more details, see page 4.