Assetz Capital Page 1 PLEASE NOTE The information contained in this credit report has been provided by the applicant who has declared it complete and correct. Assetz Capital has not conducted an audit and provides no warranty as to the accuracy of the information. Assetz Capital gives no recommendation or advice in relation to this loan application and investors should seek their own advice before bidding. Techflow Flexibles (Holdings) Ltd TERM LOAN AMOUNT SECURITY VALUE LTV 5 Years £1,800,000 £2,400,000 75% INTEREST CAPITAL Paid Monthly Paid Monthly SECURITY Debenture over Techflow Flexibles (Holdings) Ltd. Debenture over Techflow Flexibles Ltd. Inter-company guarantee between Techflow Flexibles (Holdings) Ltd and Techflow Flexibles Ltd. 1st Legal Charge over the land and property at 4 Bassington Drive, Bassington Industrial Estate, Cramlington, Northumberland, NE23 8AS. Personal guarantee for £250,000 from Kenneth Beattie.
Transcript
A s s e t z C a p i t a l
Page 1
PLEASE NOTE
The information contained in this credit report has been provided by the applicant who has
declared it complete and correct. Assetz Capital has not conducted an audit and provides no
warranty as to the accuracy of the information. Assetz Capital gives no recommendation or advice
in relation to this loan application and investors should seek their own advice before bidding.
Techflow Flexibles (Holdings) Ltd
TERM LOAN AMOUNT SECURITY VALUE LTV
5 Years £1,800,000 £2,400,000 75%
INTEREST CAPITAL
Paid Monthly Paid Monthly
SECURITY
Debenture over Techflow Flexibles (Holdings) Ltd. Debenture over Techflow Flexibles Ltd.
Inter-company guarantee between Techflow Flexibles (Holdings) Ltd and Techflow Flexibles Ltd. 1st Legal Charge over the land and property at 4 Bassington Drive, Bassington Industrial Estate,
Cramlington, Northumberland, NE23 8AS. Personal guarantee for £250,000 from Kenneth Beattie.
A s s e t z C a p i t a l
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1 BORROWER
1.1 Background
This is a company operating in the oil and gas sector and has been trading very well (see
financial summary below). They specialise in the design, manufacture and supply of hoses to
the Oil and Gas Exploration and Production industries. The hoses are used in a variety of
different applications, such as – fire water mains, cement hoses, rig supply hoses etc.
The trading company has been in existence for over 11 years. The holding company over 5
years.
The directors are Ken Beattie & Bryan Beattie. Ken’s father (also Ken) & Ken’s Uncle (Bryan)
started business (“K & B Beattie”) in the sector around 40 years ago. Originally an
engineering business using CNC machines and lathes to produce machined metal products
for their customers. In the 1980’s considerable work was undertaken for customers in
Aberdeen in relation to specialist diving equipment. They moved into manufacture of high
pressure diving hoses. They sold out in 2000 for £10M. Subsequent to this, they established
a new business (“TechDrill”) in 2002. This business manufactured manifolds and couplings
primarily for the oil & gas sector. This business was sold for £24M in 2011.
Alongside Techdrill they established Techflow Flexibles in 2006. The business has been built
up to a turnover regularly in excess of £20Mpa now. They had a division in China that was
being used to produce goods. However, they recognised that the Chinese product was
sometimes viewed as of inferior product quality. They also noted that the products they
provide are predominantly for new oil platforms etc. and they wished to diversify to be able
to provide a “repairs & maintenance” offering, rather than simply supporting new
exploration. To this end, they have recently sold off their stake in the Chinese operation
having spent the last few years undertaking significant research and development to enable
them to serve the repairs & maintenance side of the sector. Over the last few years they
have spent over £8M on new equipment in the UK and research & development.
They now carry various valuable certifications, including the following:
• API 7K Rotary Drilling & Mud hoses Type Approved to DNV-OS-E101 & ABS CDS
• API 7K Cement Hoses Type Approved to DNV-OS-E101 & ABS CDS
• API 7K Hydraulic Tensioner Hoses Approved to DNV-OS-E101 & ABS CDS
• API 16C Flexibles Choke & Kill Lines
• API 17K Bonded Flexible Pipe
(“API” = American Petroleum Institute)
… which are now enabling them to secure new contracts on maintenance projects. This is very
good news for Techflow as the maintenance side of the sector is considerably larger and
A s s e t z C a p i t a l
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presents much more opportunity (as well as being something that cannot be “turned off” if
demand dictates – such as new exploration projects).
As an example, Saudi Aramco (the national petroleum and natural gas company of Saudi
Arabia) has over 17km of pipes that need to be replaced on a rolling programme over the next
10 years. These pipes are currently made of steel. However, the steel corrodes over time and
creates leaks in the system. These are currently being patched on a reactionary basis. Techflow
have developed a steel reinforced thermoplastic pipe (“RTP”) (effectively of rubber
construction with spiral wrapped steel reinforcement) which is easy to substitute the existing
steel and has a much longer expected lifespan (approximately 10 years v the current 1 to 2
years – before they potentially start leaking). In addition, they are much more flexible, smaller
and lighter – easier to handle.
The certifications above are coveted and these, coupled with the existing and new contracts
coming on line, have made Techflow an attractive acquisition target. The directors have
advised they have had an approach to sell the business. The offer at this stage is c$66M USD.
They are continuing discussions with the potential purchasers. However, this is considered
some time off and indeed is by no means certain at this time.
1.2 Structure
Techflow Flexibles (Holdings) Ltd is the top company with shares owned 50/50 by Bryan &
• External Secured lay down / storage area = 50,000 sq ft
• Overhead crane facilities with multiple 10 Tonne capacity.
Offshore services include:
• Project Management
A s s e t z C a p i t a l
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• Hose Design & Configuration
• Hose Manufacture
• Research & Development
• FHA Management Services
• Inspection & Repair Service
1.5 Market
The marketplace is enormous and breaks down into many different segments /
requirements. Techflow provide a wide variety of products, some of which are listed below:
• High Pressure Drilling Hoses
• Drag Chain Hoses
• Fire Resistant Hydraulic BOP Hoses
• Firewater Mains Hoses
• Industrial & Rig Supply Hoses
• Specialist Heat-Trace Hoses
• Fire Resistant Hydraulic Quick Release Couplings
• Hose Loading Stations
• Breakaway Couplings
To give some perspective to this, the renewal of 17km of steel pipework for Saudi Aramco
alone will cost in the region of £1.7Bn. Each new oil platform will spend over £1M in hoses,
pipes and ancillary products – all of which need regular replacement too.
1.6 Suppliers
Steel wire is generally sourced from Bekaert. They have other options but have a good
working relationship with Bekaert and therefore choose not to spread around supply
requirements.
Rubber products are supplied by 2 or 3 sources both domestically and internationally.
1.7 Customers
Techflow has a wide variety of clients including: BP, Total, Maersk, Seadrill, Bentec, Samsung
Heavy Industries, Statoil, Daewoo Shipbuilding, Petrobas and Keppel Fels. The client base is
wide and varied – predominantly blue chip quality.
1.8 Competition and Strategy
Techflow’s most proficient competitor is considered to be Contitech. Contitech is an
international company offering a very wide variety of products and services, although their
key offerings are in drive belts and hoses. Techflow consider them good, but they are quite
A s s e t z C a p i t a l
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inflexible in their approach and they are not offering RTP. They are also comparatively
expensive.
Pipelife does offer the RTP system. They are also an international company and focus
predominantly of pipe products. Two of the key technical staff at Pipelife are now with
Techflow.
Copper State Rubber, based in Arizona, US, are considered to produce an inferior product to
Techflow’s RTP product. They are also unable to provide the analysis and data Techflow can
offer as part of their services.
2 PROPOSAL
2.1 The proposal is to re-finance the premises from which they trade to repay existing debt with
HSBC (£595,000) and the rest will be used in part to acquire some specialist equipment in
relation to their trade, along with reimbursing themselves for some of the considerable R&D
spend they have undertaken in the last couple of years. In the financial reporting period to
31/12/15, they spent c£3.47M on research and development. This exercise will inject cash
to be used as part of the growth funding of the business as turnover grows again.
2.2 The request is for a 5-year commitment on a 1+19 amortising profile. The interest only
period at the outset will offset some of the transaction costs. The following low repayment
rate will allow them to preserve cash generated for ongoing R&D spending and to fund the
re-growth in turnover of the business which they have allowed to reduce while they have
focussed on securing their additional accreditations.
2.3 It is fair to say the directors have spent large sums of cash on R&D and also clearing
substantial funding lines over the last couple of years. This has left them short of cash and
the net loan proceeds will assist with reinstating a suitable level of working capital from
which to grow the business again.
3 CONDITIONS AND COVENANTS
3.1 Conditions Precedent
a) Satisfactory AML/KYC checks in respect of the Borrowers / Directors / Shareholders.
(COMPLETE).
b) Clear credit searches against the Borrowers / Directors / Shareholders.
(COMPLETE).
c) Satisfactory completion of all stated security requirements.
(IN PROGRESS WITH SOLICITORS).
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d) A formal, independent valuation addressed to Assetz Capital Trust Company Limited
and its Lenders from time to time by a RICS qualified valuer confirming market values
of the property. Expected minimum market value of £2,400,000 (based on vacant
possession value and an assumed 180-day restricted sale period).
(COMPLETE).
e) Loan to value not to exceed 75% value (as measured against the Vacant Possession
Value – 180-day restricted sale period).
(COMPLETE).
f) Satisfactory insurance cover with Assetz Capital noted as first loss payee.
(IN PROGRESS WITH SOLICITORS).
g) 6 months’ copies of the business and personal bank statements revealing satisfactory
conduct.
(COMPLETE).
h) Assetz Capital due diligence to be satisfied that loan can be serviced.
(COMPLETE).
3.2 Covenants
a) Annual accounts to be provided to Assetz Capital within 180 days of the period end to which they relate.
b) Monthly management accounts comprising of profit & loss, balance sheet and cash flow statements to be provided to Assetz Capital within 30 days of the period end to which they relate.
c) Debt Servicing – EBITDA to All Debt Service Liability for each Quarter must be at least 1.25:1. To be tested Quarterly on a Rolling 12-month basis.
d) Interest Cover – EBITDA to All Interest Cost for each quarter must be at least 1.50:1. To be tested quarterly on a rolling 12-month basis.
e) Maximum Loan to value (as measured against the Vacant Possession Value – 180-day sale period) not to exceed 75% on each valuation date.
f) Dividends in any annual period not to exceed £0 without the prior written consent of Assetz Capital SME Ltd.
g) Expenditure on research & development in any annual period not to exceed £100,000 without the prior written consent of Assetz Capital SME Ltd.
h) Repayments of the loan from Marine as proposed per the 5 year projections
(produced Jan 17 – Revision 0) not to be accelerated. Repayments to be regulated by
* Please note the 2015 period was actually a 16-month period generating turnover of
£34,068.974 and EBITDA of £4,509,072. The figures used above are the annualised figures to
afford a like-for-like comparison.
The 2014 & 2015 periods (now to 31st December) demonstrate the level of business Techflow
can readily attract. The 2016 figures reflect the period in which management took a deliberate
decision to withdraw from higher volume / lower margin work and focus on a lower volume
of more profitable contracts. This has also enabled them the capacity to focus on their
research and development activities and successfully attract the new accreditations (which
will give rise to securing more lucrative work going forward).
Despite the halving of turnover, the underlying profit percentage is up, primarily as a result of
the higher gross margin on work taken on. The intention is to continue in this manner, and
also lift turnover in future periods whilst maintaining margin levels. The customers have
projected forward for 5 years and the following data completes the projected picture (albeit
could not be included in the tabulation above due to space constraints):
• 2019 – Turnover £33,652,000; EBITDA £5,671,000
• 2020 – Turnover £36,957,000; EBITDA £6,816,000
• 2021 – Turnover £40,243,000; EBITDA £7,747,000
The customers have advised that there is adequate capacity within the existing buildings to
accommodate the above levels of business.
Since producing the 5 year projections, the customer has revised (upwards) their expected
turnover for 2017 to £24,925,454 (up c£2m). This is based on confirmed monthly orders for
£15,475,454 and pending orders of £9,460,000 already accumulated for 2017. These numbers
confirm turnover is already set to climb from the 2016 period.
It can be seen above that the company can service the debt proposed and would exceed the
proposed 1.25x covenant (even based on the historic 2016 period). The debt servicing
obligation equates to £1,262,000pa and incorporates this proposed loan along with all other
facilities (primarily 1 large asset finance agreement and a few small ones soon to run off).
A s s e t z C a p i t a l
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Please note, there is little corporation tax payable (indeed the 2017 & 2018 periods are
expected to feature net refunds from HMR&C). This is as a result of the research &
development undertaken and the successful reclaiming of relief in that respect.
5 FINANCE ASSESMENT INCLUDING SERVICEABILITY FROM PAST AND FUTURE PERFORMANCE
Debt servicing based on profitability has been demonstrated above. In addition to this, an analysis
based on cash generation has been undertaken below.
In 2016, there was a little over £4.5M of cash generated from operating activities. This would be
a little unusual based on the reduced turnover. However, reflective of a collect-in of debtor
balances in the main. The funds were used to clear approximately £3.3M of external funding as
well as c£1.3M of inter-company loans.
Turning to the 2017 figures, there is an expected net cashflow (before financing capital and
interest repayments) of £1,980,000. This figure includes the proceeds of sale of the Chinese
operation and the proceeds of this funding request. If we strip this back, there would be negative
cash generation of £1,169,000. On the face of it, this might be concerning. However, it is entirely
understandable as turnover increases and debtors balances will naturally increase and consume
cash pending receipt of payment from customers under trade terms. There is an expectation that
debtors balances will climb by some c£5M+ in the period. This consumption of cash is offset in
part by an increase in supplier terms, reduction in stocks, retained cash profits and the
aforementioned funds coming in.
2018 is expected to see net cash flow of c£4M before financing and a surplus of c£2.765M after
financing. The net cash flow before financing compares with the forecast EBITDA of c£4.662M and
indicates a slow down in cash consumption by balance sheet assets such as debtors and stock.
Net worth is stated as £12,471,586 per the 2015 audited accounts. However, this includes an
“intangibles” figure of £7,584,775 and as such one might prudently consider the net worth to be
a little under £5M if one excludes the “intangibles” value. That said, the intangibles reflect the
value in the patents and patents pending in relation to a number of the products they produce
and manufacturing processes employed. These would likely be of some reasonable value to a
competitor who wished to obtain them and use them.
Bank Statements
Bank statements have been provided for the business as well as the personal bank statements for
the guarantor.
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The business bank statements for the holding entity and the trading do not feature any unpaid
items. They are generally well-conducted. There is the occasional modest overnight overdrawn
position. However, this is always cleared the next morning.
There was a large influx of cash in December as a result of the re-finance of machinery to release
additional cash. The repayments on this facility have been included in the debt servicing above.
There were £30,000 regular payments to HMR&C which looked unusual and warranted further
investigation. It transpires that the customers had a large research & development allowance
claim in and the customers were reluctant to pay out the calculated corporation tax on their
profits, knowing that they were entitled not to pay it. As a compromise, HMR&C agreed to accept
the nominal £30,000 payments until they had reviewed the claim and settled it. This has since
been settled and the amounts are no longer payable.
The personal bank statements for the guarantor do feature 2 modest unpaid items. I have inquired
as to why this occurred as there is a good level of income going through the personal account. It
seems the guarantor has been undertaking some sizeable home improvements and this has
caused a lot more personal expenditure than usual to go through the account – and the unpaid
items were as a result of an oversight in relation to the extra expenditure through the account.
6 SECURITY
6.1 The following security shall be provided:
a) Debenture over Techflow Flexibles (Holdings) Ltd.
b) Debenture over Techflow Flexibles Ltd.
c) Inter-company guarantee between Techflow Flexibles (Holdings) Ltd and Techflow Flexibles
Ltd.
d) 1st Legal Charge over the land and property at 4 Bassington Drive, Bassington Industrial
Estate, Cramlington, Northumberland, NE23 8AS.
e) Personal guarantee for £250,000 from Kenneth Beattie.
A valuation report has been commissioned / received and the following key figures have been provided:
• £2,750,000 = Market Value assuming Vacant Possession
• £2,400,000 = Market Value assuming Vacant Possession (and a 180-day restricted sale period)
• £370,000 = Market Rent (equates to £2 per sq ft) Key commentary is as follows:
• The property is located on the Bassington Industrial Estate in Cramlington in the north east of England, approximately 10 miles north of Newcastle. It is very close to the A19
A s s e t z C a p i t a l
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& A1(M) and as such has good transport links. In addition, it is c6 miles from Newcastle International Airport.
• The site is c13 acres in size and the property comprises a large industrial complex arranged in two buildings which have been refurbished. The industrial accommodation is of steel frame construction with brick elevations which have been overclad with profile metal sheeting beneath a pitched roof with an asbestos sheet covering. To the west of the site is a car park and area of grassed expansion land. Site coverage is c32% at present.
• The estimated useful economic life of the building is stated as 25 years.
• The location is not considered to be in a floodplain and the risk of flooding is considered negligible.
• An Energy Performance Certificate was prepared on 28th June 2012 and rated the building as a “D” rating. As such it would not currently fall foul of the upcoming Minimum Energy Efficiency Standards (effective 1st April 2018) whereby a property with a rating of “F” or worse must have energy efficiency improvements made before it can be leased.
• The valuer comments that “despite the wider economic and political uncertainty, industrial occupier take-up has continued to remain strong”. He goes on to say that “generally the stock of industrial premises on the market in the North-East region is relatively low and in particular for freehold opportunities for which there is a considerable appetite. Currently demand remains for modern units, which are now available in very limited numbers and consequently there is now a significant disparity between rental and capital values for modern and older second hand space. Cramlington continues to be a popular industrial location given the town’s excellent communication links being situated close to the junction of the A1 and A19. Up until the past 10 years there had been limited new development in Cramlington however those new developments which have taken place have proved extremely popular.”
• The valuer states “The main production facility has an eaves height of approximately 4.43m which is relatively low and would limit occupier demand to manufacturing occupiers. The facility is large at c.185,000 sq ft and while demand for units of this size is relatively “thin” we are aware of a number of existing requirements for this type of asset in and around Cramlington. In the event the property was offered to the market at present we believe there would be reasonable levels of demand.”
Our funding will represent 75% of the vacant possession value (assuming the restricted 180-day sale period). Further comfort is derived from the personal guarantee from Ken Beattie.
7 RISK AND MITIGANTS
7.1 Sector Risk
The business is very much dependent on the oil and gas sector and as such, fluctuations in the
performance of the wider sector can have a great impact on a business like this, especially if
their activities are tied to the exploratory side of the sector and the installation of new
facilities for the extraction of oil. It is for this reason that the business has invested heavily in
research & development and diversified its offering such that it is now serving the existing
markets on more of a “repairs & maintenance” front than the new / exploratory operations.
A s s e t z C a p i t a l
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This puts the company in a much stronger position as it has the capabilities to serve new &
existing facilities and significantly reduces exposure to any cyclical patterns in the oil & gas
sector.
7.2 Currency Risk
Given the company trades with partners in a number of locations around the world, there are
often occasions when large payments are made in currency. The business chooses to hedge
against currency movements from time to time to mitigate against exchange rate loss.
7.3 Property Risk
The valuer has indicated that the roof is made of asbestos and considers that renewal will be
required over the medium term. The customers have confirmed that they have implemented
and continue a regular maintenance programme on the whole building. They envisage the
lifetime of the roof to be substantial. Upon a visit to the site and inspection of the properties,
it is confirmed there were no signs of any leaks to the roof (it was a wet day).
As part of the legal process, we shall seek a copy of the asbestos register to ensure that the
asbestos has been examined, considered safe and / or being managed appropriately.
The eaves height of the main production facility is low at 4.43m and this will restrict the
market for the unit. That said, the valuer has indicated there is current demand from occupiers
that the building would satisfy.
The valuer has stated that whilst the site coverage is low at c32% there is a limited level of
external yard space. This was raised with the borrowers and they advised that they could
readily re-configure the parking allocation on the property so as to free up more storage /
yard space as required.
7.4 Exit Risk
Considering capacity for full repayment, there are a number of potential exit routes:
• Trade Sale
There is already interest in the business as alluded to above. The principals have
successfully achieved trade sales in the past.
• Re-finance to another lender at the end of the loan term
The debt at maturity of the 5-year term should equate to 68% of the vacant
possession value (assuming a 180 day sale period) or c59% of the market value.
This should be a level supported by a number of lenders. Alternatively, an invoice
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finance provider should be able to release sufficient cash against the debtor book
to fully repay the facility.
• Re-finance with Assetz Capital
Assuming satisfactory conduct during the 5 year term, it is quite reasonable to
consider that Assetz Capital would consider a proposal for a further 5 year term.
• Recourse to security
As a last resort, recourse to security is expected to achieve full repayment. There
would be the property, the personal guarantee and a reasonable expectation of
some collect-out of the debtor book as caught under the Debenture.
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