SRV has written down almost all of its assets in Russia and its holdings in Fennovoima, publishes programme to reorganise its balance sheet to reinforce its equity

SRV GROUP PLC     INSIDE INFORMATION    28 APRIL 2022       8.15 EET

SRV has written down almost all of its assets in Russia and its holdings in Fennovoima, publishes programme to reorganise its balance sheet to reinforce its equity

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SRV Group Plc’s (“SRV” or the “company”) board of directors has decided, effective today, to initiate a programme with the aim of achieving a full reorganisation of the company’s financing due to Russia’s war in Ukraine and the impairments of its Russian business operations caused by the related financial sanctions. As a result of the war and the consequential market conditions SRV has written down from its balance sheet practically all of its shopping centre and other assets located in Russia and its holdings in Fennovoima in the first quarter of 2022, totalling EUR 141.2 million. The remaining value of the assets in Russia after the write downs is total of EUR 2.6 million. There are no more unrecognized margin eliminations.

The decrease in asset values ​​will have a significant impact on SRV’s equity and equity ratio, and the restructuring is intended to strengthen the company’s equity. The objective of the reorganisation is to increase equity by approximately EUR 100 million, and at the same time decrease interest-bearing debt by the same amount. The reorganisation of the company’s financing has strong support from SRV’s largest shareholders, bond and hybrid bond holders as well as banks, which is why the company trusts that the programme will be implemented.

Upon completion of the restructuring, the company will be almost free of net debt (IFRS 16 adjusted) construction company and its Russia related risks will be small. The company has a good and healthy construction business in Finland.

The contemplated reorganisation of the company’s financing is comprised of the following measures:

  1. a rights issue for approximately EUR 35 million that is issued to the company’s current shareholders (the “Rights Issue”);
  2. the conversion of the company’s EUR 100 million unsecured fixed-interest bond which becomes due and payable on 23 March 2025 (with an outstanding unpaid principal of EUR 34.9 million) and another EUR 75 million unsecured fixed-interest bond which becomes due and payable on 27 March 2025 (with an outstanding unpaid principal of EUR 64.9 million) (the “Bonds”) into hybrid convertible bonds in written procedure (“Hybrid Conversion”). The conversion into a convertible bond will be executed by amending the terms of the Bonds by including in the terms a special right under the Companies Act to convert the Bonds into shares. In addition, the holders of the Bonds will be given the opportunity to tender their Bonds for full or partial redemption at a price that corresponds to 60% of the nominal value of the Bonds (“Tender”);
  3. using the EUR 45 million hybrid bond issued on 22 March 2016 (with an outstanding unpaid principal of EUR 11.8 million) and the EUR 58.4 million hybrid bond issued on 23 May 2019 (with an outstanding unpaid principal of EUR 3.6 million) (the “Hybrid Bonds”) to subscribe the company’s shares for 45% of the Bonds’ principal as part of a directed share issue of a maximum of EUR 6.9 million, which will be directed to the holders of the Hybrid Bonds (the “Directed Share Issue”). Altogether 55% of the principal of the Hybrid Bonds and any unpaid interest that has accumulated for the Hybrid Bonds as of the moment of conversion will be cut entirely as part of the arrangement; and
  4. the extension of the liquidity and project financing facility granted to SRV (the “Credit Facility”) by 12 months and the implementation of necessary amendments to the agreement governing the Credit Facility in order to account for the new equity structure and the impact of the company’s Russian business operation in those terms and conditions the fulfilment of which may be affected by the changed circumstances.

The subscription price in the Rights Issue, when exercising the right to convert the Bonds into shares and in the Directed Share Issue, is EUR 0.10 per share.

The implementation of the measures requires for (i) the company’s general meeting to decide on the authorisation of the Rights Issue with a simple majority and on the authorisation of the granting of special rights in connection with the Hybrid Conversion and the Directed Share Issue with a qualified majority of two thirds of all given votes and shares represented at the meeting as set out in Chapter 5 Section 27 of the Finnish Limited Liability Companies Act; (ii) those holders of the Bonds that represent 75% of the unpaid principal of the relevant Bond represented during written procedures to vote in favour of the Hybrid Conversion during written procedures; and (iii) those holders of the Hybrid Bonds that represent 75% of the total combined nominal value of the relevant Hybrid Bond represented during written procedures to vote in favour of the amendments that will enable the conversion and write-down of the Hybrid Bonds. Written procedures for Bonds and Hybrid Bonds begin on 28 April 2022. The company aims to complete the written procedures during the second quarter of 2022.

Shareholders that represent 73.5% of all shares in the company have warranted to the company that they will vote in favour of the authorisations that will be granted for the Rights Issue, the Directed Share Issue and the granting of special rights in connection with the Hybrid Conversion at the extraordinary general meeting. In addition, the company’s creditors that represent (i) 60.8% of the principal of the Bond that becomes due and payable on 23 March 2025; (ii) 51.5% of the principal of the Bond that becomes due and payable on 27 March 2025; (iii) 28.8% of the principal of the Hybrid Bond that was issued on 22 March 2016; and (iv) 56.2% of the principal of the Hybrid Bond that was issued on 23 May 2019 have issued a written undertaking to the company where they state that they will vote in favour of the required amendments during the written procedures. In addition, the company and its key lenders have agreed upon a standstill period that will last until 30 June 2022, during which the lenders have waived, among other things, their cancellation and termination rights of the Credit Facility that will result from the write-down of the assets located in Russia on the condition that the aforementioned reorganisation of the company’s financing will be executed and implemented. The company and its key lenders have also signed a term sheet document that sets out the new main terms and conditions that apply to the Credit Facility. SRV is confident that the final agreement regarding the amendments to the Credit Facility will be signed by the end of June 2022.

In the event that the aforementioned contemplated measures will be implemented, the company’s equity will increase approximately by EUR 100 million and the company’s interest-bearing debt will be reduced approximately by EUR 100 million compared to situation on 31 March 2022 and the company’s equity ratio (IFRS 16 adjusted), as per 31 March 2022, would rise from 9.7% to approximately over 35%.

“When implemented, the reorganisation of the company’s financing will rehabilitate our company’s balance sheet after the write-downs related to Russia to a level which will allow our strategy to be fully implemented. SRV’s future is based on a good and healthy Finnish construction business”, says Saku Sipola, President and CEO of SRV.

Background

Following the war launched by the Russian Federation in Ukraine on 24 February 2022, the Russian economy, the prices of Russian companies’ shares and the value of the Russian rouble have declined sharply, and several notable international entities have announced their withdrawal from or the cessation of their business operations in Russia. At the same time, Russia has been subjected to constantly intensifying financial sanctions. The impact of the geopolitical uncertainty and the sanctions have also resulted in a sharp decline in the future prospects of SRV’s Russian shopping centre business and in the estimated value of the assets that relate to SRV’s business operations in Russia. Simultaneously, the risk that Fennovoima’s Hanhikivi-1 nuclear power plant project will be suspended has grown considerably.

In the financial statements included in SRV’s annual report published on 2 March 2022, SRV stated that the war launched by Russia in Ukraine after the balance sheet date was a very recent development the impact of which on SRV’s business operations was difficult to gauge at the time. On 4 March 2022, SRV published an investor update where SRV announced that it was looking into accelerating its withdrawal from Russia. The valuation of SRV’s Russian assets involves significant uncertainties at this moment. As a result of the war SRV has decided to divest its assets in Russia at an accelerated schedule. SRV has negotiated on the sale of the assets that are located in Russia. The negotiations are still ongoing.

In the first quarter of 2022, the company has written down almost all of its assets located in Russia and its holdings in Fennovoima. The write-downs of the company’s assets, while taking into consideration fluctuations in exchange rates, reduce the company’s equity by approximately EUR 141 million in total. After the write-downs are completed, SRV’s equity ratio will be 6.4% and its net gearing ratio will be 748.4%. The company’s equity ratio is 9.7% and its net gearing ratio 343.2% when IFRS 16 is not taken into account. The equity ratio according to the covenant calculation of SRV’s loans is 12.3%. After the write-downs are completed, the company will be unable to meet the covenant provisions set out in the agreement regarding the Bonds nor the Credit Facility if it does not reorganise its financing, which will then trigger the termination and call-in right invested in the Credit Facility’s creditors and the holders of the Bonds.

Contemplated measures for reinforcing the company’s equity

SRV’s board has decided to initiate written procedures to convert the Bonds into convertible hybrid bonds. In addition, SRV’s board has decided to offer the holders of the Bonds the opportunity for a to tender their Bonds at a price that corresponds to 60% of their nominal amount subject to the bondholders’ approval of the amendments proposed during the written procedures. SRV has received signed voting undertakings in favour of the amendments from investors representing a majority of the outstanding nominal amount in each of SRV’s Bonds. In aggregate, these signed voting undertakings represent (i) 60.8% of the principal of the Bond that will become due and payable on 23 March 2025; and (ii) 51.5% of the principal of the Bond that will become due and payable on 27 March 2025. The undertakings also include undertakings to Tender an aggregate nominal amount of EUR 24.4 million. In order for the amendments to be approved, holders representing at least 50% of outstanding nominal amount under each bond needs to participate and at least 75% of the votes received needs to be in favour of the amendments.

SRV’s board has decided to initiate written procedures where a new clause will be added to the terms and conditions that govern the Hybrid Bonds. This clause would set out SRV’s right to request the holders of the Hybrid Bonds to use 45% of the principal of the Hybrid Bonds they own to subscribe for the company’s shares and to waive 55% of the principal of these Hybrid Bonds and any unpaid interest that has accumulated for the Hybrid Bonds as of the moment of conversion.. SRV has held discussions with several of its larger Hybrid Bond investors which have all signed voting undertaking in favour of the amendments. In aggregate, SRV has received signed voting undertakings representing (i) 28.8% of the principal of the Hybrid Bond issued on 22 March 2016; and (ii) 56.2% of the principal of the Hybrid Bond issued on 23 May 2019. In order for the amendments to be approved, holders representing at least 50% of outstanding nominal amount under each Hybrid Bond needs to participate and at least 75% of the votes received needs to be in favour of the amendments.

Furthermore, SRV’s board has decided to pursue two share issues (i.e. the Rights Issue and the Directed Share Issue) with combined total size of approximately EUR 41.9 million, and to propose the granting of special rights in connection with the Hybrid Conversion, which would entitle to the subscription of approximately 754 million company’s shares at maximum. The board will summon an extraordinary general meeting to be held approximately on 30 May 2022, and the board will propose that this general meeting issues sufficient authorisations for the execution of the aforementioned share issues.

The Directed Share Issue would involve the issuance of new shares in a directed share issue to the holders of SRV’s Hybrid Bonds as part of the aforementioned conversion whereby 45% of the principal of the Hybrid Bonds would be converted into SRV’s shares. In the Directed Share Issue, the subscriptions will be paid by setting off the principal of the Hybrid Bonds. The size of the Directed Share Issue would at most be EUR 6.9 million.

The granting of special rights in connection with the Hybrid Conversion would be directed to the holders of the Bonds as part of the conversion of the Bonds into convertible bonds.

The Rights Issue would in total correspond to approximately EUR 35 million. AS Pontos Baltic, Ilmarinen Mutual Pension Insurance Company, Kolpi Investments Oy, Havu Capital Oy, Etola Group Oy, Tungelin Investment Oy (on behalf of itself and Tuomas Kokkila), Lareale Investments Oy (on behalf of itself and Lauri Kokkila) and Varma Mutual Pension Insurance Company have given their advance undertakings to the company where they state that they will subscribe SRV’s new shares under certain customary terms. The shares subscribed based on these advance undertakings correspond to total of 62.0% of the Rights Issue. The aforementioned parties that have given the advance undertaking as well as OP Life Assurance Company Ltd, Pohjola Insurance Ltd, Tuomas Kokkila and Lauri Kokkila have additionally given an undertaking to vote in favour of the aforementioned authorisations at the extraordinary general meeting of SRV. The shares of the shareholders that have given their undertakings to vote in favour of the authorisations represent altogether 73.5% of SRV’s all shares. The authorisation for the Rights Issue requires a simple majority of votes at the general meeting, whereas the authorisations for the granting of special rights in connection with the Hybrid Conversion and the Directed Share Issue require a qualified majority of two thirds of all given votes and shares represented at the meeting as set out in Chapter 5 Section 27 of the Finnish Limited Liability Companies Act. The subscription price payable during the Rights Issue would be paid in cash. The funds generated by the Rights Issue would primarily be used for the Tender of the Bonds as disclosed above.

In addition, SRV’s Board members Tomi Yli-Kyyny, Hannu Leinonen, Heli Iisakka and Timo Kokkila, the company’s President and CEO Saku Sipola and nine (9) other representatives of the company’s executive management have committed to purchase 15,785,996 rights from OP-Life Assurance Company Ltd and Pohjola Insurance Ltd which corresponds to approximately 6.0 % of all rights expected to be issued in the Rights Issue, and has undertaken to subscribe for new shares in the Rights Issue with these rights. In the approximately EUR 35 million Rights Issue, this would correspond to a total subscription of approximately EUR 2.1 million. This arrangement is not part of the company’s remuneration scheme and the company has not provided any loan, collateral or guarantees in connection with the arrangement.

In aggregate and based on the advance commitments of the above-mentioned groups, the new SRV shares to be subscribed for in the Rights Issue correspond to 68.0% of the total amount of the Rights Issue.

SRV and its key lenders have signed a term sheet document, which sets out the new main terms and conditions for the Credit Facility, whereby SRV and its key lenders have agreed upon the extension of the term of validity of SRV’s current EUR 30 million binding revolving facility, EUR 40 million binding project financing facility, and EUR 63 million non-binding project financing facility and the postponement of their due dates by 12 months. Before the final agreement concerning the amendments to be made to the Credit Facility is signed, the credit facilities concluded with the company and its certain subsidiaries will remain in force at least until 30 June 2022 in accordance with their terms and conditions if the reorganisation of the company’s financing described above is continued. SRV expects that the final agreement concerning the amendments to be made to the Credit Facility will be signed by 30 June 2022 at the latest as part of the reorganisation of the company’s financing.

The contemplated measures are conditional to the implementation of the Rights Issue, Directed Issue and the Hybrid Conversion and require for SRV’s general meeting to decide upon the issuance of the authorisations required by the share issue and the granting of special rights.

The financial impact of the planned measures to SRV

In the event that aforementioned contemplated measures will be implemented, SRV’s calculated balance sheet position and financial status will be improved compared to the situation of 31 March 2022. SRV’s equity as per 31 March 2022 was EUR 26.4 million, and the equity is expected to increase due to these arrangements approximately by EUR 100 million. At the same time, the company’s interest-bearing debt will be reduced by estimation approximately EUR 100 million as a result of the arrangements. This means that, as per 31 March 2022, SRV’s equity ratio would rise from 9.7% after the write-downs to approximately over 35%. When implemented, the impact that these measures is expected to lower the company’s annual financial expenses by approximately EUR 6 million. The weakening of the rouble, with respect to SRV’s holdings in Russia, has had a cumulative direct effect on the amount of equity as a conversion difference totalling EUR -21.9 million through the statement of comprehensive income. In connection with the divestment of the assets, the accumulated negative conversion difference will be recorded as an expense in the income statement at a later date but it has no effect on total equity or operating profit.

In the future, SRV will focus on its construction business in Finland

Upon completion of the restructuring according to plan, the company’s financial position is expected to be materially improved. The company’s Russia related risks are low and the company will focus, in accordance with its strategy, on its Construction business in Finland (the company no longer has any ongoing construction projects in Russia or Estonia).

SRV is one of the largest construction companies in Finland with strong established track-record of completing challenging projects, such as the Helsinki Airport’s new terminal building and Supercell’s headquarters in Helsinki’s Wood City. The company will focus on growth centres in Finland and it will invest increasingly in diverse projects involving housing construction as well as in the business construction in addition to public sector projects, increase market share in private sector projects.

The company’s construction business has seen positive development during the last three years, and its project portfolio has improved. In 2021, the turnover of the Construction business segment was EUR 930.1 million and the net operating profit was EUR 14.1 million. If the loss resulting from the unusual Tampere Deck and Arena project was not taken into account, the net operating profit of the Construction business segment would have amounted to EUR 34.7 million in 2021 (i.e. 4.0% of the turnover). In 2020, the net operating profit of the Construction business segment was EUR 25.1 million (i.e. 2.6% of the turnover).

At the end of Q1/2022, SRV’s Construction business segment’s order backlog amounted to EUR 858.0 million. In addition, the company has published projects that have not yet been recorded in its order backlog for the value of approximately EUR 1.4 billion. These projects are estimated to increase the company’s order backlog even more in 2022. SRV expects that approximately EUR 760 million of backlog and pre-agreements would be realized as revenue in 2022, EUR 560 million in 2023 and EUR 380 million in 2024. A significant part of the current order backlog consists of alliance projects or project management contracts, which are low-risk agreement types compared to other project types. Furthermore, majority of projects that have not yet been recorded in the order backlog are similar alliance projects or project management contracts. On these grounds, the company has a strong project portfolio with a healthy risk profile. In addition, the outlook of new projects in the next few years are positive.

“Our order backlog is on a sound and relatively low-risk basis, achieved by investing in collaborative contracting. Over the past year, we have announced several new projects that are expected to increase our order backlog, all based on our core strengths, namely customer-driven project development and collaborative contracting, as well as lifecycle wisdom. In our business, we will focus on Finland’s growth centres and strive to increase the share of housing construction in our revenue,” says Sipola.

Important dates

Voting period for written procedures (Bonds and Hybrid Bonds) 28 Apr 2022 – 23 May 2022
Invitation to SRV’s Extraordinary General Meeting 6 May 2022 (expected)
SRV’s Extraordinary General Meeting 30 May 2022 (expected)
Subscription period for Rights Issue and Directed Share Issue Following the EGM
Settlement of Tender for the Bonds, Hybrid Conversion completion Following the completion of the Rights Issue

Advisers

Danske Bank A/S, Finland Branch (“Danske Bank”) acts as the Sole Global Coordinator of the Rights Issue and as a financial adviser to SRV. Pareto Securities AB (“Pareto”) acts as a financial adviser to SRV. Borenius Attorneys Ltd acts as the legal adviser to SRV. Krogerus Attorneys Ltd acts as the legal adviser to Danske Bank in the Rights Issue. Miltton Ltd acts as the communications adviser to SRV.

Additional information

Saku Sipola, CEO, tel. +358 40 551 5953, saku.sipola@srv.fi

Jarkko Rantala, CFO, tel. +358 40 674 1949, jarkko.rantala@srv.fi

Distribution

Nasdaq Helsinki

The media

www.srv.fi

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SRV in brief

SRV is a Finnish developer and innovator in the construction industry. We are building a more sustainable and responsible urban environment that fosters economic value and takes into consideration the wellbeing of both the environment and people. We call this approach lifecycle wisdom. Our genuine engagement and enthusiasm for our work comes across in every encounter – and listening is one of our most important ways of working. We believe that the only way to change the world is through discussion.

Our company, established in 1987, is listed on the Helsinki Stock Exchange. We operate in growth centres in Finland. In 2021, our revenue totalled EUR 932.6 million. In addition to about 1,000 SRV employees, we have a network of around 3,600 partners.

IMPORTANT NOTICE

This release is not an offer for sale of securities in the United States. Securities may not be sold in the United States absent registration with the United States Securities and Exchange Commission or an exemption from registration under the U.S. Securities Act of 1933, as amended. SRV does not intend to register any part of the offering of the securities in the United States or to conduct a public offering of securities in the United States.

The distribution of this release may be restricted by law and persons into whose possession any document or other information referred to herein comes should inform themselves about and observe any such restrictions. The information contained herein is not for publication or distribution, directly or indirectly, in or into Australia, Canada, Japan or the United States. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. This release is not directed to, and is not intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.

In any EEA Member State, other than Finland, and in the United Kingdom this release is only addressed to and is only directed at qualified investors in that Member State or in the United Kingdom within the meaning of Regulation (EU) 2017/1129 (the “Prospectus Regulation”), which forms part of domestic law in the United Kingdom by virtue of the European Union (Withdrawal) Act 2018.

This release is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any securities mentioned herein are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this release or any of its contents.

This release does not constitute a prospectus as defined in the Prospectus Regulation and as such, does not constitute or form part of and should not be construed as, an offer to sell, or the solicitation or invitation of any offer to buy, acquire or subscribe for, any securities or an inducement to enter into investment activity.

Full terms, conditions and instructions for the Rights Issue will be included in the prospectus that will be prepared by SRV in connection with the Rights Issue. The Finnish-language prospectus will be published on SRV’s website at https://www.srv.fi/en/investors/.

An investor is advised to read the prospectus before making an investment decision to fully understand the risks and rewards associated with the investment. The approval by the Finnish Financial Supervisory Authority of the prospectus shall not be considered as an endorsement of the securities offered.

No part of this release, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. The information contained in this release has not been independently verified. No representation, warranty or undertaking, expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. SRV or any of its respective affiliates, advisors or representatives or any other person, shall have no liability whatsoever (in negligence or otherwise) for any loss however arising from any use of this release or its contents or otherwise arising in connection with this release. Each person must rely on their own examination and analysis of SRV, its subsidiaries, its securities and the transactions, including the merits and risks involved.

Danske Bank and Pareto act exclusively for SRV and no one else. Danske Bank and Pareto do not regard any other person as a respective client in relation to the arrangement. Danske Bank and Pareto will not be responsible to anyone other than SRV for providing the protections afforded to their respective clients nor for giving advice in relation to the arrangement or any transaction or arrangement referred to herein.

This release includes “forward-looking statements.” These statements may not be based on historical facts, but are statements about future expectations. When used in this release, the words “aims,” “anticipates,” “assumes,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “should,” “will,” “would” and similar expressions as they relate to SRV and the transactions identify certain of these forward-looking statements. Other forward-looking statements can be identified in the context in which the statements are made. These forward-looking statements are based on present plans, estimates, projections and expectations and are not guarantees of future performance. They are based on certain expectations, which, even though they seem to be reasonable at present, may turn out to be incorrect. Such forward-looking statements are based on assumptions and are subject to various risks and uncertainties. Readers should not rely on these forward-looking statements. Numerous factors may cause the actual results of operations or financial condition of SRV to differ materially from those expressed or implied in the forward-looking statements. SRV or any of its affiliates, advisors or representatives or any other person undertakes no obligation to review or confirm or to release publicly any revisions to any forward-looking statements to reflect events that occur or circumstances that arise after the date of this release.

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