Debt-for-assets swap: Ascendis reaches compromise deal with its creditors

Ascendis Health will surrender its valuable international assets to settle debt in a restructuring and recapitalisation deal reached with its lenders. If shareholders approve the transaction, they won’t be left empty-handed, retaining most of the SA businesses. If they don’t approve it, they may be left with nothing. 

The compromise deal, announced on Wednesday, is the result of months of heavy bartering between management led by CEO Mark Sardi and chief financial officer Cheryl-Jane “CJ” Kujenga and creditors Blantyre Capital and L1 Health. 

Sardi, a former head of investment banking at Nedbank, has also held CEO and CFO roles at a number of other businesses, including House of Busby, Cipla South Africa and Truworths International. He joined Ascendis more than 18 months ago to lead its turnaround. Kujenga joined in December after leading a balance sheet restructuring process while CFO at Adcorp.

Sardi said his brief was to stabilise, optimise and monetise the business. It’s well on the road to achieving the first two objectives, with just the overstretched balance sheet left to address. 

The company has amassed debt that is expected to reach approximately €447-million (R7.6-billion) at the estimated closing date of the proposed transaction. 

“The ills on the balance sheet arose from significant acquisitions in 2016 and 2017,” Sardi said in a presentation to investors. 

“You could argue that we paid too much for them. We certainly structured them with too much debt.” 

In January Blantyre and L1 collectively increased their senior debt exposure to more than 75% of the lender consortium. Due to the terms of its loan agreements, they gained de facto control of Ascendis, allowing them to rule out the sale of lucrative underlying assets like Remedica in order to reduce its gearing. 

Under the proposed transaction, the lenders will exchange their debt interests for European subsidiaries Remedica and Sun Wave Pharma, as well as Ascendis’s 49% shareholding in Farmalider. They will also receive the net proceeds from the disposals of South African subsidiaries Animal Health, Biosciences and Respiratory Care Africa (RCA), all of which are at an advanced stage of sale negotiations.

Ascendis will retain its three divisions in South Africa, namely Medical Devices (excluding RCA), Consumer Brands and Pharma.

“This transaction solves the unsustainable capital structure,” Sardi said. 

“Interest on the debt grows by more than the market cap every six months. It’s the best possible outcome, given the alternatives on the table.” 

Blantyre and L1 would also grant new debt facilities, on significantly better terms, including the rand equivalent of €15-million, which will be used to repay accumulated interest of approximately R220-million related to the current facilities and to contribute to the costs of the recapitalisation. A further drawdown facility worth €20-million would primarily fund the remaining transaction costs and working capital requirements of the business.

Sardi said no stone had been left unturned in looking at alternatives, including finding private buyers, issuing a convertible bond, merging businesses within the group, and raising capital from shareholders. 

The sale of Remedica was ruled out by Blantyre and L1 in January, while a rights issue would have been prohibitively expensive for shareholders, given the level of debt compared with a market capitalisation of less than R400-million.                       

Sardi said the transaction would lessen the complexity of the group, reducing its operations from eight businesses in a number of different jurisdictions to three locally-based operations. He believed the remaining assets would still appeal to investors and that Ascendis could continue to attract interest from potential buyers. The cost base would be cut to an appropriate level to reflect the remainder of the business.

While the Ascendis board has given the proposed transaction the green light, it now requires 75% shareholder approval. 

“If we don’t get shareholder approval or the transaction isn’t implemented for another reason, then lenders can enforce their rights,” Sardi said. 

“A business rescue plan would result in the sale of assets and there is a strong possibility the debt would be greater than what we can get for the assets.” 

Sardi said shareholders had been very supportive of management throughout the process, perhaps due to the way they had engaged with each other. 

Harry Smit, one of the founders of lobby group Ascendis Activist Investors (AAI), said the deal was likely to get their vote. Representing minority shareholders with about 135 million Ascendis shares, or about 27% of the total, AAI holds the swing vote. However, larger institutional investors also have to be on side. 

“Given the situation that we are in, I think it’s a fair and reasonable deal,” Smit told Business Maverick. 

“It’s never going to satisfy everyone, but we all know the situation we are in.”

While AAI disagreed with going the business rescue route, Smit said minority shareholders hoped for more out of the settlement with the company’s lenders. However, the risks and costs were too high to chase an alternative. 

He agreed with Sardi on the potential for the remaining assets and said they could potentially attract trade buyers due to the low gearing the scaled-down company would have.  

“We’re not cashing out at 86c, definitely not. We’re in it for the long haul,” Smit said. 

“Our goal was to save the South African company. We want to take this forward and grow it.” 

Ascendis said the deal would probably be finalised by the end of August if shareholders voted in its favour at an extraordinary general meeting, which is also likely to be held in August. 

“This is the best outcome given the circumstances and the hand we’ve been dealt,” Sardi said. DM/BM