Douglas - Exit the 2LNs
All,
We have had a great ride with the 2LNs from a straight 50c/E last summer. A lot of work has been spot on and it has paid off. Thankfully we’ve also had no other name do the reverse.
Exit:
However, at the bid price of 95.625 c/E we are seeing now, it is time for us to exit this position and leave some 5% upside on the table for those coming after us. While we remain convinced that Douglas has all the ingredients to a deal, risks remain and the downside would be catastrophic.
Risks:
- Refinancing: As in Lowell, it’s a self-help deal concerning the entire cap structure where the company needs to replace a sizeable contingent of CLOs that require a re-rating from CCC+ to at least B and further fresh cash should flow into the company. CVC’s touted E300m do not achieve that and there is no vested interest from protection sellers to mobilise. On the bright side, Douglas is the better business.
- Third Wave: Not only Germany is increasingly debating a “Third Wave” of covid infections, which are met with continued news of further vaccine delays. Seen through the eyes of the ever-cautious German administration those could result in further delays to the easing of lockdown measures. Another tightening of lockdown restrictions is perhaps not yet likely, but at least that tail risk is thickening.
Fundamentally:
- We continue to be constructive on the business and view the rotation towards online as entirely positive, with margins very comparable to the store chain.
- Moreover, the online rotation should set free considerable store inventory, which for the first 500 store closures has already been accounted for, but which should continue to support cashflows as that rotation continues.
Happy to discuss,
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003