Grifols - Fundamental and Merger Arb

All,

Please find our initiation on Grifols here.

The Grifols name has repeatedly come up as a requested name from clients but our initial view has always cast doubt on the opportunity in the name. We have spent some time on the name in August and our fundamental view has not changed. Grifols will continue to deleverage and the recent asset sales have removed most liquidity concerns.

Investment Considerations:

- We are not taking a position in Grifols at the moment. Despite Grifols' accounting concerns, the business enjoys a significant listed equity cushion beneath its bonds. The Senior Secured bonds trade very tight at c.6.5% YTM, with 100bps additional pick-up for subordinated Senior Notes. At c.90%, the Senior Notes are not attractive for us on a yield basis.

- The yields have tightened on the back of a potential MBO, backed by Brookfield, which will trigger a change of control. Under a change of control scenario, there are c.10pts of upside in the sub notes, with c. 8-10pts of downside. The only senior Secured Notes trading at a substantial discount to par are the 2027 Notes, which have 8pts of upside, with c.4pts of downside, trading in line with the other pari-passu notes that trade above par.

- The bonds are at fair value without a bid but will trade down if a bid is not forthcoming.

- The risk arb trade looks attractive, but we are cautious about the underlying business. We do not have enough information on the treatments and competitive environment for Grifols products to make our modelling more robust. This ultimately is the reason we are not taking a position.

Take Private:

- On July 8th, Grifols released a statement stating they had received a request from the Grifols family, working with Brookfield the Canadian firm, for further access to the Company's books, to carry out due diligence concerning a possible acquisition. Brookfield confirmed it had exploratory talks with the family over a joint bid for the Company.

- The Company did not release any further information, stating it does not know whether or not such a transaction would take place, and it is completely unaware of the terms and conditions under which a potential transaction would happen.

- Grifols stated last month it would study a preliminary offer presented by Brookfield and the Grifols founding family, which holds a stake of around 30% in Grifols, for a possible joint takeover bid with the intent to de-list Grifols.

- However, the Company has created a further committee, with fully independent directors to manage any conflict of interest concerning the potential bid.

- In late August, news agencies reported that Brookfield was in substantial talks with banks to raise funds to fund any potential takeover bid.

- Any bid is likely to trigger a change of control, meaning all existing debt will need to be refinanced.