AA - recap on recent news. Preclose statement on Tuesday 11th

All,

Away from acknowledging the existence of three potential bidders, the announcement last week emphasised the necessity of the AA Group to deleverage its balance sheet.  We do not expect the Company to pursue an asset sale of the insurance business and deleveraging is likely to occur from either a rights issue or a voluntary partial debt for equity swap.  The latter has been muted previously and the expectation is Davidson Kempner, a 15% shareholder, has a significant holding in the B notes.  

As previously announced, the Company refinanced the outstanding A3 notes (4.249%) that fell due in July 20 with a L+175bps (<2%) saving £4.5m interest p.a.  The next refinancing that falls due is the A5 notes (senior) £375m (Jan-22) and the B notes (subs) £570m (July-22).  

It should be noted that the announcement by AA last week was not with the approval of the three potential bidders, Centerbridge & TowerBrook acting together, Platinum Equity Advisers and Warburg Pincus.  There was limited press speculation prior to the announcement and it would appear the Company announcement was premature or seeking to accelerate any process.  The three bidders are required to either "put up or shut up" by 1st September. 

The shareholdings is surprisingly concentrated with Albert Bridge (c.18%) & Davidson Kempner (15%)  the largest two shareholders, but top 11 accounting for over 55% (excluding the market makers and providers of swaps and CFDs).   

We remain long the B notes, at 8% yield at current price, 95%, and with three potential bidders and a firm focus of deleveraging from the Company.  If the three potential bidders step away prior to 1st September the bonds are likely to fall a couple of points, but unlikely to give up all of the recent gains.  

Happy to discuss further.

Tomas