Altice SFR - Proposals and Counters
All,
The opening bell of negotiations between Drahi and creditors has rung, with the Company/Drahi floating a proposal to the steering creditor committee. The proposal appears light with no fresh equity coming from Drahi. Creditors would receive 10-15% of the equity in exchange for write-off of principal, extension of maturities and a lower interest rate than the existing debt.
This is slightly better than the previous kite-flying from the Company of 20% haircut, but frankly, we can’t see this proposal being met enthusiastically. Opening gambit from creditors had Drahi losing majority control of SFR, without new capital. With initial negotiations commencing between creditors and the Company, we evaluate the initial proposals from the Company.
Investment Considerations:
- Our initial view is a flattening trade across the Senior debt structure is the most appropriate response to negotiations appearing to have commenced. It is not in the interest of the Company nor the majority of senior holders to allow short-dated bonds to mature at par. 2025 bonds debt trade c.95% which with any meaningful haircut will result in a capital loss.
- We will continue to do further work on the name, as we contemplate how any restructuring will deal with the Altice France Holdings SA (sub-bonds) entity.
- However, we remain conscious of our fundamental view that Altice SFR continues to underperform its peers and the process of a financial restructuring will not improve underlying performance.
How it might work:
- Debt forgiveness, maturity extensions and lowering of coupons have differing impacts for investors depending on where on Altice SFR’s curve they are currently invested. This highlights the conflict internally between creditors, with 2028 & 2029 maturing debt trading c.75%, and 2025 debt trading at 95%. This conflict is further highlighted with 68% of the senior debt in the 2028 and 2029 maturities. Including 2027 bond maturities, this increases to 83% of senior creditors.
- Longer-dated creditors will be more receptive to debt forgiveness given their current market value coupled with the fact that any deal would prevent short-term debt from being repaid at par.
- Similar to Intrum restructuring, a majority of the senior Secured debt is long-dated. If Drahi can get an agreement with 66%+, he can start to threaten the short-dated bond holders with a legal process to fall in line (Chapter 11/Sauveguarde). The same threat will be used against the France Holding bonds, who are out of the money.
- However, under the current proposals, Drahi would also be out of the money, and would have to inject fresh cash/assets to retain majoirty control. Drahi has already positioned signifcant assets outside the restricted group, but the fresh cash and potential insolvency should bestow France Holding SA holders with significant nuisance value. Going forward, we expect a similar long winded process, similar to Intrum.
- All of this will test the strength of the cooperation agreement over time.
- Ignoring the sub debt (Atlice France Holdings SA), a 10% haircut, coupled with a new 5% coupon across the board would equate to a c.1.5x interest coverage level. An 8% yield to maturity would be appropriate/wide for a 4.5x leveraged telecoms company.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk