SFR Altice France - relatively stable
All
Please find our initiation on SFR Altice France, here.
A number of you have asked us to examine Altice (Altice International to follow) and its debt stack. There are concerns about refinance risk and the overall interest bill at SFR Altice France. We are comfortable with the near to medium term for bond investors. There are no upcoming maturities until 2025 and although the interest bill could conceivably double from SFR Altice France’s current weighted Average coupon, dropping interest coverage to only 1x, but we expect CAPEX will be reduced in the coming years to allow time for inflation to drive the top line (in line with interest rates) without loss of customers. Meanwhile, the long-dated SSNs seem to have interesting downside protection.
We are having a follow-up conference call with management later this week.
Underlying Business
- SFR Altice France is essentially a utility business with stable cashflows historically supporting relatively high leverage. The business has failed to deleverage since the take private, due mainly to the large CAPEX spend by the business. This has been partially a result of the purchase of the 5G spectrum, with spectrum license payments stepping down in FY24.
- The business is subject to intense competitive pressures and in particular their pricing strategies. As seen in the Italian market, a reduction by one participant can lead to an overall reduction in ARPU for all market players. However, given the relative leverage of operators in the French market, the universal focus in the near term will be deleveraging, which will help conserve cash for SFR Altice France.
Recent News
- At the Q2 results, the Company announced the buyback and cancellation of $125m of their Senior Unsecured Bonds. This repurchase was funded by the monetisation of swaps (mainly FX swaps), with SFR Altice capturing a $33m discount from the purchases. SFR Altice France acknowledged they have another €300m of in-the-money swaps that could be used to fund further repurchases.
- The Company also confirmed its medium-term target of 4.5x net leverage guiding to higher customer numbers and ARPU, which will drive improvement in EBITDA. Additionally, as we have outlined, a reduction in CAPEX is expected in the coming years, improving free cash flow.
Model:
- The Company provides very little operational data to enable us to produce an in-depth model. Despite this, we can project forward some deleveraging from minor changes in ARPU and cost inflation.
- However, without significant movement in ARPU and considering the CAPEX requirement in the next two years, the leverage is likely to stay within the 4.75-5.5x net leverage by FY24 (before the first maturities). There is limited scope for leverage to be significantly lower (or higher) than this range without a step change in CAPEX assumptions and we therefore expect a full refinancing at inflated interest rates over time.
Investment Rationale:
- We are not taking an active position in the bonds at the current time. Concerning the Senior Secured bonds, there is a distinct lack of catalyst to decouple the bonds from wider market moves. There is a limited downside from current levels (away from wider market moves) especially given the likely high recovery value of these bonds due to the strong asset coverage and more importantly the pari-passu status of the Senior Secured bonds alongside the RCF and Term Loans. However, as we state above, there are no likely positive catalysts in the near term.
- The sub bonds are vulnerable in the capital structure and in any French restructuring process could find themselves out of the money. However, our base case is marginal deleveraging over the coming years and a future refinancing is possible albeit with lower interest coverage.
- There is the potential for further buybacks of the Senior Unsecured (sub) bonds which limited the ability to short the sub bonds.
- Finally, it may be worth highlighting that under the new Sauvegarde regime the long-dated SSNs have little to fear. Altice may be far away from restructuring, but in such a scenario, those bonds would merely drop two years of interest, term out by three years, but receive a higher coupon/armortisation and improve their relative maturity-rank vs the remaining structure. As we begin to feel the the dust settling in this market, we will keep an eye on those.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk