2023-08-31 11:27:06 ET
Summary
- Diebold Nixdorf successfully restructured debt, reducing liability and converting secured debt into equity.
- New debt agreement costs $160 million per year in interest, with a current interest rate of 12.8%.
- Despite growing sales and gross profits, Diebold still finished the first half with an operating loss and burned $337 million in cash from operations.
Earlier this month, Diebold Nixdorf ( DBD ) announced that it would be emerging from Chapter 11 bankruptcy after successfully restructuring its debt in federal court. The retail technology company spent less than three months restructuring after entering into an agreement with specific creditors back in May. While the restructuring successfully reduced the company’s debt load, I am hesitant to purchase the company’s newly issued shares.
In conjunction with its re-listing of shares and emerging from bankruptcy, Diebold management created a presentation summarizing the re-organized company and providing an outlook. Under the restructured agreement, all the old unsecured debt was virtually cancelled, while $2.1 billion of secured debt was converted into equity. With a current market cap of $750 million, it’s safe to assume that secured debtholders took an average haircut of 67%.
The $1.25 billion debtor in possession financing was converted to debt under the new structure. While the new debt is substantially lower than the company’s previous debt load, it is coming at a price. The new term loan is priced at a 750-basis point premium to SOFR, which currently stands at 5.3% for the 30-day rate. This would imply a current interest rate of 12.8%. Diebold’s new debt agreement currently costs $160 million per year in interest!
While the company has not released a post restructuring balance sheet, investors can get an idea of the new capital structure by reviewing the balance sheet provided for the end of the second quarter. On the balance sheet, the company discloses $2.2 billion of liabilities subject to compromise, which is what was converted to equity and written off. It is important to note that even with the liability write-off, shareholder equity is barely above $0. Also, more than 20% of the company’s total assets are intangible, meaning that the new debt plus accrued liabilities leverage all the physical assets.
Diebold’s income statement presents further challenges. Despite growing sales and gross profits by $70 million and $65 million, respectively, during the second quarter of 2023, the company still finished the first half with an operating loss. The operating loss was calculated before interest expense. Therefore, the company would have lost money in the first half without debt. Additionally, Diebold paid $199 million and $195 in interest expenses in 2022 and 2021, meaning the current debt structure would save less than $40 million in annual interest expense.
I’m further concerned by Diebold’s cash flow situation. Through the first half of 2023, the company burned $337 million in cash from operations, which was mainly comprised of interest on debt combined with changes in working capital. Management is optimistic that Diebold will generate positive free cash flow during the second half of 2023, but no specific guidance has been given. Management’s projection of cash on hand exceeding $600 million would imply second half free cash flow of greater than $60 million ($541 million in cash at the end of Q2). The improvement is expected to be somewhat influenced by positive changes in working capital, which won’t repeat themselves in 2024.
Diebold’s restructuring is a step in the right direction, but too much remains uncertain to justify an equity investment. The high interest rate on the company’s new debt will act as an earnings headwind until interest rates drop. While management is optimistic about cash flow during the second half, little is known about whether the positive variance will be driven by one-off events or not. Until I see organic free cash flow driven by improved profitability, I’m staying on the sidelines.
For further details see:
Diebold Nixdorf: Avoiding Post-Restructuring Equity