Time for new names
All,
The last 15 months have seen an incredible rotation of risk and returns and many of the names that offered opportunities last year have done phenomenally well, either because the feared drop in revenues never occurred, or because the market has bestowed them with sufficient liquidity to trade through the crisis. Either way, many of the names that were topical last year no longer carry the opportunities we are looking for and we have to free up time for a fresh crop of new opportunities.
In with the new:
We will be initiating on travel-related names including Carlson Wagonlit soon and are doing more work on Tui and the curious case of its cash balance. We may also do more work on energy-related names like Enquest and WellTec and more consumer names - maybe including Selecta. Amigo Loans has been in the market for a while and hearings are already underway, but it too was recently mentioned. We are screening a number of other new names, but as ever, we would be glad to hear from you if you have a specific wish.
Out with the old:
Please let us know if you would like further coverage of any of the names below. Failing any such requests and as part of an evaluation of the names we currently cover and new names we aim to initiate on, we have decided to shelve the following names. Again, we will continue to monitor if clients wish us to follow a specific name.
AA
A very successful trade. The original thesis played out that there was sufficient equity value and the bond would be refinanced. At current levels, with very little event risk we are dropping the name.
CABB
Within two months of hitting 80c/E, the bonds were back above par. End markets proved stable and production continued uninterrupted. Failing any unforeseen production problems, the name trades too tight now to warrant further work.
Dufry
We initially started analysing Dufry as a potential short given the significant drop in footfall in their premises due to Covid. However, the Company has very flexible tenancy arrangements and has demonstrated its ability to access the public markets for equity and debt raising, culminating in its upsized two bond issuance in April.
HEMA
HEMA was not a successful trade. We’ve ended up losing a few points after the sales process returned less than inspiring bids and bondholders resolved to sell to a consortium involving the same shareholder again. We have not been plugged into the news flow after the sale.
Lycra
The quality of the reporting and lack of Q&A at the end of conference calls has made it extremely difficult for us to add value with analysis of the Company. Sports apparel may have done well during the pandemic and may possibly continue to, but the Company is exposed to competitors infringing on their intellectual property and it is difficult to understand any long-term defence plans.
LoewenPlay
Small German arcade hall operator. We have gained little traction with clients on the name and given its size we are dropping the name.
LOXAM
Europe’s largest equipment rental business looked vulnerable, but aside from producing positive FCF in Q220, the company was among the first to raise a government-guaranteed loan and had otherwise reacted quickly to establish a war chest of liquidity. Since then revenues have held up well, as was to be expected once the boom in construction became visible.
-guaranteed-Loan
RAC
Another successful trade, alongside the AA. Because the RAC has been better capitalised than the AA, bonds ultimately have not been taken out, but yields are too tight and the business is too stable to warrant spending much time on. We still hold a small legacy position in the name - instead of cash.
Seadrill
The name is primarily traded out of the US and significant portion of the debt is locked up.
Voestalpine
Volumes had been struggling before the pandemic and, as could be seen at Swiss Steel, were going to hurt some producers. However, Voestalpine’s exposure to less volatile end markets, as well as an unwavering following in the Austrian retail market have prevented the IG bonds from widening / ever falling into HY territory.
Once again, please let us know:
1) If you would like us to continue covering any of the above names and
2) which new names you would like to see next. We are happy to discuss any names we are looking at and which we may choose to bring out next.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003