29 August 2018 by lberuti
Today, a broker published a research note on COFP ( Casino Guichard Perrachon SA ). They slashed their price target by 25% to current levels and highlighted the company’s weak cash flow generation. It triggered a 4% drop of COFP’s share price, and immediately worries about RALFP (Rallye) ability to service its debt resurfaced. Indeed, it sounds like double jeopardy for RALFP. It relies on COFP’s dividend as it main source of cash and that income stream could be under threat. If it effectively dries up, the company will have to borrow money as bonds it issued in the past will soon reach maturity (€970 are due early next year). In order to do that it will have to pledge the COFP shares it owns which value has plummeted (the stock of COFP is down 40% since the beginning of the year), potentially impairing its ability to do so. Even though RALFP’s CEO commented that he does not foresee any difficulty accessing the credit lines that require pledging COFP’s shares to draw down, investors’ unease was obvious. They sent RALFP’s 5-year risk premium 150bps wider. They now put the probability that RALFP defaults within 1 year at 29% and the probability that it defaults within 5 years at almost 80%.