Thevelia Holdings Ltd.

Overview Key strengths Key risks Largest provider of corporate services in Asia, with high customer retention. Higher interest expenses amid rate hikes will slash cash flow and constrain financial flexibility. Good revenue visibility. High leverage with debt-to-EBITDA at 7x-8x over the next 12-24 months. Stronger profitability than the industry average and of direct peers. Material exposure to reputation and regulatory risk. Operations in fragmented markets. The company's capital structure primarily includes a US$1 billion (HK$7.9 billion) Secured Overnight Financing Rate (SOFR)-based U.S. dollar term loan and is exposed to floating interest rates. We forecast Thevelia's adjusted EBITDA coverage will fall to about 1.6x in 2023 amid rising interest rates for U.S. dollar debt, before recovering to 1.9x-2.1x in 2024-2025. Our

...Thevelia Holding Ltd. will see tighter EBITDA interest coverage and weaker cash flows. The company's capital structure primarily includes a US$1 billion (HK$7.9 billion) Secured Overnight Financing Rate (SOFR)-based U.S. dollar term loan and is exposed to floating interest rates. We forecast Thevelia's adjusted EBITDA coverage will fall to about 1.6x in 2023 amid rising interest rates for U.S. dollar debt, before recovering to 1.9x-2.1x in 2024-2025. Our base case includes an interest rate hedge on US$400 million (HK$3.1 billion) of its first-lien term loan at SOFR of about 3.3% for four years. Higher interest expenses will likely weaken free operating cash flow (FOCF) to about HK$160 million (US$21 million) in 2023 and HK$300 million (US$39 million) in 2024, from about HK$390 million in 2021 (before the rate hike). Yet, we believe Thevelia can maintain positive FOCF unless the interest margin goes above 7%, which is a very unlikely scenario. We expect Thevelia's solid performance and EBITDA...

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