Algeco - New position and Q1 20 model update

All,

We have just updated our Algeco model for the Q1 20 results and call. Please find it here.

Algeco has remained relatively resilient during the coronavirus crisis.

Segments that could have been more at risk, such as Energy/Natural Resources and Industry/Services, appear to be bouncing back strongly. Its geographical and sector diversity, a far cry from past periods of heavy concentration in US Oil&Gas, has served the company well. The 12 months duration of most of its contracts, which would under normal conditions be considered short, have led to a significant divergence of performance vs asset owners on weekly or daily contracts such as Loxam and Hertz.

We are moving to a 4% long on the Algeco USD senior secured notes at 97 (YTW 9.3%). While we acknowledge that there is a risk of chasing the market under the recent dynamics for the Algeco bonds as well as the overall stressed HY space, following further work we are now more comfortable with the senior level of the capital structure.  We note that the second hand unit market has held up well so far but new business has slowed down, and risks remain on the medium term.

We are not considering the unsecured USD 10% notes at 77 (YTW20.4%), at this stage. We see the valuation cushion of these notes as thin to non-existent under our current conservative assumptions. As the initial impact of the coronavirus passes, the medium term impact on second hand unit values or in new rental activity remains unclear. Because of the small size and relative liquidity of these bonds, a total loss under even minor variations of EBITDA expectations remains a significant risk. 

We are looking forward to exchanging ideas on Algeco with you.

Juliano