Euro High Yield & Crossovers - More Angst than Facts“More Angst
than Facts”
7 Credit Drivers
8 Micro Fundamentals: looking good just a little bit longer
10 Credit quality: a delayed but longer US default cycle
ahead
11 Market Technicals: issuance and redemptions
12 Valuation & Timing
12 Strategic View: …but no blowout risk
13 Issuer Recommendations
Stephan Haber, CFA (UniCredit Bank) +49 89 378-15191
[email protected]
Dr. Philip Gisdakis (UniCredit Bank) +49 89 378-13228
[email protected]
Dr. Sven Kreitmair, CFA (UniCredit Bank)
+49 89 378-13246
[email protected]
Christian Aust, CFA (UniCredit Bank)
+49 89 378-12806
[email protected]
David Bertholdt
+49 89 378-13212
[email protected]
+49 89 378-18202
[email protected]
Fundamental Credit Views
21 Sappi (Buy)
80 HeidelbergCement (Hold)
87 Italcementi (Buy)
93 Wienerberger (Hold)
99 Xella (Hold)
127 Ardagh Glass (Sell secured/Piks, Hold unsecured)
136 Bombardier (Sell)
169 ista (Hold)
176 KION (Hold)
182 Manutencoop (Buy)
216 CNH Industrial (Sell)
263 Peugeot (Hold), Banque PSA (Hold)
268 Piaggio (Sell)
274 Rhiag (Hold)
280 Schaeffler (Hold)
303 Cirsa (Buy)
310 Douglas (Hold)
318 Gamenet (Hold)
330 Ontex (Buy)
342 Thomas Cook (Hold from Buy)
348 TUI (Hold)
354 Zobele (Hold)
377 RCS & RDS (Hold)
397 Unitymedia (Hold), UPC (Hold), Virgin Media (Buy), Ziggo
(Hold)
Telecommunication 422 Matterhorn Telecom (Sell)
430 Oi (Hold)
443 Telecom Italia (Hold)
465 TeamSystem (Hold)
In this 31st issue of our HYCO publication, we provide a detailed
analysis of around 70 high-yield corporates comprising credit
drivers, credit-profile developments, SWOT analyses, liquidity
analyses, financial forecasts for 2015 and 2016, corporate
structures, bond-documentation summaries and recommendations.
Recent credit news has been dominated by China headlines,
commodities and the Fed. Of course, all three items are somewhat
interrelated. The plunge in Chinese stock markets – which shaved
40% off the market cap of the Shanghai stock index – increased
concerns that a broader and deeper EM crisis might affect the
economic prospects of European companies with sales exposure to
China and other EM countries. However, while some sectors
(particularly Oil and Gas and Basic Resources) may remain
vulnerable, European companies are faring well overall thanks to
healthy domestic demand growth. Although fundamental
differentiation is crucial, rising overall risk aversion is not
warranted. Hence, recent spread widening has created ample
opportunity to selectively add risk, even if the China and
commodity stories are also part of a bigger theme in global
markets: the potential consequences of the upcoming end of cheap
money and the relative performance trend of emerging economies
versus developed ones. In this publication, we shed some light on
these developments.
Top Story: Over the last 15 years, there has been a close
relationship between the performance of commodities and EM stock
markets. The sharp drop in the commodity index level at the short
end of the curve is mostly due to the plunge in oil prices. While
the immediate risks to EM stocks from such a correlation should not
be exaggerated, it highlights corresponding downside risk. The key
question regarding EM is whether a more pronounced correction in EM
assets could result in a correction in OECD assets.
Macro Outlook: The eurozone’s economic recovery remains well
established, but a number of uncertainties loom. These stem
primarily from the market reaction to the upcoming start of the
Fed’s rate-hike cycle and from emerging markets’ performance.
Micro Fundamentals: The fundamental picture remains fairly sound
amid the eurozone’s recovery. Total debt has been trimmed, and
issuance has slowed this year. Our constructive stance is supported
by the rating trend, which continues to be positive.
Credit Quality: Default rates are likely to stay low for some time,
but when the tables turn, the cycle could last much longer than it
did during the financial crisis. Since the end of the recession,
the rating composition in the US has deteriorated significantly,
with the share of B3 rated issues having risen from 58% to
72%.
Market Technicals: After an even stronger start to the new year,
issuance activity started to cool in the second quarter of 2015
amid climbing sovereign yields and consolidating spreads.
Nevertheless, the total outstanding volume has since grown by EUR
21bn to EUR 236bn in the iBoxx HY NFI.
<date>
UniCredit Research page 5 See last pages for disclaimer.
Top Story: China, commodities and the Fed Recent credit news has
been dominated by China headlines, commodities and the Fed.
Of course, all three items are somewhat interrelated. On the
single-name side, Alpha Natural Resources (the second-biggest US
coal miner) filed for Chapter 11 protection and more companies may
follow. Of eight companies in the Bloomberg US Coal Operations
stock index, four have lost more than 80% of their market
capitalization in the last six months and three more than 50%. But
also here in Europe, bonds of energy-related companies experienced
partly strong price volatility. Although not directly related to
the commodity crisis, bonds of Abengoa, for example, the Spanish
renewables company, plunged to a price of 60% a level usually
deemed close to recovery value, implying an imminent threat of
default, followed by weeks of substantial price swings. Tereos, a
French company active in the sugar business, saw its bond price
drop 15pt due to concerns that cheap oil prices might reduce demand
for more-costly alternative fuels. Moreover, the plunge in Chinese
stock markets – which shaved 40% off the market cap of the Shanghai
stock index – added to concerns that a broader and deeper EM crisis
might affect the economic prospects of European companies with
sales exposure to China and other EM countries. However, the China
and commodity stories are also part of a bigger theme in global
markets: the potential consequences of the upcoming end of cheap
money, and the relative performance trend of emerging economies
versus developed ones. In following, we shed some light on these
developments.
EM assets remain vulnerable Over the last 15 years, there has been
a close relationship between the performance of commodities and EM
stock markets. This is highlighted by our left chart below,
depicting the MSCI EM together with the weighted average of the
GSCI Energy and Industrial Metals indices. The sharp drop in the
commodity index level at the short end of the curve is mostly due
to the plunge in oil prices. That plunge has resulted in a
decoupling of the two time series. While the implications for
immediate risks to EM stocks on the back of such a correlation
should not be exaggerated, it highlights the corresponding downside
risks. Moreover, as highlighted in the right chart below, equities
in developed economies have outperformed EM equities since about
2011. While EM stocks have moved more or less sideways in quite a
broad range, developed market stocks have risen about 60%, despite
the sovereign-debt crisis weighing on European stock markets to
some extent. Furthermore, the MSCI EM index dropped below important
technical support levels established since October 2010 (see dotted
line in the right chart below).
EMERGING MARKET EQUITIES
…vs. major commodities (based on GSCI indices) …and vs. developed
market equities
Source: Bloomberg, UniCredit Research
G S
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UniCredit Research page 6 See last pages for disclaimer.
However, the higher relative attractiveness of OECD risky assets
over EM ones is hardly a new insight, as highlighted by the left
chart below depicting the Composite Leading Indicators for the OECD
and various EM countries. Moreover, the developments in China
resulted in a significant widening in the 5Y CDS spread for China
and the iTraxx Asia ex. Japan (see right chart below). In the light
of these developments, the key question regarding EM is whether a
more pronounced correction in EM assets could result in a
correction in OECD assets.
EM RISK PERCEPTION
Composite Leading Indicators for OECD and EM 5Y CDS on China and
iTraxx Asia ex Japan
Source: OECD, Bloomberg, UniCredit Research
While a good deal of caution is always advisable as the
above-mentioned single-name examples highlighted, we do not think
that an overly bearish stance is appropriate. While a further
consolidation – in particular in equities – is always possible, it
should not be ignored that in particular the plunge in commodity
prices (in particular in the oil price) is a decisive factor
supporting the European economy. The lower oil price additionally
boosts domestic demand, which is already on the rise as the
periphery recovers from the sovereign debt crisis. August EU27 car
registrations, which came in quite strong (rising to a rate of
11.2% yoy from 9.5% the month before) nicely illustrate this
development. The August number was the second highest in 2015 (June
was 14.6% yoy) and the third highest since the peak in late 2009,
when car sales were boosted by support measures such as the German
Abwrackprämie (scrappage program). Hence, the rise in domestic
demand is clearly able to mitigate declining demand from EM
economies. And this development also illustrates that a large part
of the powerful implications of the drop in energy prices are still
unfolding. Furthermore, the shifting focus of global investors from
the EM universe to developed economies will result in reversing
fund flows. With money flowing back into developed economies, the
valuations of risky assets in Europe will remain well
supported.
While fundamental differentiation is crucial, risk aversion is
unwarranted
In summary, while some sectors (particularly Oil and Gas and Basic
Resources) may remain vulnerable, European companies are faring
well overall due to healthy domestic demand growth. While
fundamental differentiation is crucial, rising overall risk
aversion is not warranted. Hence, recent spread widening has
created ample opportunity to selectively add risk.
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Credit Drivers
Macro: constructive picture despite vulnerabilities Notwithstanding
the fact that the eurozone economic recovery remains well
established, a number of uncertainties loom. These stem primarily
from the market reaction to the start of the Fed’s rate-hike cycle
and from emerging markets’ performance. However, the Chinese
government’s announcement of fiscal spending, the ECB standing
ready to act with additional stimulus and Fed policymakers
prudently weighing the central bank’s next steps are factors behind
our constructive view.
Well-established pace of recovery on the back of household
consumption
The latest eurozone GDP data confirmed a well-established pace of
recovery, stemming largely from a stronger (than in recent
recoveries) contribution from household consumption, though the
slowdown in emerging markets represents a drag factor on eurozone
economic growth. The key driver of the household consumption is the
faster growth of household spending being supported by the
favorable inflation environment going forward. The latter, together
with a modest growth outlook, led ECB president Mario Draghi to
revive expectations of a second round of quantitative easing
recently. All in all, the overall macro picture in the eurozone
implies a very low interest rate environment for the foreseeable
future, which supports appetite for yield, while the strong
household consumption is, in turn, good news for household
spending-related sectors, such as Consumer Goods & Services and
TMT.
Our economists expect the FOMC to start raising rates in 4Q
While the Fed refrained from a rate hike in September and adopted a
wait and see stance to get a better sense of how the latest global
developments – i.e. the slowdown in China, the related stock market
sell-off and the decline in oil prices – affect the outlook for
growth and inflation, our economists expect the FOMC to start
raising rates in 4Q. Investors are likely to be well prepared for
the step.
EM still a concern but policymakers’ approach reduces spillover
risks
The slowdown in emerging markets presents an important risk factor
also for high yield credits due to spillover risks. The recent
downgrade of Brazil’s sovereign and corporate ratings by S&P to
below investment grade – the second BRIC economy after Russia to
lose its investment grade from S&P – is a reminder of the
worsening momentum in economic and political prospects in one of
the major emerging markets. However, although the growth
differential to DM is shrinking, our base scenario is a gradual
deceleration of EM growth (to 6.6% in 2015 from 6.8% last year and
further to 6.4% in 2016 – IMF forecasts). Moreover, the prudent
approach by Fed policymakers and swift action by the Chinese
government to step in with a (USD 180bn) fiscal stimulus limits our
concerns of major market disruptions.
GROWTH DIFFERENTIAL BETWEEN EM AND DM HAS DECLINED, INCREASING EM
RISK
Growth differentials between emerging and advanced economies JPM
CEMBI spread index vs. iTraxx XO
Source: IMF, Bloomberg, UniCredit Research
-3
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UniCredit Research page 8 See last pages for disclaimer.
Micro Fundamentals: looking good just a little bit longer While
fundamentals remain sound, global concerns have created fresh
opportunities. Pick-up in eurozone growth key to corporate
risk
The ongoing pick-up in eurozone growth is beginning to be reflected
in the currency bloc’s unemployment rate, which dropped to its
lowest level since February 2012 (10.9% in July). This bodes well
for domestic demand going forward and should support corporate risk
as well. With central banks still cautious, corporate bonds could
enjoy the near-optimal environment of positive, albeit below
long-term average growth rates and ultra-low yield levels for some
time longer. Following the recent consolidation in risk premiums,
the appeal of higher-yielding corporate debt will continue to
attract investor interest, especially as the fundamental picture
remains fairly sound amid the eurozone recovery. Total debt has
been trimmed (left chart) via debt-reduction measures and slowing
issuance this year. This has also decreased dispersion in the iBoxx
HY NFI, which had grown for almost three years: the upper quartile
debt level (light red line in the left chart) has declined by EUR
2.4bn to EUR 8.9bn YTD. While the median debt level is just
slightly lower (EUR 80mn) since end-2014, the intermediate rise
that took place in 1H (as high as EUR 3.8bn) has been levelled.
Leverage ratios have remained fairly stable in 2015 after declining
in 2H14 (right chart).
IBOXX HY NFI TOTAL DEBT AND LEVERAGE
iBoxx HY NFI total debt (adj., EUR mn) iBoxx HY NFI leverage (net
debt adj./EBITDA adj.)
Source: UniCredit Research
Spread widening has been fairly orderly and has taken place
predominantly in commodity-related sectors
Despite the sound fundamentals, risk premiums have been pushed
wider as growth concerns in EM and price declines in commodities
added to heightened risk aversion. So far, investors are not shying
away from riskier assets in general, but rather on a selective
basis. While sectors that are more directly affected by the Asian
growth concern (Oil & Gas, Basic Ressources) have
underperformed, the riskier end of the HY market has not shown
disproportionate widening. The usual underperformance of CCC
compared to B and B to BB notes during times of stress has not
taken place in the recent weakening. In fact, the spread ratio of B
over BB and CCC over B has been fairly steady (top left chart
overleaf). This proportionate widening suggests that the current
re-pricing is relatively orderly, arguing in favor of a
consolidation rather than a sustained deterioration, in which case
investors would be more concerned about the recovery overall and
potential jumps in default rates. Hence, we think that high-yield
spreads have room to come down from their elevated levels,
regardless of the pending first rate hike by the Fed.
Rating drift continues to be positive
The constructive stance is supported by the rating trend, which
continues to be positive, albeit at a reduced action rate. Across
the three major rating agencies, the rating-action rate for iBoxx
HY NFI issuers is at 0.48 (red line in the right chart below) –
meaning that less than five out of ten issues have experienced a
rating action. The rating-action rate and drift are calculated
based on the last twelve months with the rating drift in positive
territory since May 2014. At 0.12, the rating drift indicates that
an issue that experienced a rating action was upgraded, on average,
by one eighth of a full notch in the past twelve months – or
otherwise, that one in eight issuers received a one-notch
upgrade.
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<date>
IBOXX HY NFI SPREAD RATIOS BY RATING AND RATING DRIFT
iBoxx NFI spread ratios by rating iBoxx HY NFI rating action rate
(rs) and drift
Source: UniCredit Research
US vs. European HY – less pick-up than it appears
Part of the pressure on spreads has been exerted via the US, where
the HY Master Index has climbed over 100bp since June to over 500bp
and investors pushed back risk premiums to levels last seen at the
end of 2012. This left US HY with a significant premium (91bp) to
Europe. However, large parts of the premium stem from the differing
compositions in indices, as the European index is tilted much more
in favor of BB issues (around 70%). The US HY Master and the iBoxx
NFI trade almost level when recalculating the spread of the US
index with the European rating weights (light-red dashed line in
the left chart below).
Yield advantage of US HY at peak level
In absolute terms, the yield difference (2.5%, right chart below)
between US (7.35%) and European HY (4.9%) is back to peak levels.
The difference in the BB yield is still significant but the driver
of the renewed build-up in yield pick-up is the riskier rating
categories. The discount that is historically seen in B and CCC US
HY notes vs. their European peers has been shrinking in recent
months, as investors are presumably becoming more cautious. As rate
hike expectations have been pushed back, this yield premium of US
HY appears sufficient to buffer rising sovereign yield levels and
to allow the US to outperform Europe.
US VS. EUROPE LEVEL IN SPREADS BUT NOT IN YIELD
US HY Master vs iBoxx EUR HY NFI (ASW, bp) Yield premium US vs.
European HY at peak levels
Source: Bloomberg, Markit, UniCredit Research
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CCC vs. B median CCC/B B vs. BB median B/BB CCC vs. BB median
CCC/BB
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US HY Master iBoxx HY NFI US HY ex Energy US HY in iBoxx Rating
weights
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<date>
UniCredit Research page 10 See last pages for disclaimer.
Credit quality: a delayed but longer US default cycle ahead Default
rates are likely to stay low for some time, but when the tables
turn, the cycle
could last much longer than it did during the financial
crisis.
Default rates typically rise when rates are cut rather than when
they are raised
As the first FOMC rate hike since 2006 approaches, investors are
becoming increasingly concerned about declining credit quality and
potential defaults going forward. However, even if rate hikes start
soon, this does not automatically mean that the beginning of the
default cycle will start soon after as well. Typically, default
rates do not rise strongly when rates are raised, but when rates
are cut, as this indicates economic trouble ahead (left
chart).
The next default cycle will be longer, but with a lower peak
default rate
The next US default cycle could be closer to the average in terms
of length and severity than that experienced in the aftermath of
the financial crisis, according to Moody’s. This means the duration
of the default cycle is expected to be longer, but to show lower
peak levels than in 2008/09, when defaults surged to almost 15%
over a 21-month cycle. In the preceding default cycles ending in
1992 and 2004, the cycles lasted 37 and 57 months, respectively,
with the long- term average default cycle lasting 38 months and
peaking at a default rate of just under 9%.
The share of B rated firms in the US has risen sizably
Since the end of the recession, the rating composition in the US
has deteriorated significantly, with the share of B3 rated issues
having risen from 58% to 72% on the back of high demand for yield
pickup. Moody’s notes that annual average default rates for B rated
issues in those years fully encompassed by default cycles (1990-92,
2000-02 and 2009) were 3.7% (B1), 9.3% (B2) and 18.3% (B3). This
compares unfavorably to the average one-year global default rates
for these rating groups between 1983 and 2014 (at 2.2%, 3.4% and
5.6%, respectively). In Europe, the picture is completely
different, with the BB share having climbed from 48% to 68% most
recently (right chart).
Next default cycle expected to be more like average than like
financial crisis
The length of a default cycle and its severity are important for a
couple reasons. The default rate influences firm-wide recovery
rates and the mix of default types may be influenced by the
duration, or perceived duration, of a default cycle, according to
Moody’s. The comparatively short duration of the last default cycle
was aided by government intervention and showed a significantly
different default mix from previous cycles. Whereas around 85% of
rated US defaults have historically ended in bankruptcy, this
percentage declined to approximately 65% in the default cycle
during the financial crisis. Moody’s attributes this to the
realization by lenders and borrowers that the US central bank’s
liquidity injections would lead to a rapid decrease in default
rates and that distressed companies were able to wait out the
default cycle with a distressed debt exchange, rather than filing
for bankruptcy.
DEFAULT RATE AND FED FUNDS – STILL TIME BEFORE THE NEXT CYCLE
STARTS
US and European default rates vs. FOMC policy rate (RS) iBoxx EUR
HY NFI outstanding volume by rating
Source: Moody’s, Bloomberg, UniCredit Research
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UniCredit Research page 11 See last pages for disclaimer.
Market Technicals: issuance and redemptions HY issuance has slowed
after a strong start to 2015
After an even stronger start to the new year (1Q saw 52 issues with
a total volume of EUR 24.6bn, while EUR 18.5bn were printed in 1Q14
via 42 bonds), activity already started to cool in the second
quarter amid climbing sovereign yields and the consolidation of
spreads on the back of uncertainty surrounding Greece. While in
2014, issuance accelerated in 2Q to EUR 27.4bn via 66 new HY notes,
new deal volume in 2Q15 slipped one third to EUR 16.9bn from a
total of 39 new issues. This year’s third quarter also sizably
trails (-38%) primary market activity compared to last year: midway
through September 2015, the tally for 3Q has reached EUR 9bn from
23 bonds, which compares to an issuance volume of EUR 13.7bn across
37 notes in 3Q14. Nevertheless, the total outstanding volume has
grown by EUR 21bn to EUR 236bn in the iBoxx HY NFI, with the
biggest contributors being Industrials (EUR 50.1bn), Consumer Goods
(EUR 42bn) and Telecommunications (EUR 39.2bn). Oil & Gas (EUR
18.2bn) has become the fifth-biggest sector this year after Gazprom
and Petrobras entered the index in March with EUR 13.7bn in bonds
following their downgrades.
Low-maturity volumes until end-2016 will likely meet persisting
demand for yield
Overall, the slightly lower issuance level is unfolding as
expected, albeit we do not see a further acceleration in sovereign
yield increases but rather a gradual increase in risk-free yields
towards year-end. The levelling-off in issuance comes as many
companies have pre- financed redemptions. With maturity schedules
diminishing and less than EUR 19bn in notes coming due over the
next five quarters, supply should remain fairly contained going
forward, while interest in higher-yielding paper will likely
continue to prevail.
YTD HIGH YIELD ISSUANCE AND REDEMPTION STATISTICS
Issuance Issuance by quarter (EUR mn)
Yearly redemptions by sector Amount outstanding by sector
Source: iBoxx, UniCredit Research
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1Q 2Q 3Q 4Q
.
IDU CGD TEL BSC OIG CSV CNS THE HCA UTI MDI
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UniCredit Research page 12 See last pages for disclaimer.
Valuation & Timing Tactical View: near-term widening pressure
might persist…
Over a tactical time horizon (up to three months), we think that
the pressure on HY credits might persist.
First, a rate hike by the Fed remains in the pipeline, which will
result in a continuing debate about the potential implications on
FI assets in general and HY and EM credits assets in particular.
While for the time being, the ECB’s monetary policy stance will
remain accommodative, one should not overlook the potential
psychological implications of a successful lift off by the Fed.
Many commentators criticized unorthodox monetary easing measures
(such as quantitative easing) because of concerns that it would be
tough for policy makers to normalize monetary policy thereafter.
However, if the Fed manages to turn around the monetary policy
trajectory successfully, this could have repercussions regarding
monetary policy expectations, also resulting in a steepening of
European yield curves. And this, in turn, could result in a shift
in asset allocation, putting spreads under pressure.
Second, there are no credible signs that the triggers of the recent
volatility – the plunge in commodity prices and the EM crisis –
will be reversed any time soon. Hence, the corresponding pressure
on those sectors and companies that are exposed to these
developments will also persist.
Strategic View: …but no blowout risk While some concerns regarding
near-term volatility are clearly warranted, we also think
that
an overly pessimistic stance towards European credits is not
justified, for three reasons:
First, the European economy continues to recover, with domestic
demand an important driver (bear in mind the strong EU27 car
registration as an indicator). This is supported by low energy
costs, which act like a tax cut. Clearly, with global trade
stagnating, as indicated by our proprietary Global Leading
Indicator, export-oriented businesses will feel some pressure, a
significant part of which is already discounted in the
corresponding equities. The corresponding credits, on the other
hand, have remained roughly stable.
Second, monetary policy will continue to be expansive in Europe,
which will support the economy. In such an environment, a spike in
systemic risk aversion is not very likely.
Third, the declining prospects in emerging markets will result in a
reversal of fund flows back into developed economies. The resulting
investment needs by portfolio managers will also keep European
credit assets supported technically.
SPREAD FORECAST AND SPREAD DEVELOPMENT OF COMMODITY-RELATED HY
SECTORS (BP)
Spread forecast (bp) Commodity-related sectors (bp)
Source: Bloomberg, Markit, UniCredit Research
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Oil & Gas Non-Financials Basic Materials Utilities
<date>
Issuer Recommendations RECOPMMENDATION OVERVIEW
Schmolz + Bickenbach Stora Enso
Construction CMC di Ravenna Italcementi
Buzzi Unicem HeidelbergCement AG
Abengoa S.A.
Manutencoop
Ardagh Packaging Group Plc Bombardier Inc.
Automobiles & Parts Grupo Antolin Faurecia
FCA HP Pelzer
GESTAMP Peugeot Rhiag
Douglas Gamenet S.p.A.
Zobele Group
UPC Ziggo BV
Telecom Italia Group
UniCredit Research page 14 See last pages for disclaimer.
Lecta (Hold) Recommendation We keep a hold recommendation on Lecta.
Despite the fact that LECTA 05/19 is trading at
a yield-to-next-call of 5.0% and that LECTA FRN yields 5.5% –
assuming refinancing at the LECTA 19s’ call-price step date in May
2016 – we think the odds of there being an early call very much
depend on an overall tightening environment towards year-end
2015/early 2016 (and we would prefer higher-beta CCCs in that
environment) and on the successful raising of coated woodfree (CWF)
prices from July 2015 on, in view of continued volume
pressure.
Credit drivers Structural demand pressure in the European
graphic-paper industry, including persistent overcapacity
Ongoing restructuring efforts (including capacity adjustments) to
further stabilize and to sustainably turn around operating
performance of the group
Potential active industry consolidation with Lecta “interested in
exploring opportunities” with peer Burgo (a tie-up would create the
largest CWF paper manufacturer in Europe)
KEY PERFORMANCE INDICATORS
Pricing is clearly improving Restructuring is starting to benefit
EBITDA margins
Source: company data, UniCredit Research
Latest earnings review Lecta reported 2Q15 results that beat our
estimates. A 1% decline in paper volumes (which implies
market-share gains) and lower energy sales were more than offset by
better paper prices (+3% to average EUR 904/t). While we had
expected slightly lower revenues in 2Q15, sales increased 1.7% yoy
to EUR 374.5mn in 2Q15, which marked the first sign of quarterly
top-line growth since the consolidation of Polyedra in 4Q12.
Reported group EBITDA of EUR 21.8mn (-6% yoy) was impacted by the
EUR 6.5mn one-off effect of PaperlinX’s insolvency, while the
underlying EBITDA margin of 7.6% was sequentially stable in 2Q15
but up yoy as higher pulp costs were offset by reduced labor and
energy costs. Lecta stated that its unit gross margin further
improved in 2Q15. Higher-than-expected seasonal W/C-related inflow
(EUR 37mn) and lower capex (EUR 6mn) were the main drivers of
improved FCF of EUR 21mn in 2Q15 (vs. FCF of EUR 15mn last year).
Hence, the company’s reported cash position improved to EUR 150mn
at end-June 2015, with the EUR 80mn RCF remaining untapped. Adj.
net leverage improved to 4.6x at end-June from 5.0x in 1Q15 and
4.8x at FYE 2014.
-15%
-10%
-5%
0%
5%
10%
15%
760
780
800
820
840
860
880
900
920
940
Coated woodfree Specialties Other activities
<date>
UniCredit Research page 15 See last pages for disclaimer.
Credit profile development Given the structural demand pressure for
CWF paper in Europe (CWF still represents 73% of Lecta’s LTM 1H15
EBITDA), with European shipments roughly 35% below their 2007
level, Lecta is undergoing significant restructuring in order to
turn around and improve its operating performance. According to
EURO-GRAPH, CWF paper volumes continued to decline in 1H15, but the
benefits of Lecta’s cost-savings program and improving CWF prices
supported the further stabilization of Lecta’s EBITDA in 1H15.
Lecta’s cost-reduction program targets EUR 42mn of fixed-cost
savings, of which EUR 29mn had been achieved by FYE 2014. However,
given the structural demand trend and despite the positive price
trend in 1H15, further significant industry-wide capacity
reductions are needed, in our view, to rebalance supply with demand
on a sustainable basis. While major European CWF producers (e.g.
Sappi, Lecta, Burgo) have announced permanent capacity closures in
Europe of more than 1mn tons in recent quarters (which have
contributed to higher prices since end-2014), we believe further
capacity consolidation is necessary (e.g. via a tie-up of Lecta and
Burgo, which however seems off for the time being following Burgo’s
debt restructuring).
Company outlook / key model assumptions
During its 2Q15 call, Lecta mentioned its FY15 EBITDA guidance is
for approximately EUR 110mn (“increase similar to 2014 vs. 2013”,
which was an increase of EUR 10mn to EUR 100mn), and its
management, for the first time in recent memory, talked about
actively looking into the early redemption of its callable bond
structure. While the company’s FY15 EBITDA outlook is slightly
higher than the EUR 105mn we had expected so far for this year, the
guidance looks achievable. Lecta generated EBITDA of around EUR
59mn in 1H15 (adj. for EUR 8.3mn of one- offs), which implies a
sequentially stable EBITDA result in 2H15 (no additional one-offs
expected, according to management) in order to meet the full-year
guidance.
In 2H15, earnings should be supported by further rising prices –
Lecta highlighted a EUR 10/ton rise in prices in July alone
(compared to end-June), i.e. initial success with regard to the
announced CWF-paper price increase from July 2015 – as well as by
cost savings and lower energy prices. This should more than offset
the impact from the continued structural pressure on paper volumes
(Lecta’s order intake was down 4% yoy as of end-July) and offset
the impact from yoy-higher pulp prices – although the trend in the
price of bleached hardwood (eucalyptus) pulp might turn around
given additional capacity and slowing demand in China. Hence, adj.
EBITDA/net debt should slightly improve towards 4.4x by FYE 2015
(from 4.6x at end-June 2015), which might provide the basis to
refinance the callable EUR 390mn FRN 05/18 (pays E+550bp) and the
EUR 200mn 8.875% 05/19 bond (currently callable at a price of
106.656). Management has indicated that it will look into the
potential refinancing/terming- out of the bonds towards year-end
2015 or at the next call-price step in May 2016, but this clearly
depends on market conditions.
THINGS TO WATCH
3Q15 results: end-November
Development of graphic paper prices and volumes as well as pulp and
energy costs
Potential refinancing activity and/or efforts to consolidate the
European CWF market
Christian Aust, CFA (UniCredit Bank) +49 89 378-12806
[email protected]
<date>
UniCredit Research page 16 See last pages for disclaimer.
Lecta Group Analyst: Christian Aust, CFA (UniCredit Bank), +49 89
378-12806 Corporate Ratings Rating Outlook Credit Profile Trend
Recommendation Index Mcap B2/B/-- STABLE/STABLE/-- Stable Hold
--/iBoxx HY/-- Not listed
Company Description: Headquartered in Luxembourg, Lecta is one of
the leading European producers of coated fine paper (capacity of
1,200,000 tons) and specialty paper (200,000 tons). It was
established in 1997 by the private equity firm CVC to acquire
Italian paper manufacturer Garda and was subsequently expanded with
the takeovers of French Condat in 1998 and Spanish Torraspapel in
1999. Today, the group's main focus is on southern
Europe and France, where it commands leading market positions.
Besides paper production, Torraspapel is also active in the
distribution of paper in Spain, Portugal, Argentina and France.
Additionally, Lecta operates a pulp mill (through Torraspapel). The
company is majority-owned, i.e. about 57% of total voting rights,
by CVC; its remaining shares are held by other investors and by
management.
SALES BY REGION (1H15)
Strengths/Opportunities – Good market position as the
second-largest producer of coated fine paper
in Europe – Good cost position supported by lower transportation
and distribution costs
and a well invested asset base – Solid liquidity position to
support transformation
Weaknesses/Threats – Cyclical and capital-intensive business –
Limited vertical integration into fiber and pulp, although the
latter benefits
the company in times of low pulp prices – Structural challenges in
the industry limit pricing power – Limited business and
geographical diversification – Highly leveraged financial
profile
DEBT MATURITY PROFILE AS OF 30 JUNE 2015
Source: company data, UniCredit Research
LIQUIDITY ANALYSIS
– Lecta benefits from strong liquidity on the back of a cash pile
of EUR 150mn at the end of 1H15 (EUR 139mn net of overdrafts) and
full access to an unused committed RCF of EUR 80mn (due in 2018, no
maintenance covenants).
– Lecta has only limited short-term maturities of EUR 23.2mn,
related to overdrafts (EUR 11.3mn) and other financial debt (EUR
11.9mn).
Europe 82.3%
Americas 11.4%
RoW 6.3%
Coated woodfree
0.0
100.0
200.0
300.0
400.0
500.0
600.0
<date>
CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn)
Net Lev. Moody's* S&P* EUR 80mn RCF EUR E+425bp May-18 0
Total Super Senior Sec. 0 0.0x Lecta SA EUR EUR003M+550bp May-18
May-14@101 390 49% 30-50% Lecta SA EUR 8.875% May-19
[email protected]
200 49% 30-50% Bank overdrafts EUR 11 Total Senior Secured 601 5.3x
Other debt EUR 12 Total Secured 613 5.4x Non-recourse debt 2 EUR 28
Total Senior 642 5.6x Cash & Cash equivalents EUR -150 Total
Net Debt 491 4.3x Adjusted EBITDA LTM EUR 114
*Recovery Rate Source: UniCredit Research
CORPORATE STRUCTURE
*Condat SAS is required to give notice to its workers in order to
provide a guarantee for the notes. Source: company data, UniCredit
Research
Lecta S. A.
Condat SAS*
EUR 390mn FRN 05/18 EUR 200mn 8.875% 05/19 EUR 80mn RCF line
2018
Sub Lecta 3 SA
PROFIT AND LOSS (LECTA GROUP)
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E
2016E Sales 1,520 1,601 1,380 1,522 1,577 1,624 1,585 383 1,491 751
1,506 1,476
adj. EBITDA as reported 152 138 155 161 162 139 90 50 100 57 111
113 EBITDA exceptionals 7 65 1 1 5 79 50 9 12 10 12 5 EBITDA
reported 145 73 154 160 157 60 40 40 89 47 99 108 EBIT 58 -17 76 82
85 -13 -30 9 29 19 31 43
Net income -30 -78 12 26 24 -64 -113 -10 -67 -18 -45 -33
PROFITABILITY RATIOS
adj. EBITDA margin as reported 10.0% 8.6% 11.2% 10.6% 10.3% 8.5%
5.7% 13.0% 6.7% 7.6% 7.4% 7.6% EBITDA margin reported 9.6% 4.5%
11.2% 10.5% 10.0% 3.7% 2.5% 10.6% 6.0% 6.3% 6.6% 7.3%
EBIT margin 3.8% -1.1% 5.5% 5.4% 5.4% -0.8% -1.9% 2.4% 2.0% 2.5%
2.1% 2.9%
CASH FLOW
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E
2016E EBITDA clean (UniCredit) 152 138 155 161 162 148 98 28 107 60
118 119 Adjustments/restructuring -10 -10 -37 1 -13 -10 -33 -5 -25
-15 -29 -16
Interest -86 -75 -55 -45 -46 -59 -64 -11 -64 -31 -65 -70 Tax -2 -5
-3 -4 -8 -7 -1 0 -8 -1 -1 -1 FFO (funds from operations) 54 48 60
112 95 72 -1 12 10 13 23 32 Change in working capital -21 5 58 23
18 -25 69 -37 15 9 7 1
Operating cash flow 33 53 118 135 113 47 68 -25 25 22 30 33 Capex
-59 -56 -45 -27 -51 -51 -45 -10 -48 -27 -40 -35 Free operating cash
flow -26 -3 73 108 61 -4 23 -36 -23 -5 -10 -2 Dividends -1 0 -2 -2
-6 -1 -3 -1 -1 0 -3 -1
Acquisitions/disposals 19 -56 2 2 -4 -31 9 0 1 0 0 0 Share
buybacks/issues 0 0 0 0 0 0 0 0 0 0 0 0 FCF -9 -59 73 108 51 -36 29
-36 -23 -5 -12 -3
CAPITALIZATION
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E
2016E Equity 455 358 365 386 403 330 219 208 152 134 143 141 Senior
secured bank debt/bonds 622 657 659 657 674 658 647 645 642 642 632
630 Unsecured debt 150 150 148 143 120 0 0 0 0 0 0 0
Total debt 772 807 807 800 794 658 647 645 642 642 632 630 Cash 181
142 214 310 362 178 192 149 158 150 146 144 Net debt (total debt
minus cash) 591 665 593 490 432 480 456 495 484 491 486 487
LEVERAGE RATIOS
Senior secured debt leverage 4.1x 4.8x 4.2x 4.1x 4.2x 4.5x 6.6x
6.6x 6.0x 5.6x 5.4x 5.3x
Unsecured debt leverage 5.1x 5.9x 5.2x 5.0x 4.9x 4.5x 6.6x 6.6x
6.0x 5.6x 5.4x 5.3x Net debt leverage (unadjusted) 3.9x 4.8x 3.8x
3.0x 2.7x 3.2x 4.7x 5.1x 4.5x 4.3x 4.1x 4.1x Total debt leverage
(unadjusted) 5.1x 5.9x 5.2x 5.0x 4.9x 4.5x 6.6x 6.6x 6.0x 5.6x 5.4x
5.3x
DEBT ADJUSTMENTS
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1Q14 2014 1H15 2015E
2016E For pensions 29 31 29 42 41 36 26 26 27 27 26 26 For
operating leases 17 14 12 11 21 25 20 20 16 16 16 16 Others* 0 0 0
0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 4.0x 4.9x 4.0x 3.3x 2.9x 3.6x 5.1x
5.5x 4.8x 4.6x 4.4x 4.4x Total adjusted FFO/net debt 9.1% 7.2% 9.8%
21.2% 20.2% 14.7% 1.0% 0.5% 2.9% 4.1% 5.4% 7.2%
*Contingent liabilities, guarantees Source: company data, UniCredit
Research
<date>
UniCredit Research page 19 See last pages for disclaimer.
BOND DOCUMENTATION – LECTA 8.875% EUR 200MN 05/19 SENIOR
SECURED
Issuer Lecta S.A., Luxembourg Call/Put Call Schedule On or after
May 15, 2015: @ 106.656%, May 15, 2016: @ 104.438%, May 15, 2017: @
102.219%, May 15, 2018 and
thereafter @ 100.000%. Equity Clawback expired Make-whole Clause
expired Change of Control 101%, if more than 35% of the total
voting power and more than the permitted holders or a ratings
decline occurred
after a change of control event. Guarantees Guaranteed by Sub Lecta
1 S.A.; Sub Lecta 2 S.A.; Sub Lecta 3 S.A.; Cartiere del Garda
S.p.A.; Lecta HQ S.A.;
Torraspapel S.A.; Sarriopapel y Celulosa S.A.; and Condat Holding
S.A.S. Guarantors represented approximately 70% of the company's
consolidated EBITDA, whereas Condat S.A.S. is intended to provide
guarantee after the issue date.
Security Granted directly in favor of the Security Trustee (the
"Collateral"). Ranking Pari passu in right of payment with all
existing and future debt of the company that is not subordinated to
the notes. Certain Covenants Limitation on Debt Fixed charge
coverage ratio of at least 2.5x
Most important carve-outs/exceptions: i. General basket may not
exceed EUR 115mn at any time ii. Debt under credit facilities and
refinancing debt may not exceed EUR 80mn iii. Debt of Polyedra may
not exceed EUR 25mn, if it becomes a restricted subsidiary iv. EUR
5mn CLO/PMO basket v. Guarantees by the company or restricted
subsidiary of debt incurred by joint ventures or by capitalized
lease
obligations may not exceed EUR 5mn each. Limitation on Sale of
Certain Assets No asset disposition unless:
i. Asset disposition is at least equal to the fair market values
(100%) ii. At least 75% of such consideration consists of cash or
cash equivalents iii. Total asset disposition may not exceed EUR
5mn per year.
Limitations on Investment i. Investment in permitted joint venture
transactions may no exceed EUR 20mn ii. General basket may not
exceed EUR 10mn.
Limitation on Restricted Payments Aggregate amount of such
restricted payment may not exceed an amount equal to the sum of: i.
50% of the aggregate consolidated net income accrued during the
period ii. Capital stock sale proceeds and capital stock
contributions iii. EUR 75mn in total.
Limitations on Transactions with Affiliates i. De minimus threshold
of EUR 2mn ii. Board resolution for transactions that exceed EUR
5mn iii. Fairness opinion if transaction greater than EUR
20mn.
Fall away/ Suspension Covenants Yes, if Notes achieve investment
grade. Negative Pledge No Anti Layering No Cross-default Yes
Step-Up/Down Rating Change No
Source: Company data, UniCredit Research
<date>
BOND DOCUMENTATION – LECTA E+550% EUR 390MN 05/18 SENIOR
SECURED
Issuer Lecta S.A., Luxembourg Call/Put Call Schedule On May 15,
2015 and thereafter 100.000%. Equity Clawback No Make-whole Clause
expired Change of Control 101%, if more than 35% of the total
voting power and more than the permitted holders or a ratings
decline occurred
after a change of control event. Guarantees Guaranteed by Sub Lecta
1 S.A.; Sub Lecta 2 S.A.; Sub Lecta 3 S.A.; Cartiere del Garda
S.p.A.; Lecta HQ S.A.;
Torraspapel S.A.; Sarriopapel y Celulosa S.A.; and Condat Holding
S.A.S. Guarantors represented approximately 70% of the company's
consolidated EBITDA, whereas Condat S.A.S. is intended to provide
guarantee after the issue date.
Security Granted directly in favor of the Security Trustee (the
"Collateral") Ranking Pari passu in right of payment with all
existing and future debt of the company that is not subordinated to
the notes. Certain Covenants Limitation on Debt Fixed charge
coverage ratio of at least 2.5x
Most important carve-outs/exceptions: i. General basket may not
exceed EUR 115mn at any time ii. Debt under credit facilities and
refinancing debt may not exceed EUR 80mn iii. Debt of Polyedra may
not exceed EUR 25mn, if it becomes a restricted subsidiary iv.
Guarantees by the company or restricted subsidiary of debt incurred
by joint ventures or by capitalized lease
obligations may not exceed EUR 5mn each. Limitation on Sale of
Certain Assets No asset disposition unless:
i. Asset disposition is at least equal to the fair market values
(100%) ii. At least 75% of such consideration consists of cash or
cash equivalents iii. Total asset disposition may not exceed EUR
5mn per year.
Limitations on Investment i. Investment in permitted joint venture
transactions may no exceed EUR 20mn ii. General basket may not
exceed EUR 10mn.
Limitation on Restricted Payments Aggregate amount of such
restricted payment may not exceed an amount equal to the sum of: i.
50% of the aggregate consolidated net income accrued during the
period ii. Capital stock sale proceeds and capital stock
contributions iii. EUR 75mn in total.
Limitations on Transactions with Affiliates i. De minimus threshold
of EUR 2mn ii. Board resolution for transactions that exceed EUR
5mn iii. Fairness opinion if transaction greater than EUR
20mn.
Fall away/ Suspension Covenants Yes, if Notes achieve investment
grade. Negative Pledge No Anti Layering No Cross-default Yes
Step-Up/Down Rating Change No
Source: Company data, UniCredit Research
<date>
UniCredit Research page 21 See last pages for disclaimer.
Sappi (Buy) Recommendation We have a buy recommendation on Sappi.
Over FY14/15 and FY15/16, we expect Sappi’s
credit metrics to improve on the back of the group’s focus on
deleveraging, which should be supported by normalized capex of
around USD 300mn annually, benefits from the ongoing restructuring
of the company’s European paper business as well as by lower cash
interest following refinancing in March 2015 (should result in
annual interest savings of about USD 25mn). The (secured) SAPSJ
3.375% 04/22 bond trades at a cash price of 94, or Z-spread +386bp,
and offers a significant pickup compared to issues of similarly
rated paper and packaging peers, such as SKGID, OI, STERV as well
as other BB rated Industrial names.
Credit drivers Progress of restructuring of its European paper
operations in order to sustain the operating turnaround despite
continuing structural demand pressure for paper
Focus on deleveraging towards the 2.0x reported net debt/EBITDA
target (from 3.1x at end-June 2015)
Development of dissolving wood pulp (DWP) prices and margins going
forward
KEY PERFORMANCE INDICATORS
Paper operations supported by price increases in FY14/15
Development of EBITDA margin by segment*
*in local currencies Source: company data, UniCredit Research
Latest earnings review Sappi reported 3Q14/15 EBITDA (excluding
special items) well below expectations in August. Reported EBITDA
of USD 109mn undershot market estimates as well as last year’s USD
140mn as the stronger USD bit twice (Fine Paper NA: import
pressure; Fine Paper Europe: raw material prices) and due to heavy
maintenance work during the seasonally weakest quarter. While the
paper-volume trend remained negative in Europe in 3Q (-5% yoy),
prices in the region were stable sequentially and up 3% yoy. In
North America, the stronger USD generated paper import pressure
from Asia, while paper exports became less competitive. Both were
the main drivers of the volume/revenue shortfall in the segment in
3Q15 (-17.6% yoy). Results in Southern Africa (and the dissolving
wood pulp business) were impacted by the scheduled annual
maintenance shutdowns at the company’s Ngodwana and Saiccor mills.
Groupwide maintenance work had a negative impact on operating
profit of USD 27mn in the quarter, which was higher than the
earlier indication of USD 21mn. Despite lower-than- expected EBITDA
generation, FCF remained break-even in the seasonally weak 3Q due
to a USD 16mn W/C release (vs. the USD 29mn charge last year),
reduced capex and lower interest payments. Hence, reported net debt
of USD 1.92bn at end-June 2015 remained unchanged sequentially
(still down USD 0.37bn yoy), which translates into qoq slightly
higher reported net leverage of 3.1x at end-June 2015.
-15%
-10%
-5%
0%
5%
10%
15%
600
700
800
900
1,000
1,100
1,200
q
Europe sales price per ton (EUR) NA sales price per ton (USD)
Europe cost per ton (RS) NA cost per ton (RS)
0%
5%
10%
15%
20%
25%
30%
<date>
UniCredit Research page 22 See last pages for disclaimer.
Credit profile development Following the completion of the
conversion of the company’s mills in Ngodwana, South Africa, and
Cloquet in the US in FY12/13, and the increase of DWP capacity to
roughly 1.3mn tons p.a., roughly half of Sappi’s group EBITDA is
generated from specialized cellulose (70% of operating profit).
Management indicated that demand for DWP should continue to expand
at a pace of between 6% and 8% p.a. – Sappi’s DWP volumes for
9M14/15 were -4% yoy due to a partial shift back to paper pulp at
Cloquet mill in 3Q14/15 – on the back of structural growth trends,
namely population growth and the substitution of cotton with
viscose staple fibers (VSF). However, weaker VSF prices (due to
lower cotton prices) and excess DWP capacity will likely continue
to exert pressure on DWP prices in the medium term. Consequently,
the EBITDA margin (as a percentage of sales) of Sappi’s DWP
business declined from the mid- 30% range to 29% in 9M14/15 but
remains in line with the strategic target of between 25% and 30%
and clearly above the profitability of the paper businesses
(9M14/15 EBITDA margin of 7.0%). Sappi continues to restructure its
pressured (European) paper business. Following further capacity
rationalization in FY13/14, the EUR 120mn (USD 160mn) three-year
investment/conversion program for its Gratkorn and Kirkniemi mills
(launched in 2013) should result in further variable and fixed-cost
savings from FY15/16 on and support the recovery of the EBITDA
margin at Sappi Fine Paper Europe.
Following its CEO change in July 2014, Sappi noted that there will
be “no radical change in [strategic] direction in the next two
years” and that it remains the group’s priority to use generated
cash flow to further strengthen its balance sheet (i.e. reaching
the medium-term reported net debt/EBITDA target of 2.0x at
end-2016). According to management, progress with regard to
reaching the deleveraging target is also essential to Sappi’s
reconsidering the distribution of dividends. Hence, we expect net
leverage will need to move clearly below 3.0x before it undertakes
any shareholder distribution.
Company outlook/ key model assumptions
While Sappi expects graphic paper markets to remain challenging,
performance in 4Q should be supported by seasonal factors, and
Sappi confirmed its full-year outlook for broadly similar regional
operating performance vs. FY 13/14. FX translation effects will
likely continue to weigh on group results. However, the seasonal 4Q
W/C-related cash inflow (around USD 70mn), interest-cost savings
(also resulting in substantially better EPS) as well as the further
reduced capex outlook – USD 80mn in 4Q will bring the full-year
number to USD 245mn vs. the previous projection of USD 280mn –
should imply clearly positive FCF generation in 4Q14/15, and Sappi
confirmed the outlook for lower net debt at FYE (yoy as well as
qoq). In local currencies and excluding the impact of maintenance
shutdowns, EBITDA continued to improve yoy in all three regions,
which, in our view, highlights the strength of Sappi’s business
model despite the challenging market environment. Additionally,
interest savings, capex flexibility (USD 300mn guided for 2016)
and, consequently, further net debt reduction (potentially
supported by additional disposals of Cape Kraft, Enstra mills
and/or forestry assets for around USD 60mn) will support the
deleveraging path of the group.
THINGS TO WATCH
Development of paper and (dissolving wood) pulp volumes and
prices
Progress with regard to targeted deleveraging
Christian Aust, CFA (UniCredit Bank) +49 89 378-12806
[email protected]
<date>
UniCredit Research page 23 See last pages for disclaimer.
Sappi Analyst: Christian Aust, CFA (UniCredit Bank), +49 89
378-12806 Corporate Ratings Rating Outlook Credit Profile Trend
Recommendation Index Mcap Ba3/BB-/-- STABLE/STABLE/-- Improving Buy
--/iBoxx HY/-- ZAR 21.5bn
Company Description: Sappi, headquartered in Johannesburg, South
Africa, is among the leading global players in the market for
coated fine paper and chemical cellulose, holding leading positions
in several of its markets. The company has three reportable
segments: Sappi Fine Paper North America, Sappi Fine Paper Europe
and Sappi Southern Africa. Annual paper capacity is approximately
6.5mn tons. Pulp capacity is 3.3mn tons, and chemical cellulose
capacity is 1.3mn tons (increased from 800,000 tons in 2013).
The company has customers in more than 100 countries and production
sites in southern Africa, Europe, North America and Asia. It has a
level of self- sufficiency of 95% on a net pulp basis. The company
sources its pulp in southern Africa, and around 70% of its wood
requirements are either owned by the company (555,000 hectares) or
under its management. The company employs around 15,500 people
worldwide and is publicly listed.
SALES BY SEGMENT
EBITDA SPLIT BY SEGMENT (BEFORE UNALLOCATED ITEMS)
Source: company data, UniCredit Research
Strengths/Opportunities – Competitive cost position – Good market
position in relevant markets and geographic diversification –
Expansion of higher-margin dissolving wood pulp (DWP) business –
Good level of self-sufficiency in pulp and thus lower dependency on
pulp
price changes in North America and southern Africa – Focus on
improving cash generation and net debt reduction supported by
its not paying dividends to shareholders
Weaknesses/Threats – Cyclicality of paper business and structural
demand pressure – Price pressure in DWP – Focus on paper production
although shifting to specialized cellulose – Exposure to raw
material and energy cost inflation – Relatively low level of
integration in pulp in European operations
DEBT MATURITY PROFILE AS OF 30 JUNE 2015
Source: company data, UniCredit Research
LIQUIDITY ANALYSIS
– We regard Sappi's liquidity as solid, given that it has USD 490mn
in undrawn committed credit lines available in Europe and South
Africa and a cash position of USD 351mn on hand. It faces
short-term maturities of USD 219mn on 30 June 2015 (including USD
112mn of RCF 2020 drawings).
– Short-term debt of USD 107mn (excluding RCF 2020) consists of a
short- term portion of long-term debt of USD 41mn and USD 65mn of
overdrafts.
– We expect Sappi to deliver solid positive FFO in FY14/15 (USD
450- 500mn) to finance intra-year W/C swings as well as capex needs
of ca. USD 245mn.
– Following refinancing in March 2015, liquidity has further
improved via the issuance of a EUR 450mn 2022 secured bond and an
amendment and increase of the RCF 2020 to EUR 465mn (from EUR 350mn
until 2016). Proceeds of the secured bond and drawings under the
RCF were used to call the EUR 250mn 2018 and USD 300mn 2019
bonds.
– The amended RCF (maturity 2020) has underlying maintenance
covenants of EBITDA/net interest expense of >2.5x and net
debt/EBITDA of 4.25x at end-March 2015, declining to 4.0x from June
2015 and 3.75x from June 2019. Under a term loan from
Oesterreichische Kontrollbank AG, Sappi has to adhere to a net
debt/EBITDA ratio of a maximum of 3.75x in the June 2015-June 2017
period.
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CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (USD mn)
Net Lev. Moody's* S&P* ZAR 1bn RCF ZAR 0
EUR 465mn RCF 2020 EUR EURIBOR+287.5bp Apr-20 112 61% 70-90% Total
Loans 112 0.2x Sappi Papier Holding GmbH USD 7.75% Jul-17
Apr-17@100 400 61% 70-90% Sappi Papier Holding GmbH USD 6.625%
Apr-21
[email protected] 350 61% 70-90%
Sappi Papier Holding GmbH EUR 3.375% Apr-22
[email protected] 502 61%
70-90% Total Senior Secured 1,252 2.0x OeKB Term Loan EUR Jun-17
132 Receivables Securitisation 2016 USD 305
Overdrafts, Commerical Paper USD 65 IFRS Adjustment USD -19 Other
debt EUR 3 Total Secured 1,850 3.0x Sappi Southern Africa Pty Ltd
ZAR JIBA3M+150bp Apr-18 41 Sappi Southern Africa Pty Ltd ZAR
JIBA3M+123bp Apr-16 21 Sappi Papier Holding GmbH USD 7.5% Jun-32
221 6% 0-10% Sappi Southern Africa Pty Ltd ZAR 8.06% Apr-20
61
Sappi Southern Africa Pty Ltd ZAR 9.63% Jun-16 41 Sappi Southern
Africa Pty Ltd ZAR 2020 33 Total Senior Unsecured 418 0.7x Total
Senior 2,268 3.7x Cash & Cash equivalents USD -351 Total Net
Debt 1,917 3.1x Adjusted EBITDA LTM USD 611
*Recovery Rate Source: UniCredit Research
CORPORATE STRUCTURE
Sappi Limited
Sappi Papier Holding GmbH Austria
Sappi Manufacturing Ltd South Africa
senior secured USD 350mn 6.625% due 2021 EUR 450mn 3.375% due
2022
senior secured
EUR 465mn Revolving Credit Facility due 2020
senior unsecured USD 221mn 7.50% due 2032
senior unsecured ZAR 500mn 9.63% due 2016 ZAR 745mn 8.06% due 2020
ZAR 500mn Float due 2018 ZAR 225mn Float due 2016
100% 100%
senior secured USD 400mn 7.75% due 2017
<date>
PROFIT AND LOSS (SAPPI)
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
2013/14 9M14/15 2014/15E 2015/16E Sales 5,304 5,863 5,369 6,572
7,286 6,347 5,925 6,061 3,987 5,758 5,931
EBITDA clean 677 740 431 752 821 791 539 650 413 619 691 EBITDA
exceptionals -70 69 117 11 324 -70 168 32 -55 -55 0 EBITDA reported
747 671 314 741 497 861 371 618 468 674 691 EBIT 373 297 -84 328 80
419 23 306 265 364 386
Net income 202 102 -177 66 -232 104 -161 135 84 145 185
PROFITABILITY RATIOS
EBITDA margin clean 12.8% 12.6% 8.0% 11.4% 11.3% 12.5% 9.1% 10.7%
10.4% 10.8% 11.7% EBITDA margin reported 14.1% 11.4% 5.8% 11.3%
6.8% 13.6% 6.3% 10.2% 11.7% 11.7% 11.7%
EBIT margin 7.0% 5.1% -1.6% 5.0% 1.1% 6.6% 0.4% 5.0% 6.6% 6.3%
6.5%
CASH FLOW
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
2013/14 9M14/15 2014/15E 2015/16E EBITDA clean 677 740 431 752 821
791 539 650 413 619 691 Adjustments/restructuring -82 -62 118 100
-23 71 -72 -84 -50 59 5
Interest -152 -181 -198 -309 -256 -299 -164 -162 -111 -188 -160 Tax
-47 -70 -5 -9 -38 -50 -17 -1 -16 -35 -46 FFO (funds from
operations) 396 427 346 534 504 513 286 403 236 455 490 Change in
working capital 60 1 152 -5 -98 -102 -20 34 -97 -20 -22
Operating cash flow 456 428 498 529 406 411 266 437 139 435 468
Capex -442 -505 -176 -211 -268 -355 -552 -295 -163 -245 -290 Free
operating cash flow 14 -77 322 318 138 56 -286 142 -24 190 178
Dividends -68 -73 -37 0 0 0 0 0 0 0 0
Acquisitions/disposals 78 11 -586 23 25 71 53 87 0 0 0 Share
buybacks/issues 0 0 544 -3 0 0 0 0 0 0 0 FCF 24 -139 243 338 163
127 -233 229 -24 190 178
CAPITALIZATION
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
2013/14 9M14/15 2014/15E 2015/16E Equity 1,816 1,605 1,794 1,896
1,478 1,525 1,144 1,044 1,120 1,098 1,245 Senior secured bank
debt/bonds 499 493 1,966 1,682 1,986 2,093 1,971 1,917 1,857 1,777
1,668 Unsecured debt 2,165 2,211 1,418 1,334 753 531 628 558 412
608 608
Total debt 2,664 2,704 3,384 3,016 2,739 2,624 2,599 2,474 2,268
2,385 2,275 Cash 364 274 770 792 639 645 385 528 351 547 615 Net
debt (total debt minus cash) 2,300 2,430 2,614 2,224 2,100 1,979
2,214 1,946 1,917 1,838 1,660
LEVERAGE RATIOS
Senior secured debt leverage 0.7x 0.7x 4.6x 2.2x 2.4x 2.6x 3.7x
2.9x 3.0x 2.9x 2.4x
Unsecured debt leverage 3.9x 3.7x 7.9x 4.0x 3.3x 3.3x 4.8x 3.8x
3.7x 3.9x 3.3x Net debt leverage (unadjusted) 3.4x 3.3x 6.1x 3.0x
2.6x 2.5x 4.1x 3.0x 3.1x 3.0x 2.4x Total debt leverage (unadjusted)
3.9x 3.7x 7.9x 4.0x 3.3x 3.3x 4.8x 3.8x 3.7x 3.9x 3.3x
DEBT ADJUSTMENTS
in USD mn 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
2013/14 9M14/15 2014/15E 2015/16E For pensions 283 224 462 471 472
541 478 454 397 397 397 For operating leases 136 77 74 108 86 84 73
56 56 56 56 Others* 0 0 0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 3.4x 3.5x 6.6x 3.4x 3.0x 3.0x 4.6x
3.5x 3.6x 3.4x 3.0x Total adjusted FFO/net debt 18.3% 16.6% 11.7%
20.2% 19.8% 20.5% 11.1% 17.2% 16.5% 20.7% 24.1%
*Contingent liabilities, guarantees Source: company data, UniCredit
Research
<date>
BOND DOCUMENTATION – EUR 450MN SAPSJ 3.375% 04/22 BOND
Issuer Sappi Papier Holding GmbH Call/Put Call schedule On or after
1 April 2018: 101.688%; 1 April 2019: 100.844%; 1 April 2020 and
thereafter: 100% Equity clawback On or prior to 1 April 2018: up to
35% @ 103.375% Make-whole clause Prior to 1 April 2018: Bund plus
50bp Change of control Put at 101%, if:
– sale, lease, transfer of all assets of the issuer/restricted
subsidiaries – change in >50% of voting rights – adoption of
plan to liquidate or dissolute of the parent
Guarantees Jointly and severally guaranteed by Sappi Ltd and some
of its subsidiaries, together representing 50% of EBITDA and 68% of
total assets in LTM 12M2014.
Security Secured on a first-priority basis by: – Land and PP&E
located at production facilities in Gratkorn (Austria), Kirkniemi
(Finland), Maastricht (Netherlands),
Skowhegan/Somerset and Cloquet (US) – Common shares, common stock
or similar common equity interests of each of the subsidiary
guarantors, Cloquet Terminal
Railroad Company Inc., Sappi Trading Pulp AG and Sappi Southern
Africa (Pty) Ltd – Intercompany loan agreements or receivables
under such loans that evidence financial indebtedness in excess of
USD 25mn under
which the guarantors are creditors – Certain inventory of SD Warren
Company and Sappi Cloquet LLC Limitations on the collateral
include: – Total amount of debt that will be secured by real core
assets, being any manufacturing facility, will be limited to 15%
of
consolidated net tangible assets (ca. USD 330mn as of end-December
2014). Ranking Senior, ranking pari passu with: i) each of the
guarantors' existing and future indebtedness not subordinated in
right of payment to
the guarantees or preferred by law; and ii) collateral that secures
the subsidiary guarantees on a first-priority security interest
basis.
Certain covenants Limitation on debt Parent, Issuer and subsidiary
may incur additional debt, if the parents LTM consolidated fixed
charge coverage was at least 2.0x to 1.0x
Most important carve-outs/exceptions: – Refinancing of debt only
permitted to be refinanced by the issuer, finance subsidiary or
another guarantor – Permitted debt includes:
- EUR 1.3bn for the issuer, guarantor, finance subsidiary and any
permitted obligor credit facility - Capital lease obligation etc.
of up to USD 200mn - USD 50mn JV basket - up to ZAR 7.5bn of South
African restricted (unsecured) debt - Qualified securitization
financing - Acquired debt of a legal person that becomes a
restricted subsidiary.
Limitation on sale of certain assets
Neither the parent, nor any restricted subsidiary will directly or
indirectly consummate an asset sale (>USD 10mn), unless: –
Consideration at least fair market value and at least 75% of asset
sale is settled in cash or cash equivalents – Net proceeds of the
sale may be applied within 360 days to:
- Repay notes and debt which is ranked pari passu (except RCF
drawings below USD 200mn) - Acquire assets of permitted businesses
or assets that are used or useful in a permitted business or make
capex.
Most important carve-outs/exceptions: - Aggregate Permitted
Investments amount to USD 350 mn
Limitation on restricted payments
Aggregate amount of restricted payments does not exceed the sum of:
– 50% of the Consolidated Net Income of the Parent for the period
from 29 June 2009 to the end of the Parent’s most recently
ended fiscal quarter at the time of such Restricted Payment, plus
conversion into capital stock plus proceeds from the sale of
restricted investments, plus 100% of any dividends or distributions
received from an unrestricted subsidiary.
Most important carve-outs/exceptions: – General basket: USD 50mn. –
Managers/employees equity repurchase basket (USD 5mn x 8 years) –
Basket for dividends on Parent’s equity at 6% of market cap so long
as the CLR is less than 4x pro forma
Limitations on transactions with affiliates
– Transactions exceeding USD 15mn require resolution of BOD with
majority of disinterested directors, in addition, Transactions
exceeding USD 25mn require opinion of independent financial
advisor.
Fall-away/suspension of covenants Yes; Investment grade rating by
Moody's and S&P Negative pledge No
Anti-layering No Step-up/down rating change No
Source: Offering memorandum, UniCredit Research
<date>
UniCredit Research page 27 See last pages for disclaimer.
Schmolz & Bickenbach (Hold) Recommendation We have a hold
recommendation on STLNSW notes, which we expect to be called in
the
short term. S+B’s 1H15 results show the impact of an increasingly
difficult operating environment, while profitability and cash flow
generation are still benefitting from the earnings improvement
program and the working capital optimization project, respectively.
The company is expected to achieve its medium-term leverage target
of “below 2.5x” by FYE 2015. We note that the STLNSW bond is
callable from May 2015 on and we would expect the company to make
use of this option given the continuing favorable market conditions
and the company’s significantly improved financial profile. In its
1Q15 conference call, the company already indicated the possibility
of refinancing the existing bond by FYE 2015 and management
reiterated that it is “observing and evaluating the market
developments, very, very closely”.
Credit drivers Demand in customers’ main industries, e.g.
automotive, engineering and US oil and gas
Success in implementing targeted EBITDA improvements
Net working capital improvements
Source: company data, UniCredit Research
Latest earnings review Schmolz + Bickenbach (S+B) reported solid
2Q15 results (though slightly below consensus), which were impacted
by the deconsolidation of selected distribution entities in
Germany, Belgium, the Netherlands and Austria after the proposed
disposal end of March. The following results are therefore reported
on the basis of continuing operations, excluding the selected
distribution entities. The disposal was successfully concluded on
22 July with an EV of EUR 88.6mn and an equity value of EUR 56.6mn,
EUR 48.6mn of which S+B received on 22 July, therefore not
impacting the net debt position as of the end of 2Q15, despite the
disposal having already led to impairment charges of EUR 126.7mn in
the quarter.
Order intake decreased yoy to 476kt as of 30 June 2015 versus 539kt
at 30 June 2014 and 497kt at FYE 2014. S+B reported 2Q15 revenues
of EUR 723mn (-2.2% yoy), mainly on the back of lower sales volumes
in the quarter (469,000 tons; -2.3% yoy). Adj. EBITDA of EUR 61.1mn
declined 14% yoy due to lower volumes and FX effects. However, the
adjusted EBITDA margin improved sequentially (8.4% in 2Q15 versus
7.4% in 1Q15, but declined yoy from 9.6% in 2Q14) supported by a
lower average nickel price in 2Q15. We note that the company’s
medium-term target EBITDA margin is in excess of 8%. Despite the
usual seasonal W/C build- up in 1H15, operating cash developed
quite positively and increased to EUR 52mn in 1H15 from EUR 7mn in
1H14, largely due to W/C improvements, which largely offset lower
EBITDA and
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UniCredit Research page 28 See last pages for disclaimer.
higher cash taxes. However, due to significantly higher investments
(slag disposal site at Deutsche Edelstahlwerke GmbH and the
acquisition of already rented real estate in Dusseldorf), FOCF was
little changed yoy at EUR 26mn (versus EUR 24mn in 1H14). Reported
net debt stood at EUR 638mn at end-June 2015 (vs. 634mn in 2Q14 and
EUR 587mn at FYE 2014). Net leverage was at 2.7x versus 3.5x at 30
June 2014 and 2.2x at FYE 2014. As mentioned above, S+B received
the initial EUR 48.6mn for the distribution business in July 2015,
which will reduce net leverage to around 2.5x, the company’s
medium-term leverage target.
Credit profile development S+B confirmed its FY15 outlook of
achieving the lower end of the EBITDA guidance range of EUR
190-230mn (vs. FY14 EUR 253mn), including negative FX effects. The
company maintained its capex guidance of EUR 150mn. In order to
address CHF strength and the challenging market environment, S+B
will step up its earnings improvement program and has launched a
working capital optimization project that should already show
benefits in the coming quarters. The company aims to reduce its net
working capital by EUR 100mn (assuming stable raw material prices
and stable exchange rates) until mid-2016 compared to the level as
of YE14 (EUR 992mn). We note that net working capital already
amounted to EUR 929mn in 1H15 versus EUR 1,069mn in 1H14, i.e. the
reduction at the end of 1H15 was already higher than EUR 100mn.
Still, we foresee the company being able to generate slightly
positive FCF in FY15, which was also indicated during the 2Q15
conference call. Given a potentially lower EBITDA, further
improvements in its credit profile should, however, be delayed
until FY16.
The existing performance improvement program is based on more than
600 individual measures and is expected to result in an EBITDA
improvement of EUR 230mn by FY16. This should mainly stem from cost
savings (EUR 100mn, visible in FY14/15) and top-line measures (EUR
130mn, more back-end loaded and more difficult to achieve if market
conditions weaken). From 2016 onwards (on average, over the
economic cycle), S+B will target an adjusted EBITDA of more than
EUR 300mn and an adjusted EBITDA margin of over 8%. Leverage is
expected to be below 2.5x.
Company outlook / key model assumptions
S+B pointed out the following risks to its above-mentioned company
outlook. 1. reduced global economic outlook by the World Bank, OECD
and the IMF in 2Q15 versus 1Q15; 2. significantly reduced forecast
for global steel consumption (mainly due to weakness in
Asia/China), reflected in the expected growth rate for 2015 falling
from 2.0% to 0.5%. 3. concerns about the development of industrial
sectors in which S+B’s clients are active, such as the global
automotive industry, the mechanical engineering sector as well as
the ongoing problems in the oil & gas sector, mainly the
fracking industry; and 4. appreciation of the CHF.
For FY15, we are a little more cautious regarding our FY15 outlook
than the Bloomberg consensus forecast. We expect revenues of EUR
2.77bn compared to consensus expectation of EUR 2.83bn, while our
adjusted EBITDA estimate is broadly in line with the consensus
estimate at EUR 204mn. We expect the net leverage to decline to
2.5x by FYE 2014, mainly driven by the mentioned disposal. For
FY16, we expect revenue and EBITDA to grow, although uncertainty is
high.
THINGS TO WATCH
3Q15 results:12 November
Refinancing initiatives, with the bond callable since May 2015 at
107.406
Shift towards a more growth-oriented strategy
Stephan Haber, CFA (UniCredit Bank) +49 89 378-15192
[email protected]
<date>
UniCredit Research page 29 See last pages for disclaimer.
Schmolz + Bickenbach Analyst: Stephan Haber, CFA (UniCredit Bank),
+49 89 378-15192 Corporate Ratings Rating Outlook Credit Profile
Trend Recommendation Index Mcap B2/B+/-- STABLE/STABLE/-- Improving
Hold --/iBoxx HY/-- CHF 0.7bn
Company description: Schmolz + Bickenbach (S+B) is a leading global
provider of specialty long steel. The company is operating in all
three sub- segments of the specialty long steel market: tool steel
(13% of revenues in FY14), stainless long steel (36%) as well as
quality and engineering steel (47%), offering services along the
entire value chain from production to processing and distribution
and services. It has leading market positions as the world's
second-largest producer of tool steel, the world's second-largest
producer of stainless long steel and Europe's second-largest
producer of
quality and engineering steel (all by production tonnage). In FY14,
the company generated 45% of its revenues in Germany, 6% in France,
9% in Italy, 19% in Other Europe, 2% in Switzerland, 14% in North
America and 5% in Africa/Asia/Australia. S+B's largest shareholders
are Liwet Holding AG (25.51%), S+B GmbH & Co. KG (15.17%) as
well as Martin Häfner (10.17%), with the remainder (49.15%) free
float. S+B GmbH & Co. KG, which is owned by seven individuals,
holds its shares indirectly through various subsidiaries.
EBITDA BY QUARTER
CASH FLOW DEVELOPMENT
Strengths/Opportunities – Strong market position as a leading
global provider of specialty long steel
solutions – High barriers to entry into the industry – Diverse
customer base with about 30,000 customers worldwide – Strong
relationships with customers – Less significant exposure to raw
material price fluctuations given the industry-
wide surcharge system – Well-invested asset base following the
completion of a substantial capex
program – Cash generation capabilities even in a market downturn –
Benefits from a successful disposal of the low margin distribution
businesses
Weaknesses/Threats – Highly cyclical business given the company's
dependency on cyclical end-
markets such as the engineering (31% of FY14 sales) and automotive
(29%) industries
– Generally rather low visibility in the business – Limited
geographical diversification with a strong focus on Europe (82%
of
revenues in FY14) – Very capital intensive business – Negative
impact from the strength of the CHF
DEBT MATURITY PROFILE AS OF 30 JUNE 2015
Source: company data, UniCredit Research
LIQUIDITY ANALYSIS
– As of 30 June 2015, S+B's liquidity rests on cash of EUR 56mn as
well as about EUR 168mn headroom under its syndicated credit
facility and EUR 91mn under its ABS facility (both mature in
04/19). In addition, S+B received EUR 48.6mn from disposal proceeds
in July 2015. This compares to no major debt maturities until 2019
(reported short-term debt includes drawings under the ABS
facility). Available liquidity is, hence – together with internally
generated cash – sufficient to finance seasonal working capital
(skewed towards 1H) and capex requirements.
– S+B has to adhere to financial covenants (including a leverage
covenant, level not disclosed), which are tested quarterly, in its
senior secured credit facilities as well as under its ABS facility
and the KfW IPEX loan.
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CAPITALIZATION
Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn)
Net Lev. Moody's* S&P* SCHMOLZ + BICKENBACH Luxembourg SA
EUR 9.875% May-19
[email protected] 162 56% 30-50%
ABS financing program (ABCP)
Syndicated loan EUR Apr-19 276 Other debt EUR 47
Total senior 693 2.9x Cash and cash equivalents EUR -56 Total net
debt 638 2.7x Adjusted EBITDA LTM EUR 240
*Recovery Rate Source: UniCredit Research
CORPORATE STRUCTURE
SCHMOLZ+BICKENBACH AG (Switzerland)
SCHMOLZ+BICKENBACH Luxembourg S.A.
ABS Facility Senior Secured Credit Facilities
EUR 168mn 9.875% Senior Secured Notes
KfW Installment Loan
PROFIT AND LOSS (SCHMOLZ + BICKENBACH)
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E
2016E Sales 4,247 4,092 2,052 3,119 3,943 3,581 3,277 1,730 3,338
1,489 2,766 2,821
EBITDA clean 417 234 -181 233 296 151 179 139 262 113 202 260
EBITDA exceptionals 12 13 -4 0 -1 29 37 3 9 0 7 0 EBITDA reported
404 221 -177 233 297 123 142 136 253 113 195 260 EBIT 314 125 -284
122 180 -14 18 76 131 49 75 138
Net income 189 63 -276 39 43 -163 -84 35 50 -118 21 60
PROFITABILITY RATIOS
EBITDA margin clean 9.8% 5.7% -8.8% 7.5% 7.5% 4.2% 5.5% 8.1% 7.8%
7.6% 7.3% 9.2% EBITDA margin reported 9.5% 5.4% -8.6% 7.5% 7.5%
3.4% 4.3% 7.9% 7.6% 7.6% 7.0% 9.2%
EBIT margin 7.4% 3.1% -13.8% 3.9% 4.6% -0.4% 0.5% 4.4% 3.9% 3.3%
2.7% 4.9%
CASH FLOW
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E
2016E EBITDA clean 417 234 -181 233 296 151 179 139 262 113 202 260
Adjustments/restructuring -17 22 3 -21 42 -37 -37 18 -41 17 -2
-25
Interest -50 -66 -51 -127 -88 -61 -85 -30 -51 -17 -46 -46 Tax -70
-86 -21 -4 -6 -9 -17 -3 -14 -6 -15 -17 FFO (funds from operations)
267 90 -245 81 244 44 41 124 156 107 139 172 Change in working
capital -152 103 462 -253 -25 65 45 -117 -28 -55 -2 5
Operating cash flow 115 193 217 -171 219 109 85 7 128 52 136 177
Capex -219 -220 -115 -117 -121 -137 -103 -31 -99 -77 -150 -110 Free
operating cash flow -104 -28 102 -288 98 -28 -18 -24 29 -26 -14 67
Dividends -23 -24 -10 0 -16 -10 0 0 0 0 0 0
Acquisitions/disposals -134 -6 5 25 6 11 6 0 3 1 89 0 Share
buybacks/issues 0 0 0 208 21 2 334 0 -4 -1 0 0 FCF -261 -57 96 -55
109 -25 322 -24 28 -26 75 67
CAPITALIZATION
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E
2016E Equity 730 819 527 796 844 633 890 901 901 815 921 981 Total
debt 991 1,035 1,091 981 961 953 679 699 659 693 584 517 Cash 40 47
174 54 101 51 68 66 72 56 72 72
Net debt (total debt minus cash) 951 988 917 927 860 903 610 634
587 638 512 445
LEVERAGE RATIOS
Net debt leverage (unadjusted) 2.3x 4.2x -5.1x 4.0x 2.9x 6.0x 3.4x
2.9x 2.2x 2.7x 2.5x 1.7x Total debt leverage (unadjusted) 2.4x 4.4x
-6.0x 4.2x 3.2x 6.3x 3.8x 3.1x 2.5x 3.0x 2.9x 2.0x
DEBT ADJUSTMENTS
in EUR mn 2007 2008 2009 2010 2011 2012 2013 1H14 2014 1H15 2015E
2016E For pensions 136 148 161 195 223 283 244 257 333 325 333 333
For operating leases 64 77 73 72 59 60 52 52 43 43 43 43 Others* 0
0 0 0 0 0 0 0 0 0 0 0
Total adjusted net debt leverage 2.7x 4.9x -7.8x 4.5x 3.4x 6.5x
4.3x 3.7x 3.2x 3.6x 4.0x 3.0x Total adjusted FFO/net debt 24.0%
8.4% -20.1% 8.1% 22.9% 5.0% 6.1% 14.2% 17.7% 15.3% 17.3%
22.7%
*Contingent liabilities, guarantees Source: company data, UniCredit
Research
<date>
BOND DOCUMENTATION – STLNSW 9.875% 05/19 – SENIOR SECURED
NOTES
Issuer SCHMOLZ+BICKENBACH Luxembourg S.A. Call/Put Call schedule On
or after 15 May 2015: @ 107.406%, 2016: @ 104.938%, 2017: @
102.469%, 2018 and thereafter: @ 100% Equity clawback Used
Make-whole clause Prior to 15 May 2015, Bund plus 50bp Change of
control 101% (if more than 33.33% of the total voting power and
more than the permitted holders). Guarantees The Notes will be
guaranteed by Parent and each Restricted Subsidiary of the Parent
which guarantees the Senior
Credit Facilities and the IPEX Loan. The Subsidiary Guarantors are
S+B Edelstahl GmbH (Germany), Deutsche Edelstahlwerke GmbH
(Germany), Günther+Schramm GmbH (Germany), S+B Distributions GmbH
(Germany), Ugitech S.A. (France), Swiss Steel AG (Switzerland),
Steeltec AG (Switzerland), A. Finkl & SonsCo. (United States)
and S+B USA, Inc. (United States). Issuer and guarantors
represented 80.8% of sales, 87.8% of EBITDA and 79.5% of total
assets as of 31 December 2011).
Security First-ranking liens over (i) all of the Capital Stock of
the Issuer and the Subsidiary Guarantors, (ii) certain bank
accounts of the Issuer, (iii) certain rights and benefits under
insurance contracts relating to receivables and inventory of
certain Guarantors, (iv) certain trade receivables and derivatives
and (v) certain intercompany receivables. Second- ranking liens
over certain bank accounts of the Issuer and the Guarantors that
are pledged under the ABS Facility.
Ranking Pari passu with all existing and future debt of the issuer
(including the senior guarantee given by the issuer under the
Senior Credit Facilities and the IPEX loan). Effectively
subordinated to any existing and future debt of the issuer that is
secured by property or assets that do not secure the notes, to the
extent of the value of the property and assets securing such debt,
and to the indebtedness of non-guarantor subsidiaries.
Certain covenants Limitation on debt Fixed charge coverage ratio of
at least 2.5x
Most important carve-outs/exceptions: – Debt under the Credit
Facility up to EUR 600mn less cash proceeds from disposals – Debt
under export finance loans and Förderkredite up to EUR 100mn –
Hedging obligations – CLO and purchase money obligations up to EUR
20mn – Debt of any restricted subsidiary under a Receivables
Facility up to EUR 400mn – General basket: EUR 50mn.
Limitation on sale of certain assets Consideration is at least
equal to fair market value and at least 75% of consideration
consists of cash, cash equivalents (i.e. including assumed
liabilities/securities/received assets) and is applied to debt
reduction within 365 days. Excess proceeds exceeding EUR 20mn used
to redeem notes and pari passu debt at par. Permitted investments
include: investments in joint ventures up to EUR 25mn and a general
basket of up to EUR 20mn.
Limitation on restricted payments Aggregate amount of restricted
payments may not exceed sum of the following: – 50% of consolidated
net income (minus 100% of such negative amount), – Capital
contributions/proceeds from the issue of capital stock (other than
disqualified stock), Most important carve-outs/exceptions: –
Purchase of capital stock in connection with obligations under
employee stock option agreements up to EUR 3mn p.a. – General
basket: up to EUR 20mn.
Limitations on transactions with affiliates De minimus threshold:
EUR 2mn Board resolution if transaction greater than EUR 5mn
(approval by disinterested directors required otherwise fairness
opinion). Fairness opinion if transaction greater than EUR
20mn.
Limitation on sale and leaseback No Fall-away/suspension covenants
Yes, if by both agencies and no default. Negative pledge Yes, with
the exception of permitted liens (including liens not exceeding EUR
20mn) and permitted collateral liens.
Permitted debt may be secured as long as the consolidated secured
debt ratio is less than 3.0x. Anti-layering No
Source: Offering memorandum, UniCredit Research
<date>
UniCredit Research page 33 See last pages for disclaimer.
Stora Enso (Sell) Recommendation We keep our sell recommendation on
Stora Enso. The group’s outstanding EUR-
denominated STERV 5% 3/18 and STERV 5.5% 3/19 notes trade expensive
vs. stronger pure-play packaging peers (e.g. SKGID), in our view.
Although material spread widening of the bonds is not likely due to
Nordic support and despite potential new EUR-denominated issuance
(the company met investors in June), we expect STERV cash bonds to
underperform peers in 4Q15/2016 (STERV 2018 and 2019 bond spreads
are unchanged YTD vs. FYE 2014).
Credit drivers Current transformation of the group with continued
restructuring of European graphic paper capacity and expansion of
Biomaterials and consumer packaging activities in Asia
Limited capacity for deleveraging due to large capex projects in
2015/16
Execution risks with regard to sizeable growth investment and
continued structural demand pressure for European paper
operations
KEY PERFORMANCE INDICATORS
Volume development per product (yoy change in deliveries)
Operational EBITDA margin per segment
Source: company data, UniCredit Research
Latest earnings review Stora Enso reported 2Q15 results below
expectations. Reported sales of EUR 2.56bn improved 3% qoq
(slightly down yoy due to weaker price/mix), in line with the
company’s outlook for a sequential improvement in 2Q15 and
supported by overall higher volumes, particularly of pulp,
corrugated packaging and board. However, operational EBITDA
declined 6.5% qoq to EUR 318mn (12.4% margin; minus 120bp qoq),
whereas the company had anticipated a sequentially stable result in
2Q15. The main burden stemmed from production issues and the
Guangxi start-up costs in the division Consumer Board and
price-related lower profitability in Paper, which was not fully
offset by positive FX effects. Despite lower earnings, operating
cash flow generation was solid (EUR 419mn in 2Q15 vs. EUR 271mn
last year) but was used for increased cap