Elan, Ahold’s audit woes

By Hardeep Dhillon Investors in Irish drug company Elan and Dutch retailer Royal Ahold have been biting their nails waiting to receive the companies’ 2002 accounts, which should be released this month. Elan is in a race against time to file its 2002 US accounts, after missing its fourth deadline and having to pay bondholders $2.1 million for a one-week reprieve until August 22, as reported at time of going to press. Elan’s failure to meet the original June 26 deadline for posting its accounts put the company into technical default on its outstanding $572 million Elan Pharmaceutical Investments (Epil) and $650 million Athena Neuroscience debt. If the default is not resolved, then an acceleration of payment of all Elan’s debt obligations could result. This could spell the end for Elan as it currently does not have the liquidity to satisfy all of its outstanding debt in the event of acceleration.The company has until September 14 to cure the default of its Athena debt. Epil holders will want to see a resolution to events before the Athena debt matures as they will then be placed further down the subordination ladder.“Epil investors hold some negotiation leverage as they will take precedent in the current situation because their debt matures first,” says a corporate rating analyst at an agency in New York.“But senior note holders at the Athena level would take precedence in the event of an acceleration of debt repayment after the September deadline.” Ahold debtors will hope to bypass the firm’s accounting problems by recouping their investment this month.The company, under investigation for overstating profits for the last three years, maintained that it would be able to repay in cash a €678 million convertible offering. The bond’s redemption date of September 30 coincides with an extended deadline for delivery of Ahold’s audited 2002 accounts.Delivery by August 15 was a condition for gaining access to $915 million in additional financing, but Ahold’s banks have agreed to a waiver and an extension to the deadline. Other factors in Ahold’s favour are the timing and relatively small amount of the convertible to be repaid; analysts expect banks to give new management a chance to show they can improve the balance sheet of the company. Ahold has stated it does not need to draw on $915 million in unsecured bank financing to repay the bond, as it will do so out of its existing cash balance. Previously Ahold stated that a small percentage of the convertible will be converted into shares. The Dutch retailer has enough liquidity to see the company through to the end of the year, arising from improvements to the group’s working capital management, reduced capital expenditures, operating performance, and disposals.