RAC - Dutch tender for B notes

All,

We tender our 5% of NAV long position in RAC B notes.  This Dutch tender is positive for the credit and further demonstrates the likely early call of the balance of B notes in July 2021 at par. The call protection drops to 101.25% from July 2021 and it is possible that the Company will look to refinance the whole B notes next year, but our base case assumption is they will wait until July 2021.  Given the size of the auction, we assume that all creditors tender and therefore will assume a continued holding of 4% of NAV thereafter. 

The fact that RAC management/Shareholders have no other use for £70m of cash points to the stability of the overall business.  There is no CAPEX project with internal rates of return higher than the 5% coupon on these bonds and although credit investors should be grateful that they have not dividend’ ed the money, there appears little else opportunities for the Company to spend the money.  There is no upcoming maturities on the senior debt, with the B notes, on November 22 the next maturity.  

This overall stability bodes well for our long 5% NAV position in AA, the largest Roadside Assistance Company in the UK.  Although AA have higher leverage stats than RAC, the operating metrics are similar, underpinning the ability of these companies to shoulder significant leverage. 

Announced this morning, RAC are conducting a Dutch Auction for up to £65m of the B notes a minimum price of 99.5%.  This is a positive development, especially given that £70m of the cash balances was available to make a dividend to shareholders.  Obviously, this is not deleveraging, but reduces, if successful,  the outstanding B notes to £210m and removes the possibility of cash been used for dividends.  The offer will expire at 4 pm on 4th November.

Happy to discuss.

Tomás 
___________________
E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk