Vallourec Rights Issue

All,

A rights issue after all. The possibility had been touted by the company for a long time and even in hindsight seemed an increasingly remote proposition. While fundamentals at the company had been improving since 2017 and some industry fundamentals were shifting in Vallourec’s favour, the relatively rich price of the bonds, coupled with the less than inspiring oil price, macro development, drill sector momentum etc. had prevented us from taking a position. 

We are wondering if clients had been putting the company under pressure to improve its finances before allocating orders to Vallourec. From a timing position there is only the RCF maturity in Feb 21. Unfortunately the company did not take our questions on the call. 

Predictably, the banks are getting out ahead of the bonds by cash on balance sheet and €800m rights issue - underwritten by a bank syndicate (with BPI France to maintain their stake and Nippon Steel confirming dilution to 10% post issue). 
Vallourec released results last night, slightly below our expectation on EBITDA and leverage. On the call, management improved guidance for EBITDA for 2020 to €500m and slight FCF positive, versus €482m EBITDA and a similar view on FCF per model.

The leverage post rights issue will be 2.8x (based on €500m EBITDA FY2020) with a new 4yr RCF facility of €800m undrawn.  The transaction will remove any debt maturities until October 2022.
The 24s are up 15% this morning. Shares are down 15%.

Tomas