Kerry Stokes and Seven Group have less than a week to go on their $8.5 billion bid for Boral but questions continue about the financial health of the post-bid group.
This week, Moody’s joined fellow rating group, S&P Global in raising concerns about the extra debt and leverage Seven Group Holdings will take on in its successful takeover of Boral.
Moody’s also echoed S&P’s concerns about a possible negative influence a financially weaker Seven Group might have on the stronger financial position of Boral.
Seven Group said on Thursday it had moved to a 60% stake in Boral in its bid which closes next week.
That means Seven has a big decision to make next week – does it close the bid and sit on a controlling majority stake, but still not the 90% level where compulsory acquisition of the outstanding shares happens, or does extend and hope to get to that 90% stake?
Up to Wednesday, Seven Group’s stake had only risen by around 3% (this doesn’t include the 3.3% stake held via a derivative with no voting interest) from 56.85% to close to 60%.
Looking at the situation, Moody’s this week pointed to a negative impact on Boral from the success of Seven Group’s bid.
“The increase in Seven’s ownership stake is credit negative for Boral because it exacerbates its ownership concentration by an entity we view as being of weaker credit quality than Boral,” Moody’s said.
“However, the increase in Seven’s ownership and influence over the board of Boral does not immediately affect the company’s credit profile. This is because we expect Boral’s publicly articulated financial framework will remain unaffected.
With one board seat already assigned to Ryan Stokes, Seven’s managing director and chief executive, in September 2020, the increase in ownership by Seven provides a pathway for the appointment of additional board seats and increasing influence over Boral. However, we understand that Seven intends to maintain a majority independent board, Moody’s wrote in a weekly credit outlook.
“Boral has used proceeds from business divestments to reduce debt following the adoption of its new financial framework in February 2021. This has significantly improved its capacity within its Baa2 rating.
“Following the announced sale of its North American Building Products business, Boral’s net debt target will decrease to $A1.3 billion from $A1.5 billion… We expect that the company will either reinvest and/or return to shareholders any funds in excess of the $A1.3 billion net debt target, Moody’s predicted.
The ratings group also pointed out that the increase in Seven’s shareholding beyond 50% “could trigger a change of control provision in Boral’s bilateral loan agreements and bilateral performance and financial bank guarantees, which would require Boral to repay the loans and refinance or provide cash security against the performance obligations.”
“The bilateral loans remain undrawn and Boral has utilised around $A209 million of guarantees. We do not expect Boral to face any liquidity stress due to the change of control provisions given its strong liquidity position, and expect that the company will be in a position to refinance the bilateral loan agreements, bilateral performance and financial bank guarantees if necessary. ”
Two weeks ago S&P Global placed Boral’s debt ratings on creditwatch with a negative outlook due to concerns that Seven’s increased shareholding could “act as a drag on Boral’s credit profile.“
“We believe the current shareholding increases the likelihood that Seven can exert direct or indirect control over Boral to the extent that it could influence Boral’s strategy and disposition of cash flows,” S&P said.
“The CreditWatch negative placement reflects our opinion that the combined credit quality of the Seven/Boral group is likely to be lower than Boral’s on a stand-alone basis, which could act as a drag on Boral’s credit profile.”
S&P also warned it was not clear if “sufficient conditions exist to insulate Boral from the potentially negative influence of the Seven Group” because Boral will get a lot of money from the sale of USG Boral and its North American business.
S&P is worried Seven won’t maintain Boral’s balance between shareholder returns and balance sheet repair. The rating agency said it will now take 90 days to finalise the extent to which Boral can “be insulated from Seven’s influence”.
