26 November 2012
Analysts
MYOB Subordinated Notes
(MYBG)
Damien Williamson 613 9235 1958
Barry Ziegler 613 9235 1848
Authorisation
John Gleeson 612 9255 7220
Risks require a double digit yield
MYBG provides investors with a substantial initial yield of at least 10% fixed for the first
year (90BBSW + 6.70-6.90% post year 1) to compensate for MYOB’s low interest
cover and high gearing adopted by its private equity owner Bain Capital. As a leading
provider of accounting, payroll and tax software to small and medium enterprises and
accounting practices in Australia and New Zealand, MYOB has historically generated
strong cash flow with recurring revenue representing 87% of total revenue.
Fixed
Interest
Issue overview
Issuer
MYOB
Issue ASX code
MYBG
Face value
$100
Estimated offer size
Bookbuild margin range
$125m
6.70-6.90%
Franking
0%
Interest payments
First interest payment
Quarterly
20 Mar 2013
Minimum application
Maturity
While MYOB currently has adequate headroom under most of its debt covenants, the
Senior Leverage Ratio covenant is most at risk. If this ratio remains constant at 4.04x,
it will be breached by June 2014, as the covenant requirement tightens to 3.75x from
an initial 5.60x. Assuming covenant EBITDA remains constant at $106.7m, satisfying
the Dec 2015 Senior Leverage Ratio of 2.50x will require debt to reduce by $55m p.a.
MYBG provides a similar structure to the Healthscope Notes (HLNG) issued in Nov
2010 and Myer Notes (Sep 2006). The private equity owners all issued ASX listed
subordinated debt securities yielding at least 10%, targeting an IPO before maturity.
In comparison with the Aug 2012 Crown Subordinated Notes (CWNHA) which offer a
record 5.00% margin above 90 BBSW, investors are taking on considerable more risk
in chasing the additional 2.00% yield. MYBG may appeal to investors with an above
average risk profile who are comfortable with MYOB’s operational and financial risks.
$5,000
20 Dec 2017
Figure 1: Comparative subordinated debt securities
Issue
Size
Issue Terms
EBITDA
Term
Conversion
5.0 years
2.5% (IPO)
Interest Cover
Timeline
$125m
Healthscope Notes
$200m
3 Dec 2012
Announcement of margin
4 Dec 2012
Offer opens
4 Dec 2012
Offer closes:
General
12 Dec 2012
Broker firm
19 Dec 2012
Issue date
20 Dec 2012
ASX listing (deferred settlement) 21 Dec 2012
Additional Disclosure: Bell Potter
Securities Limited is acting as Comanager to the MYBG issue and will
receive fees for this service.
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 772
AFSL 243480
1.9x
Fixed 11.25%
1.8x
5.5 years
2.5% (IPO)
Myer Notes
$255m
Fixed 10.19%
1.9x
6.5 years
2.5% (IPO)
90BBSW+6.70-6.90%
Lodgement of prospectus 26 Nov 2012
Bookbuild margin
Fixed 10.00% year 1
Discount
MYOB Notes
SOURCE: COMPANY DATA, BELL POTTER
Key features
Subordinated to $476.6m of senior debt: MYBG ranks senior to the $550m of
equity Bain has invested into MYOB.
Exchangeable at a 2.5% discount to retail offer price in the event of an IPO
Mandatory redemption at year 5 (20 December 2017)
Early redemption (excluding IPO) will result in additional payments: 5% in
year 1, 3% in year 2, and 1% in year 3.
Interest is cumulative: Suspended interest payments will accrue on a daily basis
and compound on a quarterly basis, plus a 2.00% per annum penalty.
First $53.8m raised to repay senior debt: Any additional funds raised (net of
~$5.3m of issue costs) will be distributed as a capital return to MYOB shareholders.
Risks: High debt levels with tightening covenants may result in suspension of
interest payments if MYOB’s operating performance deteriorates, and increases
redemption risk if MYOB is not able to refinance debt or proceed with an IPO.
Refer Risk section on page 6.
DISCLAIMER AND DISCLOSURES THIS REPORT MUST
BE READ WITH THE DISCLAIMER AND DISCLOSURES
ON PAGE 8 THAT FORM PART OF IT.
Page 1
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
MYOB Overview
Commencing operations over 20 years ago, MYOB is a leading provider of business
management, accounting, payroll and tax software to nearly 1 million small & medium
sized enterprises, and over 50,000 public accountants in Australia and New Zealand.
MYBG is being issued by the special purpose entity MYOB Finance Australia Limited,
a wholly owned subsidiary of MYOB Holdings, the parent entity of MYOB Group.
Group revenue was $213m in the 12 months to 30 September 2012. New software
sales accounted for 13% of revenue, while the remaining 87% represented recurring
revenues from the sale of transactional, training and consulting services (11% of group
revenue), additional software licenses and subscription (38%) and maintenance
contracts to existing clients (38%).
MYOB operates four business segments:
•
Business Division - MYOB’s largest division providing accounting software
products to small and medium sized businesses. Approximately 15% of
divisional revenue is generated from new software sales, with 84% recurring
from software support services and automatic software upgrades.
•
Accountants Division - Provides accounting practice management software
solutions. Approximately 96% of revenue is recurring from maintenance fees.
•
Enterprise Division - Enterprise Resource Planning solutions to companies with
between 20-199 employees in Australia and New Zealand. Software products
are based around financial & business management systems and payroll &
human resource administration systems.
•
Website Division - Provides web hosting, website construction and domain
registration services for small businesses with under 20 employees.
Figure 2: MYOB Divisions
SOURCE: COMPANY
Page 2
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
Operating performance
MYOB’s historical revenues and EBITDA have been relatively stable with a constant
track record of growth. Cash flow has also been sound with a respectable cash
conversion of EBITDA. This earnings profile has enable the private equity owners to
aggressively gear the balance sheet.
Figure 3: Operating performance
12 months ending
Dec 2009 Dec 2010 Dec 2011 Sep 2012
$m
$m
$m
$m
Business Division
94.5
109.7
111.8
116.2
Accountants Division
63.2
66
70.7
73.3
Enterprise Division
12.6
15.2
16.1
17.5
Websites Division
4.8
4.8
4.9
4.8
Revenue
Other
Total Revenue
EBITDA (adjusted)
0
0.8
0.8
0.9
175.1
196.5
204.3
212.7
65.2
81.9
91.6
98.5
Senior debt (pro forma)
40.7
MYBG (pro forma on $125m issue)
12.5
Net Interest Expense
53.2
Interest Cover
Operating Cash Flow (excl non-recurring items)
1.85x
53.6
87.2
85.8
86.1
Net Interest Paid
53.2
Net Operating Cash Flow after Interest
32.9
Tax
0.0
Dividends
0.0
Net Cash Flow Before Financing
Cash flow conversion (operating cash flow / EBITDA)
32.9
82.2%
106.5%
93.7%
87.4%
SOURCE: COMPANY
Page 3
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
Debt covenants: 15% EBITDA decline for covenant breach
Investors need to be aware that a 15% decline in EBITDA will result in a breach of the
Interest Cover Ratio, while a 28% decline in EBITDA will result in a breach of the
Senior Leverage Ratio. If an event of default occurs as a result of a covenant breach,
interest payments could be suspended. As interest is cumulative, suspended interest
payments will accrue on a daily basis and compound on a quarterly basis. In addition
a 2.00% per annum penalty will apply.
Figure 4: Debt covenant overview
Current
Senior
covenant
covenant
Covenant
Interest
Covenant
Debt &
Covenant
headroom suspension headroom distribution
headroom
restriction
$m
$m
92.9
63.7
53.2
53.2
7.5
7.5
7.5
60.7
60.7
60.7
Cashflow Cover Ratio
1.53x
1.05x
1.10x
Senior Debt
431.5
431.5
Covenant cashflow available to service debt
Senior + subordinated debt interest
Senior debt repayments
Debt Service Obligations
Covenant EBITDA (adjusted)
106.7
77.1
Senior Leverage Ratio
4.04x
5.60x
Covenant EBITDA (adjusted)
106.7
90.4
53.2
53.2
2.01x
1.70x
Senior + subordinated debt interest
Interest Cover Ratio
$m
-31%
66.8
$m
-28%
53.2
-28%
-15%
Senior Debt
431.5
MYOB Notes
125.0
125.0
Gross Debt
556.5
556.5
Covenant EBITDA (adjusted)
106.7
101.2
Total Net Leverage Ratio
5.22x
5.50x
EBITDA Adjustments to Covenant Ratios
Pro Forma EBITDA
98.5
2.3
One off costs: Product development / marketing
5.0
Covenant EBITDA (adjusted)
Change in net working capital
Capital expenditure
-5%
$m
Bain Management Fee
Other
431.5
0.9
106.7
-0.9
-11.5
Change in non-operating provisions
-1.4
Covenant cashflow available to service debt
92.9
SOURCE: COM PANY DATA, BELL POTTER
Page 4
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
Tightening covenant requirements
After factoring in the scheduled principal repayments required under the $212m debt
Facility A, the Senior Leverage Ratio appears the most at risk of a covenant breach. If
we assume EBITDA remains constant at $106.7m, extra debt repayments will be
required to satisfy the covenant from March 2015, peaking at an extra $34m in
December 2015. If senior debt reduces in line with the Facility A repayment schedule,
EBITDA will need to increase from $106.7m to $120.3m by December 2015.
Factoring in the scheduled debt reductions to the interest expense, EBITDA would
need to be $2.2m higher in March 2016 to satisfy the Interest Cover covenant.
Figure 5: Senior Leverage and Interest Cover covenant sensitivities
Senior
Debt Facility A Senior Debt
Outstanding
EBITDA
Senior
(constant)
Leverage
Leverage
Repayments
$m
$m
$m
Dec 2012
5.60x
14.0
417.5
106.7
Mar 2013
5.50x
417.5
106.7
3.91x
Jun 2013
5.00x
15.0
402.5
106.7
3.77x
Sep 2013
4.60x
402.5
106.7
3.77x
Dec 2013
4.40x
387.0
106.7
Mar 2014
4.25x
387.0
Jun 2014
3.75x
Sep 2014
3.50x
Dec 2014
3.25x
Mar 2015
3.15x
Jun 2015
3.00x
Sep 2015
2.75x
Dec 2015
2.50x
Mar 2016
2.50x
Jun 2016
2.50x
Sep 2016
2.50x
Senior Debt
EBITDA
Headroom Headroom
Interest
EBITDA
Cover
(constant)
Interest
Interest
EBITDA
Cover
Headroom
$m
$m
$m
$m
180.0
32.1
1.70x
106.7
53.2
2.01x
16.3
169.4
30.8
1.60x
106.7
53.2
2.01x
21.6
131.0
26.2
1.60x
106.7
53.2
2.01x
21.6
88.3
19.2
1.60x
106.7
51.0
2.09x
25.0
3.63x
82.5
18.7
1.60x
106.7
50.3
2.12x
26.2
106.7
3.63x
66.5
15.6
1.70x
106.7
49.6
2.15x
22.4
367.1
106.7
3.44x
33.0
8.8
1.80x
106.7
48.8
2.19x
18.9
367.1
106.7
3.44x
6.3
1.8
1.90x
106.7
47.9
2.23x
15.6
345.0
106.7
3.23x
1.8
0.5
2.00x
106.7
47.0
2.27x
12.8
345.0
106.7
3.23x
-8.9
-2.8
2.10x
106.7
46.0
2.32x
10.2
322.9
106.7
3.03x
-2.8
-0.9
2.20x
106.7
44.9
2.37x
7.9
322.9
106.7
3.03x
-29.5
-10.7
2.30x
106.7
43.9
2.43x
5.8
300.8
106.7
2.82x
-34.1
-13.6
2.40x
106.7
42.9
2.49x
3.9
300.8
106.7
2.82x
-34.1
-13.6
2.50x
106.7
41.8
2.55x
2.2
26.5
274.3
106.7
2.57x
-7.5
-3.0
2.50x
106.7
40.7
2.62x
5.0
27.4
246.9
106.7
2.31x
19.9
7.9
2.50x
106.7
38.9
2.74x
9.5
15.5
19.9
22.1
22.1
22.1
SOURCE: COMPANY DATA, BELL POTTER
3.91x
$m
Capital position
Gearing on MYOB’s balance sheet is quite high at 100%. MYBG ranks behind
$476.6m of senior debt, although in event of a wind up, it appears unlikely that MYBG
will receive any material consideration, only ranking ahead of $563.9m of equity, which
includes $1,209m of intangibles assets and goodwill.
Figure 6: Balance sheet
As at 30 September 2012 (pro forma)
Cash
Property, plant, equipment
Intangibles
Other
Total Assets
$m
38.1
5.6
1,209.2
31.8
1,284.7
Senior Debt
476.6
MYOB Notes
125.0
Other Liabilities
119.2
Total Liabilities
720.8
Total Equity
563.9
Net Debt / Equity
100%
SOURCE: COMPANY DATA, BELL POTTER
Page 5
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
Investment risks
MYBG risks are outline on page 83 of the prospectus. Key security risks include:
•
Subordinated to $528m of senior debt facilities. In event of a wind up, it
appears unlikely that MYBG will receive any material consideration, only
ranking ahead of $563.9m of equity, which includes $1,209m of intangibles
assets and goodwill (94% of total assets).
•
Limited free cash flow to meet interest payments, capex and scheduled debt
Facility A principal repayments.
•
Meeting debt covenants - MYOB requires a combination of increased EBITDA
and continued reduction of debt to ensure all debt covenants are continuously
satisfied. Loss of market share, aggressive competitor pricing and failure to
develop new products (limited capex funding) could result in a decline in
earnings and cash flow. Failure to meet debt covenants could result in interest
payments being suspended.
•
Refinancing risk - MYOB has a series of existing debt facilities that will require
refinancing on 30 Sep 2016. There is a risk that these facilities may not be
able to refinanced or the refinance terms may not be attractive.
•
IPO risk - Failure to achieve exit via IPO increases MYBG redemption risk at
maturity on 20 Dec 2017.
•
Adverse movement in credit spreads as a result of a tightening in the
availability and cost of credit, as well as a deterioration in MYOB’s financial and
operating performance.
•
New issues may offer more attractive issue terms and margins, placing
downward pressure on the security price.
•
Poor accounting disclosure - MYBG investors require quarterly reporting of
where MYOB is trading relative to its requirements under its four key
covenants. There is no guarantee this information will be disclosed on a timely
manner, if at all. Accurate calculation of these ratios may also prove difficult
given adjustments required to EBITDA.
If MYOB’s financial position
deteriorates and places covenants at risks, it may take some time for investors
to become aware.
Page 6
MYOB Subordinated Notes
26 November 2012
MYOB Subordinated Notes
Other investment risks
Key Business Risks of MYOB include:
•
Increasing competition - In providing business software and services, MYOB
operates in a highly competitive and rapidly evolving area. New products
offered by competitors could be superior and more cost effective. In addition,
one competitor (Xero) has MYOB’s founder and former CEO Craig Winkler as
a director.
•
A material deterioration in the Australian and New Zealand economies could
lead to a reduction in the number of small to medium sized enterprises and a
reduction in demand for MYOB products and services.
•
Accountants may no longer recommend MYOB software to clients.
•
Cloud Computing - MYOB’s investment in Cloud Computing may not achieve
the projected level of demand and market acceptance.
•
Security and storage - Failure to protect client data stored or transmitted by
MYOB could lead to significant legal action, damage to the company’s
reputation and potential loss of significant customers.
Additional investment risk:
ASIC “Be wary of the risks” warning: Money Smart website
The ASIC publication should be used as guidance which may be relevant to your
consideration of MYBG – namely, information for retail investors who are considering
investing in hybrid securities.
Copies of the ASIC Guidance can be obtained from ASIC’s website at:
www.moneysmart.gov.au/investing/complex-investments/hybrid-securities-and-notes
Basically, hybrid securities (including subordinated notes and convertible preference
shares) may be from well-known companies but they are very different from 'normal'
corporate bonds.
Some hybrid securities make investors take on 'equity-like' risks. Some also have
terms and conditions that allow the issuer to exit the deal or suspend interest
payments when they choose. Some are very long-term investments (for example,
more than 20 years).
Hybrid securities may be unsuitable for you if you need steady returns or capital
security typically from a bank term deposit style of investment.
Page 7
MYOB Subordinated Notes
26 November 2012
Research Team
Fixed
Income
Bell Potter Securities Limited
ACN 25 006 390 772
Level 38, Aurora Place
88 Phillip Street, Sydney 2000
Telephone +61 2 9255 7200
www.bellpotter.com.au
Staff Member
Title/Sector
Phone
@bellpotter.com.au
John Gleeson
Research Manager
612 9255 7220
jgleeson
Sam Haddad
Emerging Growth
612 8224 2819
shaddad
John O’Shea
Emerging Growth
613 9235 1633
joshea
Jonathan Snape
Emerging Growth
613 9235 1601
jsnape
Bryson Calwell
Emerging Growth Associate
613 9235 1896
bcalwell
Sam Byrnes
Emerging Growth Associate
612 8224 2886
sbyrnes
Stuart Roberts
Healthcare/Biotech
612 8224 2871
sroberts
Tanushree Jain
Healthcare/Biotech Associate
612 8224 2849
tnjain
TS Lim
Banks/Regionals
612 8224 2810
tslim
Lafitani Sotiriou
Diversified
613 9235 1668
lsotiriou
Stuart Howe
Bulks & Copper
613 9235 1782
showe
Fred Truong
Bulks & Copper
613 9235 1629
ftruong
Trent Allen
Emerging Growth
612 8224 2868
tcallen
Johan Hedstrom
Energy
612 8224 2859
jhedstrom
Stephen Thomas
Gold & Nickel
618 9326 7647
sthomas
Quantitative & System
612 8224 2833
jtai
Damien Williamson
Fixed Income
613 9235 1958
dwilliamson
Barry Ziegler
Fixed Income
613 9235 1848
bziegler
Industrials
Financials
Resources
Quantitative
Janice Tai
Fixed Income
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Additional disclosure:
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Page 8