11-09-2015, 12:44 PM
Hello CY09,
I suppose the way I am approaching it is rather unconventional. As you mentioned, because net profit is currently negative, using P/E ratio would be futile. However, using forward P/E based on forecast earnings once the company turns profitable (which in DEL case is expected to be FY16) is OK and has been done so for distressed, loss-making or turning-around companies. Since I chose to use EBITDA instead of net profit, I have to make a corresponding discount to the target benchmarked P/E multiple. How much to discount is debatable.
Actually, the two big term loans of US$970m are primarily interest only repayments until maturity in 2021. Also, majority of this has already been swapped to fixed rates starting Feb 2016 to account for potential rates increases. LBO lenders would face huge difficulties getting credit approvals for an LBO loan anything more than 8 years. At time of LBO, the lenders would be aware that DEL’s capital structure and its inability to service heavy principal-payment during the proposed loan tenure. As you highlighted, it would have taken more than 30 years to do so. As such, refinancing and/or the issuance of additional equity are expected before 2021. Separately, in place of the postponement of the preferred share offering earlier this year, DEL has managed to secure a short two year term loan at relatively cheap rate.
Since the LBO, performance of the DEL has been as expected and I believe the lenders would be watchful on DEL’s next few quarters’ results to make sure it can sufficiently cover the interest component.
I suppose the way I am approaching it is rather unconventional. As you mentioned, because net profit is currently negative, using P/E ratio would be futile. However, using forward P/E based on forecast earnings once the company turns profitable (which in DEL case is expected to be FY16) is OK and has been done so for distressed, loss-making or turning-around companies. Since I chose to use EBITDA instead of net profit, I have to make a corresponding discount to the target benchmarked P/E multiple. How much to discount is debatable.
Actually, the two big term loans of US$970m are primarily interest only repayments until maturity in 2021. Also, majority of this has already been swapped to fixed rates starting Feb 2016 to account for potential rates increases. LBO lenders would face huge difficulties getting credit approvals for an LBO loan anything more than 8 years. At time of LBO, the lenders would be aware that DEL’s capital structure and its inability to service heavy principal-payment during the proposed loan tenure. As you highlighted, it would have taken more than 30 years to do so. As such, refinancing and/or the issuance of additional equity are expected before 2021. Separately, in place of the postponement of the preferred share offering earlier this year, DEL has managed to secure a short two year term loan at relatively cheap rate.
Since the LBO, performance of the DEL has been as expected and I believe the lenders would be watchful on DEL’s next few quarters’ results to make sure it can sufficiently cover the interest component.