News / Ceva restructure to save cash 'needs to work' as fears grow over debt repayments

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UPDATE: The Loadstar apologizes for any inconvenience caused to CEVA Logistics resulting from the mistaken publication of a draft article written by The Loadstar’s financial columnist, which briefly appeared online. The published article represents the opinion of the columnist, although it also acknowledged that CEVA exited 2014 with positive momentum, as reported in its recent fourth quarter earnings announcement.

Ceva Logistics has mostly been in the news for the wrong reasons since the onset of the credit crunch. The key question is how comprehensive were the restructurings since May 2013?

“You already know the answer,” a senior banker in the City told me this week. “It doesn’t look good.”

In the press release that accompanied its fourth-quarter results, management made much of the fact that volumes and revenues grew significantly in the final three months of the year, offering hope of a better performance this year, especially if higher revenues combine with a new global corporate structure that has done away with regional divisions and replaced with 17 “local geographic clusters of countries”. Ceva claimed this would offer annual cost savings of $50-60m from 2015 onwards, although the programme would also incur a one-off $30m cost this year.

It is strategy that really needs to work, because without significant growth in its top line revenues, in combination with a re-engineering of its costs to produce higher margins, it is difficult to see how it will tackle its mounting debt pile. Put starkly, according to my calculations Ceva would need to cut about 25% of its global workforce, or at least 10,000 jobs, in order to become viable at an operating level and save about half a billion dollars a year – and even then, it may struggle with debt repayments when they come due.

Ceva must shrink, and the sooner the better. It can’t sell many assets, most of which are virtually owned by its creditors. Its strategy now is pretty clear: it is pushing back debt maturities, hoping somehow it will find a way out of its misery.

Created in August 2007, in hindsight just a few weeks after the first symptoms of the credit crunch had emerged, Ceva comes from the merger of TNT Logistics and EGL. It was a poor attempt by Apollo Management, a private equity house, to lever up a business that arguably should carry very little leverage – or, more preferably, none at all – in light of its thin margins and a high level of cyclicality.

Financials

Ceva operates two divisions – freight management, which recorded $3.6bn revenue and $22m in adjusted Ebitda in 2014, and contract logistics, which saw $4.2bn revenues and $220m in adjusted Ebitda.

In 2014, combined revenues and adjusted Ebitda were down 4% and 12%, respectively, to $7.8bn and $242m, for an implied Ebitda margin of 3.1%.

Core adjusted profitability was down 30 basis points year-on-year, which may seem negligible at first glance, but represents a drop of almost 10% on a yearly basis.

That’s a lot for a business whose freight unit generates an adjusted operating cash flow margin of 0.6%.

As cash from operations plummeted to $102m from $253m last year, cash and cash equivalents dropped to $386m from $522m, while working capital only marginally contributed ($13m) to cash inflows.

Given its global reach, Ceva also has problems with swings in currencies – and trends don’t look favourable into 2016, although they are difficult to predict.

The biggest issue, however, is Ceva’s rising net debt, which grew 15% to $1.84bn, for an implied total net leverage of 7.6x.

“Loss before income taxes in 2014 was $393m, compared with a loss of US$64 million in 2013, with the year-on-year change principally driven by finance expenses,” Ceva said in its annual results.

None of this should come as a surprise, however, given that the capital structure resulting from the recapitalisation in May 2013 included:

• “$689m principal amount of 11.5% junior priority senior secured notes exchanged for equity in the company, which then released the notes and received a like amount of new 10% second-lien secured PIK notes.”

This is very close to equity capital, but its real cost shows on the P&L.

• “$577m principal amount of 12.75% senior notes exchanged for equity in the company, which then released the notes.”

There was also $213m of debt priced at above 10%, which is expensive.

2014 refinancing

In March 2014, Ceva concluded a large refinancing, and “established a long-term capital structure with a weighted average period to maturity of 6.3 years. As at 31 December 2014, the weighted average period to maturity was 5.5 years”, the group said.

Xavier Urbain was appointed Ceva chief executive in January 2014

At that point, Ceva amended and extended its senior secured credit facilities, which included an $809m term loan facility maturing in 2021; a $250m revolving credit facility maturing in 2019; and a $275m letter of credit maturing in 2021 – essentially these are a mix of drawn and undrawn credit facilities.

It also privately issued $300m of 7% first-lien senior secured notes due 2021 and $325m of junior debt at 9%, also due in 2021.

The net result is that the 2014 net finance expenses bill rose to almost $400m.

The recapitalisation and refinancing helped Ceva push back debt maturities, which effectively means it is betting on a strong recovery in its core divisions in order to be able to pay off interest, while accumulating capital to repay the most of the principal when it becomes due.

This is not an unusual strategy, but if the cycle doesn’t accelerate it won’t work – Ceva needs to exit loss-making contracts faster, and drastically reduce its global workforce and also rejig its geographical mix.

An indication of the precariousness of its situation was the April 2013 scrapping of plans to float the business for $400m – despite appointing seven bookrunners, suggesting each bank would have taken a relatively low exposure of less than $60m.

“We have been working with our financial advisers over the past few months to develop a long-term financial plan for the company, exploring various options to improve our balance sheet to enhance the company’s financial flexibility in support of future growth. We are pleased that a substantial majority of our creditors have already committed their support,” Marvin Schlanger, Ceva’s chief at the time, said in April 2013, when the recapitalisation replaced the ambitious listing plan.

An Apollo man, like most on Ceva’s board, Mr Schlanger was replaced by Xavier Urbain at the beginning of 2014.

Mr Urbain started his career at Deloitte & Touche as an external auditor, so he must know that to get the books in order, either revenue needs to grow at a steep rate – say 10% or more, which would seem unrealistic – for a few years, or tough decisions will have to be taken on the company’s operating cost base.

But the final months of last year saw some progress in that direction, with air freight and sea freight volumes up 6% and 10% respectively in the last three months of 2014.

“On 1 January, 2015, we implemented our new local-based operating model to drive operations excellence in our global network and to be a more responsive and innovative partner to our customers.  Our customers’ reaction to our progress is highly positive, as evidenced by quarter four’s top line growth,” Mr Urbain said.