Credit Update: Pioneer post acquisition/equity raise
IAM Capital Markets View
The key credit catalyst will be FY22 results which should show a return to positive NPAT as well as a stronger EBITDA result. In our view, the company is taking adequate steps to repair the balance sheet and will be able to reduce the Group LVR over the next couple of years. At this stage, the credit is not distressed and so we’d urge investors not to take a haircut on the bonds in the low 90s unless they really need liquidity. If anything, we’d opportunistically be looking to capitalise on any weakness and add towards the position around the AUD90-95 mark. Being floating rate and having a high coupon is also quite attractive in the rising interest rate environment versus other comparable credit securities.
Yes, the gearing remains high at the 84% level (June 2022); however, the outlook is such that Pioneer should be able to exploit industry conditions given it is one of only two players in the Australian PDP market. Any new acquired PDPs can also be taken onboard without a comparable increase in costs because Pioneer has reached sufficient scaleability. This flows directly through to EBITDA and again helps with the deleveraging story.
In another sign of confidence, Pioneer is also close to closing a AUD45mn PDP deal with Collection House. Collection House was previously the other player in the market but urgently needs to recapitalise.
Pioneer post acquisition/equity raise
In late March 2022, Pioneer acquired a AUD38.5mn debt portfolio accompanied by a AUD11.35mn equity issue. The equity issue was raised at a 6.8% premium to the last close, indicative that it is a quality M&A deal.
Pre-purchase, Pioneer had a PDP portfolio with an outstanding balance of AUD1.9bn of which AUD400mn is currently on a scheduled performing arrangement (PA). Post-purchase, Pioneer’s PA portfolio will increase from AUD400mn to AUD458mn. The AUD11.35mn capital raising is being completed at AUD0.55 per share. The AUD38.5mn acquired portfolio consists of 9,550 customers predominantly from the major banks with a face value of c.AUD85mn. Pioneer expects a return of 1.8x on their initial investment with forecasted and lifetime liquidations of AUD68.5mn. The majority (82% of the investment) of the acquired portfolio is performing in nature.
In addition to the capital raising, Pioneer’s senior lender (Fortress Investment Group) have agreed to upsize the current senior debt facility through an additional tranche of up to AUD40mn. Rates and fees are as per the existing facility. All liquidations from the acquired portfolio will be used to pay down the additional debt facility which will considerably strengthen Pioneer’s balance sheet.
The deal is positive in that it shows evidence of Pioneer’s growth strategy, which should translate into higher earnings and operating cashflow, as well as provide the company with a low-risk path to deleverage.
There will be a significant uplift in liquidations (+AUD5.9mn in FY22), EBITDA (+9% in FY22) and EPS (+60% in FY22) against a marginal cost increase – reducing the overall average cost-to-service (CTS). Furthermore, net equity will improve and all liquidations generated from the acquired portfolio will pay down the new debt facility. Group LVR reduces from 86% in December 2021 to 84% in June 2022 (with a reduction to less than 65% in June 2025). As June 2022, net debt will be c.AUD230mn against a PDP carrying value of c.AUD283mn and net equity of c.AUD71mn. This is better than December 2021, with net debt at c.AUD212mn against a PDP carrying value of c.AUD247mn and net equity of c.AUD36mn.
Pioneer remains one of only two major players in the Australian non-performing debt purchase market (or PDP market), focussed on credit card and personal loan portfolios purchased mainly from the major banks. Pioneer’s differentiating factor remains its outstanding compliance record and industry leading customer treatment.
About Matthew Macreadie
Matthew’s current responsibilities include providing credit commentary/views on the bond market and specific issuers, with the aim of aiding investors to make better risk-return decisions.
Prior to joining Income Asset Management, Matthew spent eight years working as a Credit Portfolio Manager at Aberdeen Standard, where he was responsible for the credit portfolio construction and security selection across a wide range of financial and non-financial sectors.
Matthew began his career at KPMG working in Auditing and Assurance within the consumer and industrials group. Matthew holds a Masters of Applied Finance from Macquarie University and a Bachelor of Commerce from UNSW.