Lebara cash flow statement raises question mark over coupon payments, technical default concerns persist

01 March 2018

Besieged by investors frustrated by the incomplete disclosure of financial statements, Lebara published a 4Q17 cash flow statement (CFS) yesterday (28 February). The release stemmed the rout in the European prepay telco’s bond price, but it fails to show how the company made its last coupon payment and still omits details on intercompany transactions between the different entities comprising the bond guarantor group, according to two buysiders.


Lebara said it will release additional information regarding its 4Q17 results and plans to post an additional statement before the end of the week.


According to yesterday’s statement, Lebara Mobile Group generated a EUR 28.2m profit before tax during 4Q17, which broadly matches its quarterly EUR 29.5m EBITDA after accounting for EUR 1.2m depreciation & amortisation. Deducting EUR 3.9m for operational restructuring costs, EUR 13.3m for working capital, EUR 0.9m for PPE investments, EUR 0.6m for finance leases and EUR 1.3m of FX losses resulted in EUR 9.4m of free cashflow, which increased the group’s cash balance to EUR 26.4m at quarter end from EUR 17m at the end of 3Q17.


However, Lebara makes quarterly interest payments of around EUR 6m on its EUR 350m senior secured 2022 FRNs paying Euribor+ 675bps. The interest payments are made by VIEO BV, the HoldCo that issued the notes and sits above the operating companies that comprise the restricted group.


According to yesterday’s cashflow statement, VIEO BV ended the quarter with EUR 2m of cash (of which EUR 1.4m is restricted), which was down from EUR 5.4m at the end of 3Q17. That suggests an outflow of EUR 3.4m, which would not have covered the EUR 6m coupon payment.


“This [the CFS] is garbage,” one of the two buysiders commented. “It shows no cash coming out of the (Lebara) Mobile Group BV – so how did they pay the coupon?”


The company told some investors that the EUR 13m working capital outflow included the EUR 6m coupon payment, suggesting actual working capital movements were just EUR 7m.


“I have never seen an HY company report interest (payment) in working capital!” the second buysider commented. “And why is there not a detailed balance sheet so we can see what those working capital items are … the way they report, nothing is clear!"


The CFS also falls short of the group’s reporting obligations, leaving Lebara at risk of being in technical default since it did not provide requisite reports in 3Q17 either, the buysiders and a legal source following the situation said.


They suggest that the group’s Permitted Reorganisation exemption does not cover its financial reporting requirement, noting that the bond OM states that “the issuer shall prepare interim accounts (as per IFRS) of the VIEO BV, consolidated and unconsolidated, and make them available not later than 60 calendar days after the end of the relevant quarter date.” VIEO BV comprises Lebara Digital Group, Lebara Media Services and Lebara Service Centre.


“The EBITDA carve-out to exclude Lebara Digital Group BV/Lebara Media Services Pvt/Lebara Service Centre Ltd is only for 'EBITDA' purposes as used in the leverage ratio denominator,” the legal source noted.


“I do not read it [the Permitted Reorganisation] as limiting the interim and annual financial statements format and disclosure – ie figures for Lebara Digital Group BV/Lebara Media Services Pvt/Lebara Service Centre Ltd should not be excluded from those interims and annuals,” the legal source added, pointing out that “a breach of the delivery requirement for the issuer’s financial statements within 60 days does not trigger an event of default itself as the related event of default has a further remedy period of 20 business days from the date on which the issuer is aware of the breach or the bond trustee has given the issuer notice of the breach."


Lebara is subject to net leverage and minimum liquidity covenants, as reported.


Lebara’s EUR 350m E+ 675bps senior secured 2022 FRNs stabilised around 65/67 this morning after a roughly 20-point slide since Monday and inched back up to around 70-mid, according to a third buysider.


The company and sponsor Palmarium declined to comment.


by Robert Schach