Astaldi’s 7.125% €750 million bonds keep declining on a series of investors’ concerns and speculations regarding the company’s liquidity and possible third-quarter performance, sources told Reorg. The notes are down further 3 points to 83/84 today, while shares dropped another 23% to €3.22 from Thursday’s opening. The company’s market capitalization has shrunk to about €320 million.

The decline started on Wednesday when unexpectedly the company’s bonds and shares experienced a sharp drop. The 2020 notes were quoted over par and fell to the high 90 while the shares lost over 15% of their value. On Wednesday night, Il Sole 24 Ore published a story saying the company was considering a €200 million capital increase. According to the Italian newspaper, Unicredit, BNP Paribas, Banca Imi and Banca Akros are already working on pre-subscribing the increase. Some of these banks are the group’s largest lenders.

On Thursday, Astaldi confirmed it was considering a capital increase as part of a wider refinancing process but did not specify whether its potential €200 million equity raise will be underwritten and why it needs more liquidity. Thursday, the Italian market watchdog Consob opened an inquiry on Astaldi for insider trading after Nov. 8 bond and shares drop.

On Nov. 6, the company announced the postponement of third-quarter results, which now some investors think may not be due to technical issues. Others point to the company’s exposure to Venezuela and to a potential liquidity problem, which might justify the reason for the capital increase announced on Nov. 9.

If Astaldi ran into liquidity issues, the company’s could struggle completing projects and some of the guarantees could crystallize, sources commented. This would damage recovery for existing creditors.

Other investors point out to the company having a public relation crisis, rather than a financial one. Some argue that in response to the article written by the Italian press, Astaldi decided to confirm the potential capital increase without giving out too much information but failed to consider that the market would have questioned liquidity as a result.

The company has €961 million of bank debt and a €500 million unsecured revolving credit facility, €340 million of which has been drawn as of March 31. Its tear sheet is HERE, and the capital structure is shown below:
 
The group currently has significant exposure to Venezuela, with around €270 million of receivables. The recent decision of President Nicolas Maduro to renegotiate the country’s debt obligations does not bode well for the business.

Uncertainty around Venezuela’s compliance with its debt obligation could result in a series of impairments for the company, sources pointed out. The company has a 1.8x net debt to equity covenant that could be triggered following a deterioration of the debt payment situation in Venezuela. At the end of June, the net debt to equity ratio was at 1.66x.

In the past, the company managed to get a covenant waiver from its lending banks, which consist of a pool of Italian and Middle European banks.

Currently, Astaldi has frozen operations in the country and is pursuing bilateral negotiations with the country alongside the Italian government. Management said that the Italian government continues to work with its Venezuelan counterpart to recover its credit and reactivate construction sites in the country.

Investors are also questioning the company's ability to generate cash. Astaldi's €214.4 million half-year EBITDA was encouraging after a weak first quarter, but the improvement has not translated into cash flow, according to a JPMorgan research from August. The improvement may have been supported by one-off effects such the completion of several projects during the second quarter. The analysis considered Astaldi’s leverage too high for a construction group facing high cyclicality, high construction risk and a high cash balance to run the business. According to Reorg’s calculation, the group is 5.4x levered.

Astaldi renegotiated its covenants in 2016 to the following levels that are applicable as of today:
 

1. Debt/EBITDA must be less than 4.15x on Dec. 31, 2017, and 3.7x on Dec. 31, 2018.
    
2. Debt/equity must be less than 1.8x on Dec. 31, 2017, and 1.6x on Dec. 31, 2018.
    
3. Gross debt must be less than €2 billion at the end of 2017 and €1.9 billion at the end of 2019.