About 25 years ago in France, a singer of the name of Patrick Bruel released a new album which was an instant and huge hit. He sold millions of records, became immensely popular and went on tours across the entire country and abroad. Not only were all his concerts completely sold out and the lyrics of his songs sung from the start to the end by his audience, but his fans couldn’t help screaming “Patriiiiick!” any time he appeared on stage.
25 years on, you may wonder what this story has to do with the current state of European credit markets. Not much at first glance unless you’ve noted that another French man of the forename of Patrick has been the largest seller of European HY bonds since 2014 and has built a huge investor fan base. Mr. Patrick Drahi is the Chairman, founder and main shareholder of Luxembourg-based cable and telecom group Altice. Out of a relatively small France-based cable operator and a few other assets, he has built over the past couple of years a group with an enterprise value north of €60bn. Since 2014, he acquired the second largest telecom operator in France – SFR – from Vivendi, the Portuguese incumbent operator Portugal Telecom and he just signed the purchase of 70% of US-based cable operator Suddenlink after being rumored to have approached Time Warner Cable. In total, the combined Altice group entities now have ca. €35bn of leveraged finance debt outstanding in the euro and US dollar-denominated bond and loan markets.
Being one of the largest providers of assets to hungry credit markets, it’s little wonder that Mr. Drahi has achieved cult status with many credit investors worldwide. And if investors are not shouting his name during the roadshows, new bonds issued by Mr. Drahi’s group are sold out with order books multiple times oversubscribed and investors adding more risk on the name any time a new acquisition has to be financed. Witness the following funny comment written by one bank analyst covering the TMT sector:
US Investor: Who is this Patrick guy?
Your favourite Telco specialist: Well, he’s a bit of a magician.
US Investor: He does magic?
Your favourite Telco specialist: Yeah, sort of…financial magic. He buys businesses and then turns out the lights, stops paying people and fires pretty much everyone to get the EBITDA margin to 60%. We think he’s so good that, when he buys a business, we give him over 100% of the synergies on day 1 because he’s just awesome.
US Investor: That’s crazy – the guys over here are not going to take that. What’s his background?
Your favourite Telco specialist: He worked for John Malone for a bit.
US Investor: Hang on buddy, back up the truck…why didn’t you say that before? Where can I buy some shares?
Beyond the jokes, the buzz and the staggering numbers, we believe that the Altice story provides access to some great businesses, interesting lessons and attractive investment opportunities. Here are four key rules that we use in combination to make investment decisions in such complex and multifaceted situations:
In the end, Altice is a prime example of the current risks and opportunities which investors can find in European credit markets. Rather than being blind-sided and unconditional fans of Patrick we have opted for a more rational and selective support, going long a number of instruments issued by certain credit pools where we consider that valuations are consistent with our assessment of the four rules mentioned above, and carefully staying away from the others.