AMS Osram - Revisiting the name - Positioning

All,

Please find our updated analysis post the Q3 numbers last month here.

We have revisited the name in light of recent issuance in the high yield market. We don’t regret our decision to exit the name on the back of the euphoria of the refinancing plan in late September as we envisaged a difficult refinancing market. However, the Company has posted neutral Q3 numbers (marginally ahead of our projections) coupled with a cautious outlook for FY24. More importantly, the Company has achieved a higher sale and leaseback amount, and with EGM approval received for the underwritten rights issue, the stage is set for them to launch their HY deal.

Investment Rationale:

- We are taking a 2% long position in the 0% March 2025 Convertible bonds. At 89.625% the converts yields 8.5% to maturity. Assuming the refinancing is executed, the 0% convertibles will become the next maturity, and post equity injection, leverage will fall to 3.9x.

- There is potential further upside if the Company decides to repay/tender for the outstanding converts which would make sense to both investors and the Company.

- However, even if it is not taken out, the total net leverage will be reduced from 5.4x to 3.9x (including the liability for the Osram put). The 0% 2025 Convertible will be the shortest-term debt with bank debts and RCF longer dated.

- We maintain there is also a middle ground where the Company tenders for the 0% bond in the mid-90s providing upside to both bondholders and the Company.

- AMS Osram will benefit from the macro shift in their end markets but see some execution risk in implementing their recapitalisation plan.

- We exited our position in late September on the back of the announcement from the Company outlining their refinancing plans. We used the moment of euphoria to take profit having entered into our long position of 2% in the 2025 HY bonds at 88.5% (exited at 98.5%) and 2% in the 2025 Convertible Bonds at 75% (exited at 89%).

- Current offer prices are at similar levels to where we exited, but with Q3 numbers behind us and EGM approval received, there is still upside in both the bonds and the convertible.

- The July 2025 bonds will be taken out on the back of the upcoming refinancing which gives an upside on the straight bond of c. 2pts over a 6-8 week period, which includes 1.5pts pull to par plus 0.5 pts of interest.

- Downside is from a failed deal. The rights issue is subject to a successful HY issuance, with the sale and leaseback subject to the rights issue. Therefore, the total plan hinges on the HY offering. With the market reopening this week, we feel more confident a deal will be done. If a bond deal fails, we could envisage the 0% convertibles trading down to the 70’s.