Rekeep - initiation

All,

Please find our initiation report on Rekeep here.

- As with most sectors with significant contract tendering activity, including construction, public transport, natural resources, infrastructure concession, and others, legal disputes are prevalent in facilities management. In our experience of everything from bus transport in Sweden to gambling in Mexico, we have seen legal challenges as an inevitable factor in this kind of sector. For sectors with recurring revenues, such as facilities management, we see such cases as the price one has to pay for having less exposure to the extreme EBITDA fluctuations of sectors such as autos, steel and non-food retail. In periods of strong growth this can be overlooked, but investors are very happy to stick with non cyclical credits with (moderate) legal challenges in periods such as coronavirus and 2008-2009. 

- We are moving to a 4% long on the Rekeep 9% secured bonds at a price of around 98 (YTW 10.2%). While they have already rallied significantly over the past few weeks, both under a positive market environment for high beta bonds and following reassuring results and all, we feel there some additional upside on the bonds. The company diversifies the risk on the book as it is not particularly impacted by Covid 19. Instead risk comes primarily from two litigation proceedings that could leave the company NCF flat. 

 - If that materializes, the strong liquidity and likely resilient performance should allow Rekeep to buy-back bonds or otherwise invest in sufficient growth to make us feel adequately compensated with a 10% running yield / YTM. We note that the limited convexity curtails the downside on negative news.

- Fundamentally, Rekeep is one of the few service businesses that we have come across in the European high yield space that has a consistent track record of strong contract tendering and pricing, as measured by the combination of backlog evolution and positive FCF after interest over several years. This is a strong sign that the company has robust contract pricing and tendering skills. As contracting has been the key driver of financial distress in the service space over the medium to long term, this is a major source of reassurance.

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