Rotating the book - 11 names we like and a lot more we really don't

All,

Below is an account of each of the names we follow and have begun work on in the context of Covid19 and Oil prices. Several names stand out as having become either uninvestible or outright attractive - already now. Some are good to sell 1-year CDS, some won’t restructure at all, some will and are still attractive.

In short, we like the following 11 names some now, some still have to wait for the market:

1) AA Bs

2) RAC Bs

3) Douglas SSNs

4) Iceland

5) Lowell 1-year CDS

6) Intrum

7) S+B Equity

8) TEVA long end

9) INTU PropCos

10) e-Dreams

11) CMA 21s - still in production

Please let us know which new names you are interested in.

Automotive:

- AA - No short term triggers in sight. Stable long-term customers. No direct impact from either Covid19 or Oil. Already long the Bs, but would add if we weren’t.

- Adient: Will survive - JIT affords lower volatility - strong liquidity -  Exploring to sell 1 year CDS.

- Aston Martin: Revised rights Issue and bridge loan, but we’d rather stay away

- RAC: Same as AA. Good to buy if not already long.

Capital Goods:

- Mangrove (Heatexchangers): The sponsor is committed and liquidity is provided, but Oil & Gas is the biggest client sector. We still hold a position in the post reorg SSNs and unless we can convince ourselves that the oil price war will be short lived, we will have a look for a bid. The last we head still had a 9 handle, but that is days ago…

Consumer Discretionary:

- Maxeda: Could see a tailwind offset some of the Covid19 damage, but low liquidity and debtor friendly documentation leave us on the sidelines.

- New Look: Probably another restructuring now. 

- Douglas: Covid19 exposure like everyone else. Its Germany’s and Europe’s largest online retailer of perfumes and cosmetics, but its physical stores will be suffering. As ever, could benefit from a lipstick effect when people come out of their cupboards. The company is on a strong trajectory and had been looking to refi the SUNs this year. Liquidity should be sufficient to stomach a 15-20% drop in sales, but only just so. Given the successful turnaround sponsors CVC should be committed to the company. We still hold a position in the name, but may be rotating into the SSNs again as the SUNs are relatively small and unprotected.

- Hema: the company was skating on the edge before and 2020 was already to be a transition year with the new DC coming online last month, but not fully utilised yet, which should mean a drop in margin. We are expecting news on the Jumbo deal as well, but in an environment of mounting difficulties the PIK redemption may prove extra painful for Ramphastos. Even the SSNs have now dropped dramatically and there is probably no bid in sight. There is better value elsewhere now.

- Matalan: Having been on a good path until it disappointed in the last results, Matalan bonds have dropped violently into the 60s and 70s. The first and second lien notes trade almost side by side, given the rumoured Hargreaves stake in the latter, but fundamentally, we feel more comfortable in the SSNs. We still hold a position in Matalan, probably the best of the UK retail HY names - and one that tends to outperform when the public has to tighten its belt, but its too early to step into retailers now.

- Pizza Express: The SSNs are defying gravity - probably on lack of liquidity - but while Carluccios are hoping to negotiate rent holidays of 3 months, and given the problems had begun piling up before Covid19 already, this name is likely too much brain damage to be worthwhile now in the 70s.

- Steinhoff: That Pepco sale story is in grave danger. The company faces difficulties retaining Pepco management if it can’t produce adequate incentives. The IPO/sale to PE was supposed to install such incentives. Multiples of 15x+ should be a thing of the past and sponsors may see better value elsewhere now. Mattress Firm may be doing reasonably well if consumers chose to invest in their homes rather than going on a holiday and Pepco stores are positioned at the bottom of the price range. But in particular Conforama looks vulnerable, as does said sale of Pepco in general. We still have a small position in the B2s and are exploring an exit. 

- Takko: Takko has another 2 quarters to go in which it can post strong LTM figures - ignoring Covid19 that is. Like Matalan, the stores are out-of-town and most customers arrive by car, which should be slightly more stable than the high-street demand New Look depends on. Still, we thought the company got lucky last summer and therefore have been hesitant to buy the bonds at the subsequently elevated prices - further propped up by rumours that Apax was looking for a buyer (a sure sign that the company did indeed just get lucky). So we are not about to engage on Takko, not north of 50 c/E and not before we’ve seen some of the Covid19 damage.

Consumer Staple:

- Boparan: Was struggling to refinance before. China had to cull millions of Chicken. If the same is required in Europe/UK, Boparan will ave to approach creditors. Better risk elsewhere for now.

- Casino: This story was dependent on a number of large scale asset sales. Those buyers - including Aldi of Germany - may however now have other ideas on how to spend their cash. The risk is therefore now difficult to calculate and we suspect that even a deal announcement at this time would have a subdued effect. Thus at the right time we may not be afraid of taking further exposure along the curve, but for now the investment thesis of asset sales funding the turnaround is impaired.

- Iceland: Not the name with the best historical trajectory, given its store expansion over the last years, but that is over now, providing scope for some margin expansion. Covid19 may actually impact Iceland a little bit less than certain other retailers. Management commented on the call that its customers do not have the liquidity to panic buy. FI so, they may also be forced to continue buying throughout any forthcoming lock-down period. Leverage is significant and NCF had been only just about break even, but even if Iceland burnt through all its cash and thus far undrawn RCF, around 70p/£ the bonds value the company at 5x on a normalised basis. We don’t think that is likely however and think the bonds are too cheap. Exploring to add at the right time.

Diversified Financials

- Lowell/GFKL: Performance should deteriorate as summer jobbers and gig-economists will likely struggle to maintain their finances. We are not fans fundamentally, but deterioration should be slow, new purchases can be stretched. Exploring to sell 1 year CDS.

- Intrum: Like Lowell Intrum could owe us a write-down of its book on the grounds that it is unable to collect on schedule and has to renegotiate with delinquents. However, rates are now lower for longer, providing grounds to mark up the ERC book. Compared to Lowell at any rate Intrum, which is more widely diversified, less levered, marginally more cost focussed / cash productive and derives a larger share of its income from 3PC is now trading too wide. We suspect the company will survive the downturn well enough. Exploring a long position in the bonds, although there should be time until late April before the next numbers. So no rush.

Energy:

- KCA Deutag: Was a restructuring before already.

- Vallourec: We don’t like betting on that rights issue. The RCF runs out in Feb. 21. Waiting for Tomas to return from skiing before firming up opinion on short term triggers.

- Seadrill: Drill ships are now even less in demand. Perhaps a chance for an utter bargain, but it will be one for the long haul.

Entertainment:

- Codere: The overlevered high fixed cost business has enough liquidity to withstand an 8% downturn in revenues (all else equal). If and when Argentina and Mexico are also shutting down gaming halls, its game over for Codere again.

- Intralot: Swimming in cash and no direct exposure to Covid19 or Oil. Topical business. But the wheels have been coming off recently - off the company and our confidence. At 27c/E however it warrants a more legalistic look.

- Loewenplay: Its probably a bet that one of the local players will buy it in the context of its own regional re-profiling / re-distribution, or that German authorities are suddenly softening stance. 

Materials:

- Lycra: Large fixed costs, upstream demand volatility, weak shareholder, direct Chinese exposure. Waiting for Tomas to return / refresh.

- ProGest: If there is a company that is probably benefiting from the turmoil its Pro-Gest. Chances that the Mantova administration will be doing whatever it takes to preserve as many jobs in the region as possible have just risen dramatically. Orders for Pizza delivery boxes should also be doing well. However other applications of its oestliner will of course suffer. Fixed costs are high and the case remains absolutely binary. There are better opportunities out there now.

- Schmolz+Bickenbach: The bonds are to be taken out and orders are not rebounding as planned. In particular automotive customers have not chosen to increase orders again. Liquidity and financing are assured however so the post reorg equity trade will have to wait somewhat but we are still looking to enter it.

- SGL Carbon: The company’s 2024 business plan seemingly failed to convince even management and was from before Covid19. Still, liquidity is strong, a large RCF is standing by and the asset is strategic to powerful non-financial shareholders (VW+BMW+S.Klatten (shareholder of BMW)). Liquidity could come under pressure if 2020 is a disaster (will be) and if the company has to return E50m to its shareholders for a past contribution. Clearly they won’t lose control over this issue. Exploring to sell 1-year/2year CDS.

- Voestalpine: We are impressed with the resilience of this name. Asutrian Rail being one of the principal clients as well as its electric arc flexibility are two of the reasons. Bonds dropped some 10 points only to tighten by 3 again. We are short the name, but the trade was not a success.

Pharmaceuticals:

- Teva: The Opioid scandal is now largely quantified and although there are risks remaining in the near term, they no longer appear existential. We still have a small long and short position on. Looking to buy back the short once the legal situation is all clear. Then possibly buying more of the long duration end of the curve - at a later date.

Professional Services:

- Almaviva: Operating call centres in the age of Covid19 can’t be easy. The Palermo site is not yet closed and the Italian rail contract renewal is slowly approaching. Otherwise no direct exposure to Covid19, nor to Oil. We still have a small long position and may be looking to reallocate elsewhere - as per original thesis, just a lot lower.

Real Estate:

- Intu: Some of the securitised propco debt, particularly in SGS and Metrocentre is trading above 10% YTM in otherwise (relatively) solid assets. In the long term that is certainly too low. Exploring to take a position.

Travel & Transport:

- e-Dreams: The company has relatively manageable fixed costs and we have data to show us its earnings volatility in a downturn. With nearly half a year of revenue in cash and RCF, we don’t see a scenario in which the bonds could be in danger in the near term or actually at all. Exploring selling 1-year CDS if available or taking a long position.

- CMA: In production, but overall looking positive.

- Dufly - Tomas is on it.

- Naviera Armas: This was more than on the edge coming into the year, selling ships to pass covenants and with a questionable CapEx strategy and soft documentation. Covid19 exposure is likely strong, even if the company gains the majority of its revenues from local residential and business travel. There will be less business. Staying away.

- Samsonite: coming soon.

- Tui: Tomas is on it.

- Various others coming.

Utilities:

- Southern Water: We have neither a downgrade nor a confirmation from S&P following the company’s acceptance of the final determination. We will investigate what is taking so long. We remain short the name although we understand that liquidity has dried up.

- Thames Water: We have neither a downgrade nor a confirmation from S&P following the company’s acceptance of the final determination. We will investigate what is taking so long.

Wolfgang