Stena - Outlook and positioning
All,
Please find our unchanged analysis here.
We have been procrastinating on this trade a little bit, primarily, because it does not really aim at a specific event. The aim of the trade instead is to generate some 10% return for the year, in part from coupon, in part from improving figures surrounding its drilling operations and therefore further receding of risk to the SUNs. However, while those drivers should clearly add alpha, this near par trade is clearly taking on some beta as well.
Trends:
Stena is clearly benefiting from its diversification in this environment, but in short, we expect:
- Drilling to begin to break even in H2 of this year, as contract coverage improves, even at poor conditions and as units avoid cold stacking.
- Shipping to experience a normalisation (fall) of the high-margin revenues it generated in the last two years from effectively just holding liquid inventories.
- Ferry Operations to recover from H221, in line with recovery rates we use elsewhere for airlines and other travel names.
- All other segments, including Swedish RE to remain stable.
Liquidity:
- We forecast a SEK 5bn cashflow shortfall over the next two years. Stena’s marketable securities alone should be sufficient to cover this. Moreover, the above shortfall does not anticipate any borrowing against its expansionary CapEx, which is difficult to quantify but should be possible, given the hard assets involved. Finally, we see ample further headroom to borrow in the unrestricted group to continue to support the restricted group (as has been the case over the past years) as well as the S.A.
Legal:
- Given the impaired security is the very centrepiece of the SSN collateral package and that the SA guarantees almost all debt of International’s subsidiaries, which in turn International guarantees to the SA, the benefits of the collateral package, let alone enforcing it, should be marginal to the SSNs. More of their value is derived from the SA’s guarantee (of the SSNs directly) and therefore from value accruing to SA from its holdings in the unrestricted group, specifically the Swedish residential RE portfolio.
- We, therefore, see little chance for instance of a scenario where one bond defaults, but another does not.
- There is at least a theoretical scenario in which the CDS orphans if the SUNs at some point are refinanced with a bond issued out of another entity. But this is not our base case.
Positioning:
- We are selling 5y CDS (going long) for a risk exposure of 6% of NAV for 3.5 points upfront / 580 bps as we are seeing indicated. The CDS should have some more convexity than the underlying SUNs and as discussed above, has the unlikely but theoretical upside of orphaning. We see the spread on the bonds and CDS tightening some 100bps over the year with news flow of the stabilisation of operations and are therefore aiming for a ~10% return on the position this year.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003