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[TOP STORY] Will debt-laden Ascendis have to sell its crown jewel?

‘Blantyre and L1 Health have just added to the cocktail of what Ascendis could potentially become in the next 12 to 18 months’ – Small-cap analyst Anthony Clarke.

SIMON BROWN: I’m chatting now with Anthony Clarke, a small-cap analyst. You’ll find him on Twitter’s @smalltalkdaily. Anthony, good morning. I appreciate your time. An interesting Sens out of Ascendis Health yesterday. A bit of a backstory –they’ve got some issues around debt. They’ve got a sort of a standstill, in a sense, from the lenders on condition they sell one of the European businesses. 

Suddenly the Sens yesterday says, hang on, there’s this company called Blantyre, which operates out of the UK, and … assists companies in Europe that have these sort of issues, who’ve come forward and said, we don’t think selling assets is the right idea. A capital raise is a better idea – and ultimately keep that business in Europe, which is actually not a bad business at all. 

ANTHONY CLARKE: Good morning, Simon, from sunny Cape Town. You hit the nail on the head there. Ascendis, as you know, it’s current market value is about R372 million, roughly R7 billion in debt from the past endeavours expanding very, very aggressively and building up a sizeable sort of a debt position. 

And out of the blue, yesterday came the Sens that two companies, its Blantyre Capital and LetterOne, which has a $3 billion healthcare business, actually wants to get involved in restructuring and assisting Ascendis in sort of rehabilitating that large debt pool.

And, as you correctly say, the single biggest asset inside Ascendis is a Cypriot-based pharmaceutical company called Remedica, which basically is a crown jewel. That is the Koh-I-Noor in the crown of its operations, with a sizeable ARV and oncology division, and operating extremely well.

It’s been the backbone of that company for many, many years. 

But, as you say, one of the caveats of having a large debt pool, particularly in this country, is the banks who control the debt just want their pound of flesh. So they instigated a standstill agreement, which Ascendis paid a very large fee for last year, giving management 12 months’ breathing space to sell the crown jewel, which they tried to do a year-and-a-half ago, and it fell apart. 

And a second beauty parade I understand occurred late last year, which could have proved quite successful, but Blantyre and L1 seemed to fit keeping the crown jewels together, as restructuring the balance sheet is probably a better plan going forward. So they now have negative control of Ascendis, because they’ve bought enough of the debt from the previously unhappy lenders, probably at a fair discount to market to actually get involved and engage with management. So that’s the current story

SIMON BROWN: It’s going to get interesting. As you point out it’s negative control.

So, as per the rules, two-thirds of the debt lenders have to approve major corporate actions.

They’ve now got more than a third. So, in essence, there’s a bit of a standoff that’s happening in the debt market. And this is not at the boardroom level, which is usually where these sort of things happen. In this case, it’s at the debt level in the bond market.

ANTHONY CLARKE: Yes, it’s actually extremely interesting. If you knew the makeup of the former lenders, it was generally a consortium of banks. And, as you and I both know, particularly in these tough times when banks lend money, but generally ultimately want that money back, they will perhaps put onerous conditions and onerous lending rates on a distressed company to try and extract that value. So you can call them slightly unfriendly – a bit like loan sharks, to be unkind. 

Perhaps the newer crowd, if I can call them that, the way that I understand it, their methodology in assisting companies with problems like Ascendis (particularly L1 Health, which has some very well-known luminaries from pharmaceuticals and corporate CEOs running the fund) they want to help rehabilitate the company and will be a lot less onerous than the banks.

So they’ve bought the debt fairly cheaply, one would imagine.

But I think the concern going forward is could there will be a rights issue, a convertible bond? Some form of restructuring actually has to occur.

And at this stage, I think that’s the uncertainty. We just don’t know what the new consortium actually wants to do, because it literally just happened in the last 48 hours. 

But I would concur that at some point ongoing asset sales to reduce debt and some form of balance sheet restructuring will occur. I think it’s very clear from the Sens that Remedica, that crown jewel which pumps money and profits into Ascendis, will be kept, because that’s really what Blantyre and other ones think is the driving star of Ascendis going forward.

SIMON BROWN: Big story for the shareholders here. This is going to play out. It’s going to take some time. But to your point, that Remedica is a massive quality asset. And the fact that there are attempts here for Ascendis to hold on to that asset is, bottom line, good news for Ascendis shareholders, notwithstanding we don’t know how it shakes out.

ANTHONY CLARKE: Absolutely. I think what’ll probably transpire in the next couple of weeks is that more information will come out regarding this. And let’s not forget that Ascendis has a December interim results period. And, checking my Sens yesterday evening, I note that they are coming out this morning. They traditionally issue a trading update in the first week of February. So if history holds true, at some point in the next couple of weeks an update to investors from Ascendis will be forthcoming. And let’s not forget that in the current world we operate in, and the products that they actually sell – such as ventilators, respirators, chronic medication – one would imagine that they probably had a fairly good second half, given what’s going on with the world with Covid and a need for ventilators, nasal respirators, and so on. 

But let’s see what happens in the next couple of weeks. But I think for a small company with a microcap story, it seems to generate an inordinate amount of press and investor interest. But Blantyre and L1 Health have just added to the cocktail of what Ascendis could potentially become in the next 12 to 18 months.

SIMON BROWN: Definitely punching above their weight in the media space. We’ll keep an eye on this. That’s Anthony Clarke, a small-cap analyst. You’ll find him on Twitter’s @smalltalk daily. Anthony, I appreciate your time this morning. 

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