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Ill Named VALEO

03 August 2020 by lberuti

FRFP ( Valeo ) is one of Europe’s largest car part suppliers, making components for most global car makers. It has about 136 production sites scattered around 29 countries. It operates four business groups: Comfort and Assistance Systems (interior controls and security systems), Powertrain Systems (engine and electrical systems, transmissions), Thermal Systems (climate control, compressor, engine cooling), and Visibility Systems (lighting and wipers). If the company name means “I am doing well” in Latin, its diversification was not enough to spare it from suffering from the impact of the COVID-19. S&P expects FRFP’s earnings, cash-flow and leverage to deteriorate materially in 2020 from already weak levels in 2019. The demand for cars has plummeted due to the extensive lockdowns imposed by governments to combat the spread of the pandemic. S&P reckon their expectations of a 20-25% decrease of auto unit sales in Europe, 21% in the US and about 10% in China for the full year 2020 should translate into a 17-18% sales drop for FRFP. They foresee a significant cash burn, and “given the slow pace of market recovery, (they) expect Valeo’s free cash flow to remain subdued in the next two years and that cash contributions to its joint venture Valeo Siemens eAutomotive will further limit its ability to reduce debt”. They therefore lowered FRFP’s rating to junk, from BBB- to BB+, triggering an 11.5bps widening of its 5-year risk premium, despite a now stable outlook. It made it the worst performer among the iTraxx Main constituents, in an otherwise fairly bulled up session. iTraxx Main closed at 58bps, its tightest level since late February…

Will Europecar Share Hertz' Fate?

30 July 2020 by lberuti

US car rentals which were denied a bailout from Washington, and that was one of the reasons Hertz filed for bankruptcy in late May. In contrast, EUROCA ( Europcar Mobility Group ), a French company, was able to tap state-backed loans. That might not be enough though. On Tuesday, it reported a first-half loss of €286mln and warned its existing structure “weighs on its ability to ensure a proper path to recovery”. It is therefore evaluating “short and long-term alternatives” to address its capital structure and “liquidity constraints”. It has €1.7Bln of debt, including €320mln of state guaranteed loans and excluding vehicle related borrowings, but only €400mln of unrestricted cash. The best hope for EUROCA’s stakeholders would be that someone makes a bid for the company. Eurazeo, which still owns 30% of the equity, is looking to exit its stake and VW ( Volkswagen ), which sold EUROCA to Eurazeo for €1.3Bln in 2006, is exploring an offer for its former subsidiary, according to a Bloomberg report published last month. Eurazeo’s patience is allegedly wearing thin though, and they said at the beginning of the week that they want any deal to happen before September. Absent a takeover offer by that deadline, EUROCA looks to be heading for a financial restructuring, which would crystallise debtholders’ losses. Because of this dire prospect, the good run of EUROCA’s risk premium came to an abrupt halt and 5-year CDS referencing the company traded up from roughly 10pts upfront on Monday to 41pts upfront at the close tonight. Insuring $1 of EUROCA’s debt now costs you 40cts upfront plus an annual fee of 5cts.

Will It Stop The Rot?

29 July 2020 by lberuti

Like all the other players in it sector, ROLLS ( Rolls Royce Plc ) has been among the many casualties on the COVID-19 crisis. The company has been negatively impacted by the slow recovery in international long-haul travel, which has disproportionately hit it as it mainly powers jets that serve those routes. Cash-flows from hourly maintenance contracts have slowed immediately on reduced flying (the company highlighted at its trading update that wide body engine flying hours fell by roughly 50% and 75% in the first half of 2020 and the second quarter of 2020 respectively), and it will be followed by time and material as engine work will be cancelled or delayed. The slow recovery is putting ROLLS’ financial situation under extreme stress and it has led the company to review a range of options in order to strengthen its balance sheet so that it can weather and see past the current crisis. It therefore came as no surprise when Reuters said the company is planning a share issue to raise as much as BGBP1.5Bln. Although at current levels (453bps) ROLLS’ risk premium is meaningfully off its wides (it traded up to 670bps back in May), it had been trending a bit wider recently. If the right issue materialises, it should be enough to stop the rot momentarily, but some said that such an amount is most likely at the low end of what is needed to calm durably the credit story.

Fancy A Slice Of Your Favourite Watering Hole?

28 July 2020 by lberuti

STGATE (Stonegate Pub Company Financing Plc) owns and operates high-street, student, and local community pubs, as well as country inns, late-night bars and venues. It serves customers in the UK in familiar chains including ‘Walkabout’ and ‘Slug and Lettuce’. Last Friday, it finalised the terms of what is the largest Sterling-denominated junk bond issue since 2013. They sold at par GBP950mln of bonds maturing in 5 years and carrying an 8.25% coupon. It is the last part of the financing of last year’s purchase of EI Group (formerly Enterprise Inns), a company boasting 5,000 leased and tenanted drinking establishments under individual names. As you can see on the above grapple, CDS referencing STGATE were very volatile in the run up to the pricing as the new bonds were issued by a different entity, Stonegate Pub Company Financing 2019 Plc. The guarantee language originally included in the prospectus suggested that it may not be qualifying, preventing the bonds to be delivered into STGATE CDS. This issue was addressed with a pricing supplement: “Notwithstanding anything to the contrary in the Indenture or in the Intercreditor Agreement, the Note Guarantee of Stonegate Pub Company Financing plc in respect of the New Notes shall only be released and discharged (a) upon full payment or upon the satisfaction and discharge of the New Notes Note or (b) by defeasance or discharge of the New Note, as provided in the Indenture.” That alleviated orphaning fears, and after trading down from 600bps to 500bps last week, it closed at 670bps tonight.