Blue Star unlikely to meet forecasts, may breach banking covenants

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Blue Star Group's performance in the six months ended December was "considerably worse" than expected, it is unlikely to meet its prospectus forecasts and there's a risk it may breach its banking covenants, the printing company said.

Monday, March 5th 2012, 2:44PM 1 Comment

by Jenny Ruth

"Directors acknowledge that continued compliance with the requirements of the renegotiated SSCFA (senior secured credit facilities agreement with Blue Star's banks) and the ability to maintain adequate liquidity represent material uncertainties in relation to the group's ability to continue as a going concern," the company says.

Last August's deal, under which bondholders agreed to swap the $137.3 million in principal and interest they were owed for a deal with a then net present value of $44 million, was supposed to remove Blue Star from being at the mercy of its banks.

Now, the company says "there is risk that a number of the covenant requirements" will be breached.

While Blue Star reported a net profit of $12.5 million for the six months ended December but that was after last year's debt forgiveness and other alterations to the terms of its capital bonds valued at $112.3 million for the six months.

At the operating level, the company made a $15.6 million loss for the six months, up from the $6.3 million loss it reported for the same six months of 2010. Sales fell 4.4% to $280.2 million.

While Blue Star says earnings before interest, tax, depreciation and amortisation (EBITDA) for the six months was $20.7 million, that included the $112.3 million benefits of the debt forgiveness deal.

The prospectus forecast EBITDA of $53.6 million for the year ending June 30 and a $75.6 million net profit compared with the $84.9 million net loss it reported for the year ended June last year.

"The market continued to decline due to changing customer spending patterns and depressed economic conditions, particularly in Australia," the company says.

"This poor trading environment was most evident towards the later part of the calendar year when adverse conditions intensified and resulted in a performance that was considerably worse than expected."

Boding ill for the future, Blue Star says some of its competitors "have adopted unsustainable pricing strategies in order to keep or win business," putting further margin pressure on Blue Star's margins.

"Until overcapacity in the industry is resolved, this margin pressure is expected to continue."

Blue Star's accounts show its equity at December 31 was just $16.7 million, down from $84 million a year earlier, against total liabilities of $386.8 million.

The notes to the accounts show the total amounts outstanding under the SSCFA at December 31 were $182 million.

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