Making space for more new names
All,
Clearly, H121 has been phenomenal and we are sitting on unlevered 23% net return for the first six months. So naturally, we should throw out a few names where the opportunity now lies behind us and that we no longer consider worth covering - unless you do, that is.
New Names:
- Real Estate: Focus seems to have shifted somewhat to a number of real-estate-related names, including Vivion, Adler, and Corestate following a threat from Viceroy that they are to come out with a piece on one such name (seem to have signaled that it’s not Adler). The discomfort with many RE-related names seems to be a tendency to engage in shell games with undisclosed affiliates that frequently leave the value of properties unimpaired - despite the pandemic. Clearly, real estate is not everyone’s taste, so we’d like to mix it with other names you would like us to look at (or more real estate - as you like it).
- We have also been asked to look at United Group.
- We may choose one or another recent refinancing or a new issue that looks particularly precarious.
- Any leads or requests are appreciated.
Names to go onto the Shelf:
Adient:
- For the world’s largest automotive seats manufacturer, the opportunity was mostly in 2018/19, sometime after it spun off from a shareholder, we think knew only too well about the wall of new models, even though management itself seemed to know nothing about it. New management fixed the problems in record speed and the Pandemic then only prolonged some of the troubles. But overall the name has been safe again for a while. Some fringe business have either been spun-off or closed. Some JVs sold to their partners and the entire management and reporting structure has been rearranged. So now the IG spread very much reflects that new stability and we don’t even see the name as a particularly high beta candidate for a cheap short. Unless anyone wants us to keep covering the name, we will be selling a legacy position we still carry on the book and exit before the end of this week. The 9% 2025 bonds we hold trade at 109.5c/$, yielding 1.6% to worst, and are properly call constraint.
Pizza Express:
- The UK’s largest pizza chain is far from out of the woods and we still hold a fair equity position in the name which we are not intending to sell at the moment. The new bond is a partial exit for us and its worth noting that debt plus equity today (incl. new money) trades well above par in pre-restructuring terms. It is of course not the only name to do so. However, the new bond is trading well and at ~6.7% is trading fairly around par, provided the re-opening remains underway. That it’s probably a good short if re-opening fails needs no particular analysis, so we see no immediate urge to update our admittedly dated analysis of Pizza Express with the new material from the bond issue. But we understand if you do and perhaps you have even been looking at / hold some of the equity. So please let us know if you’d like it spread out one more time on the basis of the new numbers or if we should cover it going forward.
Pro Gest:
- One of our favourite trades last year as along with Boparan it represented the very few names that recovered without a covid story. In 2019 the family faced 1) a government with a green coalition partner who had revoked the license for its largest plant, a project into which it had sunk far more than anticipated and more than it picked up with its all-or-nothing bond issue, 2) material antitrust fines that on their own could have triggered insolvency, 3) worsening margins in its containerboard business 4) shaky uncommitted overdraft financing at opco level (typical in Italy, but nothing for bondholder's nerves), 5) the list is a lot longer… Today the plant is running, the ramp-up is looking good, the licenses have been obtained, the fines have been spread over many months, and the opco financing has been bundled by Carlile (even if bonds are now structurally even worse off). We still own a 6% position now trading above 96c/€ for a 4.5% yield, because we’ve been holding out for a 96.0 bid (generally a stupid thing to do). So with wade-to-containerboard spreads continuing strong and the company looking to be opportunistically acquisitive, we think it’s a good time to sell.
- Compared to Adient above, a rock-solid name, Pro-Gest is not. We are very impressed with how management have turned around the company, but it is an inherently more cyclical business (paper cycles, not credit cycles), its forecasting is unreliable and it feels just a little gaff-prone. We’ll sleep better without it. Again, we see no immediate reason to cover the name now from a long or short perspective, but will of course maintain coverage if you would like us to.
Europcar:
- VW are coming with a 50 Euro Cent bid being discussed. We are confident this transaction will take place and assume it will trigger CoC clauses all around. Thus there is little point in spending any more time on it.
Greensill:
Back in March and April we had done a lot of work on Greensill and GFG to identify and evaluate certain GFG assets and understand which bank had which exposure against which subsidiary. But we have had little response, Greensill itself has offered few opportunities and the various parts of the GFG empire are going separate ways, either being refinanced or wound up, or otherwise.
Teva:
- The Company continues to deleverage and although there is currently no settlement for the opioid litigation, a break-through should be forthcoming post a global settlement for J&J and distributors. Unlike the previous deal in Cleveland, which had an agreement in principle, Teva are not part of the current proposed settlement. This is likely due to limited cash settlement offered by Teva (instead offering product over a 10yr period) with the incentives for the AGs to agree cash settlement as soon as possible with J&J and the other distributors. The Company remains confident that the cash component is likely to remain small as it is not in anyone’s interest to push for a higher cash component (potentially pushing Teva to seek bankruptcy protection and all participants losing out).
- We exited our position in August 2020 but have maintained our model on the name as there always remained a threat of the proposed (Cleveland) deal to not form the basis of the settlement. However, the deal looks to be broadly in line with the previous one, albeit longer payment terms. We have come close to settlement before but all commentary from all participants point to a resolution before year-end.
Again, please let us know if you would like us to continue covering any of the above names.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003