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Credit Analysis: Endo Finance plc

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Endo finance plc is a financing company and a subsidiary of Endo Group which consist of several other subsidiaries. The main operations of the Group are, the chartering of vessels, ship-to-ship services, ship management services and property leasing.

In 2019, the Endo Finance issued an unsecured bond of €13.5m, with a coupon of 4.5% and a 10-year maturity. Out of this issue, €12.6m were earmarked for the acquisition of two vessels, while the remaining €0.5m was retained by the Group as part of its general corporate funding. The bond is guaranteed by International Fender Providers Ltd and IFP International Fender Providers Ltd, which both carry out ship-to-ship services, together with Endo Properties Ltd, which is in property management and leasing.

The Bond was issued to enhance the Group’s chattering of vessels. In May 2019, the Group acquired M/T Endo Breeze, being a medium-range (MR) vessel. Additionally, on 11 September, the Group announced that it acquired the third vessel, Endo Sirocco. The acquisition of both of these vessels was interrupted mainly as a result of a delay experienced when issuing the bond.

FY19 financial results: Satisfactory performance despite the Group experiencing delays in its strategic plans

The Group started its operations in FY18, however kick-started its full operations in FY19, where it reported a revenue of €5.5m. The majority of this revenue was generated from the chartering of vessels (52%), namely the charter of Endo Breeze (€2.6m). The ship-to-ship services contributed 33% to total revenue, while ship management services and property leasing contributing 11% and 3%, respectively.

The operating costs of the Group predominantly consist of costs incurred in managing the ships, in addition to the crewing and direct costs incurred in providing ship-to-ship services. The Group generated an EBITDA of €2.2m in FY19, translating into an EBITDA margin of 40.3%. Based on this, the interest coverage (EBITDA /Cash interest paid) stood at a healthy level of 3.4x.

How has the pandemic impacted the Group?

Notwithstanding the severe impact of the pandemic on both local and global economies, the tanker shipping market has been one of the few industries that has been positively affected by the COVID-19 pandemic, and the drastic fall in oil price which was conditioned twofold, COVID-19 and the supply glut.

The Group’s largest vessel, Endo Breeze, is currently under a fixed time charter of 3 years (2 years remaining) with Team Tankers International Ltd, a company listed on the Oslo Stock Exchange. Moreover the other two vessels, despite the recently imposed travel ban which in reality provided an exemption in relation to cargo ships and tankers carrying essential fuels, are expected to continue operations during FY20. Both vessels are chartered to Palm Group, being a related group to ENDO. More positively, as a result of high demand in the tankers shipping market, the Group recorded a one-off surge in revenue from its ship-to-ship services. This resulted in the interim 2020 revenue of International Fender Providers Ltd in jumping to €2.1m (H1 19: €0.7m), with an operating profit of €140k (H1 19: €79k).

Despite this, the Group did report that the pandemic has delayed the acquisition of the third vessel, however this has now been rectified and Endo Sirocco was acquired on 11 September. In view of the limited impact of the pandemic on ENDO’s operations, the Group expects to operate at satisfactory profitability levels during this year, more so it is anticipating an improvement in its financial performance. This should enable the Group to honour all of its financial obligations.

FY20 Outlook and beyond

In FY20, revenue is expected to jump through the deployment of an additional vessel and the realisation of a full-year performance of Endo Breeze, furthermore the company is also expecting to register some form of organic growth given the positives brought about by COVID-19 specifically for the industry. In fact, revenue is forecasted to increase to €9.7m, meaning an increase of 74% over FY19. Subsequently, EBITDA is expected to amount to €3.5, an improvement of 55%.

In view of the anticipated improvement in the Group’s fundamentals, the gearing (net debt/EBITDA) is expected to fall to 4.1x in FY20 (FY19: 6.4x), while interest coverage should improve to 4.5x.

The forecasts for FY20 show that the business model of ENDO is resilient to the current negative environment and the Group should be well positioned to weather the current storm. Currently, the bond is trading at a yield to maturity of 4.5%, which is higher than the average of local bonds maturing in 2029. Notwithstanding this, investors should take note of the liquidity risk shadowing this security.

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