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08 Octobre 2015

New long HY opportunities post market repricing

The increased risk aversion in global markets over the summer months gave us the opportunity to make certain adjustments to our long HY book. With the market repricing, we incepted new idiosyncratic positions at attractive entry levels where we expect the realization of some catalysts and a positive price action in the next few weeks. Here are four relevant examples of such portfolio rotation.

1. Senior unsecured bonds issued by Italy-based Wind Telecomunicazioni

Wind is the 3rd mobile operator in Italy with a 25% market share. On 6 August, the company announced its intention to merge with 3 Italia – the Italian subsidiary of the HK-based Hutchison group, a highly positive development for Wind’s credit profile. The regulatory clearance of the transaction by the EC was initially taken for granted by most market participants, but the recent cancellation of the merger agreement between Telenor and TeliaSonera in Denmark on the back of expensive remedies required by the EC significantly changed the market expectations and the price of Wind’s debt instruments. In our view, the deal will likely go through as the Wind-3 Italia combination is very different from the Danish situation: Italy experiences a much tougher competitive environment in telecoms, the country’s telecom infrastructure has been underinvested for a while and operators with stronger financial profiles are welcome, the flexibility of the Wind-3 partnership to reach a compromise with the EC is much higher than for Telenor-TeliaSonera which already has a network sharing agreement in place, the experience of Hutchison to execute in-market consolidation transactions in Europe such as in Austria, in Ireland and in the UK – pending – gives additional comfort. Wind bonds currently trade below par and pay a coupon of 7%; in our view, they could trade around 105.00 (5.5% yield) when the market will price a higher likelihood of deal completion, which in turn would generate a 12% return on the position over the next 9-12 months.

2. PIK Toggle notes issued by Poland-based Play

Play is the 4th mobile operator in Poland. It has been able to deleverage impressively over the past 2 years, with a very strong commercial performance and cash flow generation. The company’s bonds suffered in September as investors expressed concerns over the ongoing spectrum auction which is currently taking place in Poland and where bids have reached absurd levels because of a flawed process. We expect that Play’s credit profile will be less impacted by the auction than what the markets prices as a result of its disciplined financial policy and better-than-competitors free cash flow generation. Play PIK bonds are currently trading at a cash price of 102, pay a 7.75% cash coupon and are callable by the issuer at 102 in February 2016. Post auction process, we believe that Play may either put itself for sale or reshuffle its capital structure, which would likely mean that it repays this bond at the first call date in either case. Our current position would then return ca. 7% over the next 6 months with limited downside risk.

3. Senior secured bonds issued by Norway-based Hurtigruten

Hurtigruten is a well-established Norwegian cruise operator with leading positions in two niche markets, (i) public transport in Norway – contract with the government – and luxury tourism in remote polar regions such as the North Pole and Antartica. As a recent debut issuer hardly covered by the sell-side research and trading at a yield of 7%, its senior secured bonds offer attractive value relative to its credit risk: with security over the company’s fleet and little vessel-financing, asset coverage is rich; in addition, we expect Hurtigruten to deleverage significantly over the next 6-12 months by optimizing its fleet capacity – a 1% increase in utilization rate translates into a 5% increase in EBITDA – and developing new exploration segments. This should in turn generate a return in the 10% area for our position.

4. Preference Shares issued by Ireland-based Bank of Ireland (BKIR)

BKIR is the leading Irish bank, with €131bn of assets. Although the Irish banking system went through a major crisis in 2010-2011, it is now benefiting from a highly supportive local environment and from cleaner balance sheets and loan underwriting policies. BKIR Preference Shares were purchased by the Irish Government to recapitalize the bank during the crisis. In late 2013, these instruments were sold to private investors as the bank restored its access to capital markets. As part of the transaction, BKIR committed to replace those instruments no later than June 2016, which will be our natural exit horizon for the position. At a current trading level of 102 and with a 10.24% coupon, we expect an attractive 5% return for such a short-duration and low-risk position.

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