Intralot - Buying the 24s for 5% of NAV

All,

We are buying 5% of NAV in the Intralot 24s at 52c/E.

Intralot have announced a renewal and extension of their USD line, now extending to $40m. The facility is to be used within the US business and may therefore not be directly drawn to fund the repayment of the bonds, but indirectly the US business can pay for its own R&D in the future and the liquidity accrues to the group. That would layer the bonds, but it's overall good news.

More importantly, back in June we anticipated that the 21s would trade off into the Q2 results, but that has not materialised. Instead it seems that a solution is underway. The company will be looking to refinance the 21s at par-ish, but it needs a solution to the 24s. Buying them back at 50% seems to be the solution as since June their value does not seem to have moved.

If the company can use its liquidity to back a buy-back scheme at 50% (cash from balance sheet - say E15m, Helenic Lottery E20m, Gamenet Stake E55m, reflux from new US facility E35m, totalling E125m + some further liquidations) then it can reduce its net debt by that same E125m (by far the highest return on capital for the foreseeable future), arriving at gross debt of some E550m. On proportionate EBITDA of E90m+ the company would be some 6x levered into a refi / extension of the 21s of which E120m could be achieved with Sr. secured paper.

The bottom line is that given the market is already buying the 24s at 50% this type of deal seems already in the works and thus appears to be informally / hypothetically agreed. There are strong vested interests in resolving the 21s on all sides and a solution to the 24s (market based) appears to be already in execution.

Thus the timing is the same as anticipated in June (spoilt by the very deal that gives us some of our confidence), but the story is coming together anyway. The company is working towards a deal to refinance the the E250m, for which it is raising cash, but depending on success of raising cash and buying back bonds (via third parties most likely to avoid the news flow) there may be a combined refinancing in store at some point, giving the 24s substantially more upside.

The positioning in the 24s promises prima facie the same 25% YTM as in the 21s and if the 21s receive a E120m secured strip as part of their refinancing the remaining exposures trade pari passu. We think however that the 24s will re-rate into that event just as much as the 21s while carrying a better upside/downside profile due to their lower price and the off-chance of a pari passu refinancing of the entire structure in the end. We are therefore taking a position in the 24s with a view to trading between 75c/E and par following the refinancing.

We do not anticipate major revelations on the forthcoming call. Please refer to our model / call the desk for detailed assumptions and expectations.

Wolfgang