HKFoods: Expensive hybrid likely to be replaced by a more affordable one

Translation: Original published in Finnish on 8/11/2025 at 8:05 am EEST.

Replacing the old hybrid with a new one will help HKFoods cut financing costs while maintaining good solvency. This could enable more favorable terms for a larger senior bond to be refinanced in H2’26. However, from the perspective of short-term financing costs, the measure is slightly more expensive than our current estimates. We will review our financing cost forecasts again in the near future. That said, we believe the main driver of the equity story is the operational earnings trend. 

Expensive hybrid to be replaced with a more affordable option

HKFoods announced on Friday (August 8) that it is considering the issuance of new hybrid capital securities with an expected size of 20 MEUR. The net proceeds from the issuance would be used to redeem the existing 26 MEUR capital securities, among other things. We estimate that this measure will enable the company to cut its annual interest expenses on its hybrid bond to at least half of the current level, 4 MEUR/year. The current hybrid bond has an annual interest rate of 16%, and we estimate that the interest rate on the new hybrid bond will be significantly lower, perhaps around 9%, considering the current market pricing of hybrid bonds for companies with a similar credit risk. We estimate that the new hybrid bond issue will be completed within approximately one week of the announcement, at which point the pricing (i.e., interest rate) of the hybrid bond will also be confirmed. The potential new capital securities can be redeemed no earlier than the third anniversary of the issue date.

Solution may enable optimization of financing costs in the medium term

In our latest analysis (August 7), we explored the possibility of redeeming the hybrid bond and determined that it could potentially be implemented without a new hybrid based on the covenants (H1'25 cash reserves: 47 MEUR, H1'24: 16 MEUR). Based on the currently proposed plan, it can be estimated that financing costs for the hybrid will not decrease quite as much as we had predicted. Issuing the new hybrid bond ensures clearer safety margins for loan covenants, even in more negative earnings scenarios. Additionally, it could help the company refinance its current expensive (and more substantial) bond, which is due in the second half of 2026. Although the interest rate on this 90 MEUR bond is high at 7.5% + 3-month Euribor, it is priced on the aftermarket at around 3 percentage points lower, which is probably due to HKFoods' strong turnaround and strengthening balance sheet. While the present arrangement with hybrid bonds does not minimize short-term costs, it supports the equity ratio from the perspective of bond investors and may enable the optimization of overall financing costs in the medium term.

More leeway for short-term dividend payments

In recent years, the company has paid dividends or returned capital even when its results have been negative, which we believe has slowed down the balancing of the balance sheet and the optimization of high interest costs. The new hybrid bond naturally improves the company's short-term ability to pay dividends or return capital compared to our previous assumption that the hybrid would be redeemed with cash reserves, causing the balance sheet ratios to rise close to the covenant thresholds. In terms of share value development, we believe it would be optimal for dividend payments to be as low as possible until the current high financing costs can be secured below the ROE requirement. In the spring, the annual general meeting decided to pay shareholders a capital repayment of EUR 0.09 per share (paid) and also authorized the board of directors to decide on a discretionary distribution of funds of EUR 0.05 per share (no decision has yet been made).