Alkagen (aka Unifrax) FRAX 7.5% Note due 2029 a
September 21, 2023 - 10:11pm EST by
2023 2024
Price: 52.00 EPS 0 0
Shares Out. (in M): 1 P/E 0 0
Market Cap (in $M): 1,250 P/FCF 0 0
Net Debt (in $M): 2,507 EBIT 0 0
TEV (in $M): 3,757 TEV/EBIT 0 0

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$400MM FRAX 7.5% note at the current ~52 px offers an asymmetric risk / reward with PE-type upside returns (45%+ yield to v likely 2-yr play into IPO and / or sale and mid-teens cash-on-cash CY) and downside protection through the debt (leverage inside of 5x and deleveraging at ~0.6x+ clip in out years). The private equity sponsor (Clearlake) has ~$1.25Bln of skin the game junior to the debt and given the 2018 vintage investment, there is high probability shot at a sale or IPO of the asset over the next 24-months (pull to par catalyst). FRAX is debatably one of the higher quality specialty chemicals / industrial HY issuers given 1) secular tailwinds - i.e. saves energy, reduces pollution and improves safety + 2) attractive mousetrap  - resilient / majority of biz is consumable-oriented and or driven by l-term platform contracts, sticky customers/limited attrition, small part of customer COGS but mission critical and R&D has built up significant barriers to entry on installed base + 3) “free option” on new battery technology - path to >$500MM revenue and $250MM+ EBITDA contribution over the next several years which likely accelerates the path to IPO / sale if fully connects. Over time, FRAX’s top-line should grow at better than 5-10% clip (market growth + pricing power + share gains, and good reason to believe it accelerates above 10%+ as new battery technology gains more traction which is a 2H 23 – 2024 cadence) and bottom line at 15%+ growth as 50%+ flow-through to bottom line.


Alkagen (FRAX) is a private issuer (MS is the agent on loan, and bondholder datasite for prospective lenders can reach out to and, its worth noting that 2 out of the 3 parts to Alkagen (Unifrax, Lydall and Luyang) were either public in recent past (Lydall) or currently public (53% stake in Luyang worth ~$600MM as of today’s mark) making the IPO story very achievable in the next 1-2 years. The 3rd part of the biz (Unifrax) is arguably the best part of the 3 units and Lydall was more of a downstream play on gaining $50-$100MM of synergies in addition to $80MM of standalone profitability. While there are a couple moving parts to the Alkagen story (3 merged biz units), it’s worth grounding assumptions using 2021 performance as a baseline – in 2021, standalone Unifrax contributed $157MM of EBITDA + standalone Lydall ~$82MM ex-divestitures + Lydall / Unifrax cost saves of ~$75MM + Luyang 53% stake of ~$61MM (>$100MM total) = ~$375MM PF 2021. Looking forward, 2022 and 2023 have seen abnormalities both w/ Ukraine conflict (energy spike) / supply chain issues (input spike) / and more recently inventory de-stocking resulting in under-absorption of facilities (>50% flow-through) … but putting aside the recent noise, the organic growth profile of Alkagen should be 5-10% on the top-line resulting in ~15%+ on the bottom-line (>50% flow-through) which pencils out a at least a ~$400MM+ EBITDA trajectory on the biz. Additionally, FRAX has new battery technologies (provides life enhancement and accelerated charging through SiFAB + fire protection / enhancement for Li-ion batteries) that are nascent but FRAX has proof of concept and the products are being rolled out to OEM customers / mgmt. believes has the potential to be $500MM additive to revenue (>$250MM EBITDA) over the next several years (more clarity to come). The battery segment growth is NOT necessary for the credit story to succeed, but highlights biz optionality for Clearlake into a potential deleveraging event and / or IPO at the proper time. As noted below, I’ve conservatively assumed the biz achieves ~$400MM of EBITDA on the “core” biz (Unifrax, Lydall and 53% stake in Luyang) and assume the market will start to “give credit” to the new battery technologies as gain more evidence ($75 - $125MM of profit). Assuming path to $500MM of EBITDA, leverage is less than 5x w/ ~0.6x+ of deleveraging per annum (an attractive level for the quality of this biz).


There are two principal controversies that have created the opportunity in the $400MM 7.5% Unsecured Note – 1) Dec 2025 debt maturity / refinancing risk and 2) earnings power. As discussed below, anticipate clarity on the 1st controversy (refinancing the Dec 25 TL) over the next 6 months as unencumbered foreign collateral will help facilitate + expect greater evidence / clarity on 2nd (earnings power) over next several quarters particularly as gain more evidence around the battery segment performance + start to see inventory de-stock abate (heavily distorted the past 3-quarters of performance).


Cap table snapshot:

Assumes $400MM EBITDA mid-point for 2024E and gives partial credit / $100MM mid-point for the new battery technologies (reason to believe this could contribute $250MM+ in 2-3 years time) as gain greater evidence in 2H 2023 – 2024. At $500MM of EBITDA, the create through the $400MM 7.5% note is ~5x and organic growth should deleverage the balance sheet by >0.6x moving forward.



















Core Biz - EBITDA









PF - New technologies (1)



























PF Cash









TL + Other (matures Dec 25)









5.25% Secured (matures 2028)









Net Secured















at 52>>



7.5% Unsecured (matures 2029)









Total ND


















Sponsor Equity



























(1) Partial credit to battery technologies w/ path to ~$500MM revs by ~26E or uplift of ~$250MM EBITDA (assume 50% flow-through)


Pattern / Biz snapshot:

Pattern: Compounder / excellent biz with a lofty balance sheet (requires time to grow back into), market is extrapolating recent performance (distorted by inventory de-stocking and under-absorption of fixed costs), but Q4 23 – early 24 results will provide a cleaner picture of the earnings power trajectory. Certain end-markets (insulation) have already started to recover and filtration will begin recovering in early 24 once inventory de-stocking abates.


Biz snapshot: Mfters high-performance specialty materials used primarily as (1) filtration/catalysis media in air and liquid purification systems and (2) insulation products used in a range of industrial applications, including energy storage/management and fire protection. Serves multiple end-markets (e.g. construction, electric vehicles, consumer electronics, and metals). Products benefit from secular growth, as focus is on store / conserve energy, filter air, improve fire protection (end-market growth is 5-10%). FRAX well-positioned to benefit from global efforts to reduce carbon emissions (i.e., electrification/conservation). FRAX has a history of pricing power given cost of product is typically small relative to the cost of equipment failure + value-add can often be measured through energy savings and/or asset life expectancy. A significant portion of the company’s products have relative short lifecycles, which leads to recurring revenue. Serves >6k customers (diverse) and the top-line should grow high single digits (market growth + incremental share gains) and bottom-line mid-teens (40%+ flow-through to bottom line). >60 mftering facilities globally …

Additionally, FRAX has new battery technologies (provides life enhancement and accelerated charging through SiFAB + fire protection / enhancement for Li-ion batteries. FRAX will likely generate $25-$50MM of revenue in 2023E from these technologies and expects the growth profile to get closer to $500MM of revenues by 2026E (less than 5% of TAM implied). The battery segment growth is NOT necessary for the credit story to succeed, but highlights biz optionality for Clearlake into a potential deleveraging event and / or IPO at the proper time.


Controversies / Divergent View: Two main controversies:


TL matures Dec 2025: Post a downgrade couple months back, the TL traded into the mid-80s (down -7 pts) while the Unsecured debt traded from the 70-75 context into the 50s. Since that time, the TL has grinded back above the prior levels and is bid ~94. The credit concern is around Clearlake pursuing some type of liability management transaction. Divergent view is that 1) TL now trading in the ~94 context suggesting there is a healthy interest (window for company is opening to extend runway) and 2) significant foreign collateral (>70% of asset base) that can be used to help facilitate a refinancing (Luyang 53% interest in particular would provide collateral supporting a refinancing). My sense is we get clarity on the refinancing over the next 3-6 months which should serve as a material catalyst removing some of the technical overhang.


Earnings power cadence: market is under-writing 1H 23 earnings power and extrapolating further (negatively impacted by significant industry de-stocking, under-utilized facilities resulted in margins >10 pts below normal + not giving credit for new technologies that are showing additional proof points). Fast forward to 2024, my estimate is for EBITDA to be in the 400-450MM range (and new technologies likely on a path to contributing >100MM of EBITDA in 2025 – 2026E versus 2025). As the market gains more clarity on the underlying earnings power of the biz (400+ growing at 10 – 20% on core biz + path to 100MM+ contribution from new technologies), there is a viable path to an IPO or sale of the biz. Given this is a 2018 vintage buyout, think Clearlake will be keen to take chips off the table …


Buying the $400MM 7.5% Unsecured Note due 2029 provides a mid-teens cash-on-cash CY, 22%+ YTM and the most likely path is a sale / IPO / event in 2-yrs time (~45%+ return profile). Getting PE-type returns for downside protection (leverage of ~5x) is an attractive risk-reward.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Refinancing the Dec 25 TL over the next 6-mths likely

Greater evidence around earnings power cadence next several quarters (clarity on rearview heavily distorted by inputs / supply chain / industry inventory de-stocking resulting in under-absorption of fixed costs)

IPO and / or sale in ~2-yrs


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