August | Bond market wrap

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A market update from Rezaah Ahmad, CEO, WiseAlpha.

August has been a particularly active month for the WiseAlpha market. Demand for recent listings such as Domestic & General, Travelodge, R.E.A. Holdings and Burford Capital has been strong, while demand for existing listings was also strong on the back of recent results. Saga continued its upward price march in August as investors spot value.

In corporate action news, holders of Virgin Money’s Perpetual received a 5% consent fee windfall after the company was taken over by Clydesdale Yorkshire Banking Group (CYBG) in a £1.7bn deal. That means in the last 12 months investors have received combined cash interest and fees of well over 13%.

Financing has been arranged for the London Stock Exchange Group’s takeover of Refinitiv, with existing bonds expected to be refinanced at a strong premium to par. The bonds are currently trading at 114 cents on the Euro, and the transaction is expected to be completed in 2020.

August company results:

Yesterday, Lowell reported strong results with LTM revenue up 10% and EBITDA up 13% year on year. Collections are growing faster than expected, cash margins and FCF are improving yoy and portfolio IRRs are rising. The company also repurchased £33.5m (approx 15% of their £230m 11% Unsecured Notes) causing both the senior secured and unsecured bonds to rally 3-4pts. The senior secured bonds yield 10.4% to maturity while the unsecured’s yield 12.9%. Lowell’s results followed the strong results from other credit management companies such as Cabot who saw EBITDA up 15.8% in Q2 19 and Arrow Global which saw Q2 Adjusted EBITDA increasing 8.4% yoy to £67.2m.

RAC (No.2 UK roadside assistance company) also announced strong results with revenue increasing £22m to £313m in H1 2019 versus the prior year and EBITDA also up £9m to £106m. More bonds are now available on the WiseAlpha market. This followed a trading update earlier in the month from The AA (No.1) with management stating they were confident in delivering EBITDA growth and strong free cash flow generation this year while remaining on course to meet their medium-term growth targets until 2023. This undervalued sector will remain so until investors see bell-weather, The AA, return fully to predictable growth.

McLaren accelerated with H1 2019 revenues up 36% at £698m versus £511m in H1 2018, driven by Automotive volume growth, Ultimate Series sales and an improvement in Racing results, while H1 2019 Reported EBITDA was £81m up 553% versus £12m H1 2018.

Ardonagh (Kirs) bonds rallied on Q2 2019 results with revenue growth of 0.5% yoy and EBITDA up 7.7% due to improved margins from reduced staff and operating expenses. With funds managed by a strategic insurance player, Allianz, holding a large position in the bonds, investors might find this an interesting read across.

New Day announced strong results with Q2 total income up 14.3% YoY to £165m and adjusted EBITDA up 159% YoY to £37.3m while net leverage was 2.6x vs 3.2x in Q1-19.

Atalian’s senior notes also rallied yesterday, recovering some of the months earlier losses on the back of Q2 EBITDA up 10.8% over Q2 last year. Asset sales of EUR60m also bolstered the company’s cash balance. While some skepticism remains over the company’s ability to realise expected acquisition synergies with Servest and therefore grow into its capital structure, at a yield to maturity of over 13%, Atalian is a closely watched name for bargain bond hunters.

Popular bond issuer Travelodge announced solid results for H1 2019 with revenue up 6.0% at £192.1m and EBITDA up £1.1m to £44.7m mainly driven by contribution from maturing new hotels opened since the beginning of 2018, together with growth in UK like for like RevPAR and food and beverage sales.

Earlier this month we were active in Premium Credit, with trading picking up following the release of Q2 19 Results. EBITDA was up 14.4% on the second quarter of last year.

It hasn’t been all positive news on the corporate front and Amigo Loans spooked equity investors this week by amending FY20 guidance, now expecting broadly flat net loan book growth while also mentioning that it is expecting further regulatory scrutiny. Impairments also rose due to operational challenges with collections. The bonds dipped around 6% while the equity dropped by over 50%. The company floated on the London stock market last summer with Invesco and Neil Woodford participating but the shares have now lost 74% of their value, making them one of the worst-performing recent flotations, along with the peer-to-peer lender Funding Circle and luxury carmaker Aston Martin. In comparison to the equity, over the same period, the bonds still generated a marginally positive return with high interest income of 7.625% offsetting yesterday’s price drop. Another one for the bargain bond hunters to assess.

Situations like this are becoming more common and is another reason why the corporate bond asset class is fast becoming viewed as superior to equities and other high risk asset classes like peer-to-peer. It’s also why old school equity investment strategies employed by leading fund managers are under greater scrutiny. Changes in the debt/equity mix of company capital structures over the last 10 years and new macroeconomic events/situations is leading to a rethink on relative value across asset classes.

Pizza Express reported results for the first six months of 2019. While Revenue increased 2.6% (Like-for-like +0.8%) in H1 19 vs H1 18, EBITDA was -7.7% over the same period, in line with company expectations. The UK’s No.1 restaurant chain continues to struggle with cost inflation in the U.K. and stalled expansion in China following stiff competition. With maturity dates nearing for the bonds and Brexit considerations in play, bond investors’ attention over the next 12 months will be on the company/owner’s plan to deal with it’s borrowings and fend off potential buyers/bondholders seeking to acquire this highly prized asset on the cheap.

In cable television land performance continued it’s predictable path with Virgin Media Q2 revenue up +0.4% yoy to £1,279.3m due to growth in residential cable while EBITDA was down slightly (-2.5%) yoy to £547.3m, impacted by an £8.6m of increased network taxes and £4.9m severance costs. Vodafone Ziggo revenue was up by +1.5% yoy to €965.0m, driven by customer growth and higher value mobile handsets sales. EBITDA was up +2.9% yoy to €433.9m, driven by B2B and total mobile revenue growth.

Yesterday, Voyage Care – a leading provider of care homes and care services for adults with learning disabilities, saw revenue for the three months to June 2019 increased by 12% year on year, bringing annual revenue close to £250m. Over the same period EBITDA was £10.4m, up 12% year on year. The senior secured bonds are trading at a price of 99.25 while the subordinated bonds are trading at 96, yielding over 11%.

In the European bond market Flora Foods Group, Q2 showed improved performance with growth in both developed and emerging markets. Revenue was up 0.5% year on year with EBITDA also up 2.8% on a constant currency basis and the bonds have rallied 3pts. Burger King Q2 sales increased by 13.9% to €331.1m while EBITDA (pre IFRS) was up 30.6% YoY to €37.1m. This was driven by continued growth in restaurant openings. Meanwhile, Wittur Q2 revenue increased by +0.9% yoy to €212.5m and Adj. EBITDA was up by +0.3% yoy to €35.4m. Net leverage was 5.87x, down from 5.96x in Q1 19. Travelex Q2 results reported revenue for H1 2019 of £351m, up 2.9% YoY, while adjusted EBITDA grew by 5.7% YoY.

Also reporting were: Miller Homes, Puregym, William Hill, AMC, Iceland Foods, Petrobras, BurgerKing France, Upfield, Ziggo, I.D.H. (My Dentist), and Altice.

In other interesting news pubs giant Greene King secured a £2.7billion offer from CK Noble – an offshoot of the property company owned by Hong Kong’s richest man Li Ka-shing. This follows significant activity in the British pub sector with private equity-backed Stonegate agreeing to buy Enterprise Inns and Fullers selling its brewing business to Japanese firm Asahi. Reuters reports that the Brazillian Government is considering privatising Petrobras. Goldman Sachs tabled a bid for Talk Talk’s FibreNation business and Shop Direct reached a deal to supply Arcadia Group’s Topshop & Topman range online.


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