Altice International - stay awake please - Positioning
All,
Please find our initiation on Altice International here.
Following on from our initiation on SFR Altice France, we have done our preliminary work on Altice International. Similar concerns about refinancing risk and the overall interest bill if forced to take current yields for refinancing. And like SFR Altice France, there are limited upcoming maturities until 2025. We noted on the Q3 call, that management are already taking a proactive step in this respect and expect to execute on an Amend and Extend on their Term Loans. Additionally, management fielded several questions on their Altice UK exposure and the loan from Altice International to Altice UK to partially finance Altice UK’s BT stake. Management clarified that the loan is part of the security package of Altice Financing but did not disclose many details in relation to the security.
Underlying Business:
- Altice International is three distinct, utility businesses with stable cashflows. The business has a habitual high CAPEX spend which has prevented any meaningful deleveraging at Altice International. The recent CAPEX spend is linked to various 5G spectrum license payments but even prior to the 5G auctions CAPEX was relatively high.
- There are limited or no synergies between operations in Portugal, Israel and Dominican Republic. Each country has differing competitors and the focus is on peers’ pricing strategies.
- Altice International is highly leveraged, but when adjusted for the high committed dividend policy of some of the competitors. The relative leverage of the peer group requires all operators to deleverage and reduce CAPEX.
Recent News:
- Altice International haven’t released their full numbers, but initial reaction to the summarised data is positive. Operationally, revenue, EBITDA and Operational FCF have continued the previous quarter's growth. More importantly, Altice International confirms that full-year growth will broadly be in line with year-to-date performance.
- Management have reiterated their mid-term guidance of EBITDA less CAPEX to be in excess of €1bn p.a. and target leverage to remain at 4.0-4.5x.
- As mentioned above, management alluded to their aim to undertake an amend and extend exercise for their term loans which would improve further their favourable debt maturity profile.
Altice UK Srl loan:
- Although this loan is now part of the security package of Altice International debt, very little information is disclosed concerning the underlying asset. It is known to be secured by BT shares, but the level of asset coverage is unknown. Management alluded that it is fully collateralised and would need to be written down if the asset coverage (BT shares) didn't cover the outstanding amount of the loan. However, the market is not aware of how the rest of the BT share acquisition was funded and what covenants/conditions attach to other financings.
Model:
- Altice International is one of our basic models, as it is hard to get excited about the overall name. The business shows a high level of stability and any model should focus on wider trends rather than specific quarterly numbers.
- We have adjusted both cost and revenue projections, which are both more pessimistic than the Company’s stated aims. We will adjust marginally the numbers on the back of full Q3 numbers.
- However, the main takeaway from our initial modelling is the impact on liquidity and valuations (via DCF model) that small changes in CAPEX will make. We acknowledge that our CAPEX assumptions are on the high side, but we are not fully confident in lowering them to market’s expectations.
- Unlike SFR, International has a significant proportion of its debt, including some €2bn of loans to extend between 2025 and 2026. At an average rate of 8%, this will add €80m of interest burden before the majority of the debt stack comes due in 2028. All else equal, this would drop interest coverage to 1.5x and so we do not see the company develop any material solvency problems over the increase. A mere 1.5% increase in price to catch up some more with inflation will address the step-up and Altice International have years to do it.
Investment Rationale:
- We are happy to take a small 3% long position in the Finco (sub) bonds in Altice International at 73%, yielding 13%. The Finco bonds are relatively small in size versus the overall structure and we acknowledge small changes in operational data can quickly leave the sub-bonds totally out of the money.
- However, we are comfortable with Altice International’s operational data and the ability they have to maintain the momentum of the first three quarters. We take comfort in the main operations, Portugal and despite the main competitors having significantly lower leverage, both Vodafone and NOS Group have committed to relatively high dividend policy which should ensure limited price competition.
- We acknowledge that any position in Altice could be viewed as a proxy for the wider European High Yield market, but the name trades relatively wide for a stable cable business. The relative weight of Altice International and Altice SFR France in the overall market constrains the upside in the bonds absent an overall tightening in the market, but we would expect a positive boost to the bonds on a successful Amend and Extend.
- Credit concerns centre on the poor documentation and the uncertainty surrounding outflows to cross-support other Altice (Drahi) entities. As discussed under the model section, we will be paying particular attention to the overall ongoing level of CAPEX and the flexibility inherent in that number.
Happy to discuss.
Tomás
020 37447009