Tuesday 15 May 2018 by FIIG Research Company updates

Company updates – Aroundtown, Dean Foods, Hertz, Mallinckrodt, Petrobras, RSEA, Sprint Corp, Talen, Transocean, Valeant, Virgin

New Aroundtown DirectBond, MNK downgraded by S&P, Transocean purchases submersible rig through joint venture, and Sprint seeks consent to remove change of control risk. First quarter 2018 results from Dean Foods, Hertz, MNK, Petrobras, Talen and Valeant. Research initiates coverage on Virgin’s existing USD notes

New DirectBond

The following bond/s were added to the DirectBonds list:

  • Aroundtown SA AUD 4.50% 14 May 2025 senior unsecured notes. View Factsheet*. The bond is rated BBB+ available to wholesale investors at a yield to worst of 4.35%pa.

Dean Foods 1Q18 results

On 8 May 2018, Dean Foods Company (Dean Foods) reported its 1Q18 results.

Key points:

  • Free cash flow provided by continuing operations was USD22m, a USD3m increase from the prior quarter Total outstanding debt for the quarter, net of USD28m cash on hand, was circa USD884m
  • Net debt to bank EBITDA total leverage ratio at 2.68x
  • Adjusted gross profit was USD448m, down from USD465m in the prior quarter
  • Adjusted operating income was at USD32m, down from USD36m in the prior quarter
  • Adjusted interest expense at USD14m, down from USD16m in the prior quarter
  • Adjusted net income (loss) was USD13m, up from USD12m in the prior quarter
  • Raw milk costs in 1Q18 of USD14.35 per hundred-weight decreased circa 13% from 4Q17, and down 16% in the prior quarter
  • The company reaffirmed FY18 adjusted earnings expectation

The Dean Foods USD 6.50% March 2023 bond is rated BB- and available at yield to worst of 6.22%pa (at a 15 March 2021 redemption date) to wholesale qualified investors.

Hertz 1Q18 results

On 8 May 2018, Hertz Global Holdings (Hertz) reported its 1Q18 results.

Key points for US Rental:

  • Total revenue was USD1.43bn, up 5% from USD1.35bn compared to the prior quarter (4Q17)
  • Income (loss) before income taxes decreased 48% to USD434m, from USD499m in 4Q17
  • Improved adjusted corporate EBITDA at decreased loss of USD48m, from prior loss of USD116m
  • Total revenue per user (RPU) per month increased 5% to USD975m compared to 4Q17, a key performance measure for the company
  • Transactions days increased 6% as a result of growth in both airport and off airport business
  • Vehicle utilisation improved by 430bps to 79% on higher transaction day volume and flat vehicle capacity compared with a year ago

The following Hertz bonds are available for wholesale investors:

  • Hertz USD 7.625% June 2022; rated BB- at YTW – 6.96%pa
  • Hertz USD 5.50% October 2024; rated B- at YTW – 8.96%pa

Mallinckrodt 1Q18 results

On 8 May 2018, Mallinckrodt PLC (MNK) reported its 1Q18 results.

Key points:

  • Net sales increased to USD572.6m, compared to USD560m in the prior quarter (4Q17)
  • Gross profit at USD276m, a decrease from USD300.1m in the prior quarter
  • Net (loss) income at USD18m, compared to net gain of USD399.2m in the prior quarter
  • Net cash from operating activities at USD17.8m, from a loss of USD97.4m in the prior quarter
  • Net cash from investing activities at a loss of USD427.6m, from USD513.5m in the prior quarter
  • Net cash from financing activities at decreased loss of USD338m, compared to USD498.3m in the prior quarter

On 14 May 2018, S&P Global Ratings lowered its corporate credit rating on MNK to B+ from BB-. The outlook is stable. The rating action followed MNK’s 1Q18 results reporting lower than the rating agency’s expectations, and the company’s underperforming specialty generics business moving to discontinued operations. The following rating actions also occurred:

  • Issue level rating lowered on MNK’s senior secured debt to BB from BB+. The recovery rating on this debt remains ‘1’, reflecting S&P’s expectation of a very high recovery (90-100%) in the event of payment default
  • Issue level rating lowered on the senior unsecured debt to B+ from BB-, with recovery rating remaining at ‘4’ (30-50%)
  • Issue level rating lowered on the subordinated debt to B+ from BB-, with recovery rating remaining at ‘6’ (0-10%)

The rating downgrades reflects S&P’s expectation that lower projected 2018-2019 EBITDA, along with potentially lower than expected proceeds from the sale of the generics business used to reduce debt, would likely result in

MNK's leverage sustained firmly above 5x in 2018-2019. The downgrade also reflects increasing operational risks, including potential competition for H.P. Acthar Gel and INOmax, the challenging reimbursement environment for H.P. Acthar Gel, and increasing opioid-related lawsuits against the company. The combination of these factors results in a weaker credit profile, making the company more similar to the 'B+' rated peers. (Source: S&P report)

The following MNK bonds all rated BB- are available to trade:

  • MNK USD 4.875% April 2020 at YTW – 5.94%pa
  • MNK USD 5.75% August 2022 at YTW – 9.61%pa
  • MNK USD 5.625% October 2023 at YTW – 9.75%pa

Petrobras 1Q18 results

On 8 May 2018, Petrobras reported its 1Q18 results.

Key points:

  • Gross profit increased 9% to USD8.25bn, compared to USD7.56bn in the per corresponding period (pcp) in 1Q17. The company notes that this was mainly due to the increase in Brent prices resulting in higher margins of oil exports. There were also high volumes and margins of natural gas sales
  • However, exports and domestic sales volumes of oil products dropped, and the improvement of Brent prices resulted in higher production taxes
  • Operating income was USD5.49bn, a 21% increase from USD4.54bn in pcp, mainly due to the gains with sale of Exploration & Production assets (Lapa, Iara and Cacara). The result was also driven by tariff payments to the third party gas pipeline company Nova Transportadora do Sudeste S.A (NTS)
  • Net finance expense was USD2.24bn, a 9% decrease from USD2.46bn in pcp. The company notes this as a result of lower financing expenses attributing to due prepayment of debt, foreign exchange (FX) gains by depreciation of the Real against the USD and FX gains driven by the depreciation of the USD against the Pound Sterling
  • Net income attributable to shareholders was USD2.15bn, a 51% increase compared to USD1.42bn in pcp
  • Adjusted EBITDA was flat at USD7.91bn, compared to USD8.03bn in pcp, mainly as a result of foreign translation effects. The adjusted EBITDA margin reached 34% compared to 37% in pcp
  • Free cash flow was USD4.01bn, a 6% decrease compared to USD4.25bn in pcp, due to the decrease of the net cash provided by operating activities

The following Petrobras bonds all rated BB- are available to wholesale investors:

  • Petrobras GBP 6.25% December 2026 bond available at YTW of 4.87%pa
  • Petrobras USLIBOR+2.14% January 2019 bond available at YTW of 2.43%pa
  • Petrobras USD 7.375% January 2027 bond available at YTW of 5.86%pa

RSEA buyout backed by London debt funder

On 14 May 2018, the Australian Financial Review reported that London listed debt funder Intermediate Capital Group (ICG) is backing the USD145m buyout of RSEA, following an exclusive due diligence period granted by private equity owner CHAMP Ventures.

ICG submitted the bid in partnership with RSEA’s management, which has been seeking to position RSEA as Australia’s leading national workwear distributor. The asset manager has USD44bn in assets under management and is expected to support management’s growth strategy to roll out new stores and continue to invest in its service infrastructure.

The expectation is that the bonds will be called possibly in July. There is a 30 day notice period (but not more than 60) and the next few call dates are:

  • 27 April 2018 @ 102
  • 27 July 2018 @ 102
  • 27 October 2018 @ 102

Read the RSEA research compendium report*

Sprint seeks consent to remove change of control risk

Sprint is seeking consents to amend the ‘Change of Control’ language within the indentures governing its notes. The amendments would exclude the potential T-Mobile merger from qualifying as a Change of Control. The event would require Sprint to offer to repurchase the notes from holders at USD101.

To trigger a ‘Change of Control’ the company not only has to be sold or transferred, but also face a rating decline from one or both of the rating agencies. Since the T-Mobile merger announcement, rating agencies S&P and Moody’s have placed Sprint’s ratings on review for an upgrade. In addition, all of Sprint’s notes included in the consent solicitation are trading above USD101. If the consent event is successful, the Change of Control redemption, at this time, will unlikely be enforceable or attractive, and more likely a precautionary measure.

Noteholders of the following Sprint bonds would have received an email regarding the consent solicitation:

  • Sprint USD 7.875% September 2023 bond; rated single B at YTW – 6.17%
  • Sprint USD 7.625% February 2025 bond; rated single B at YTW – 6.60%

Please contact your relationship manager if you have any questions regarding the consent solicitation.

Talen Energy 1Q18 results

On 11 May 2018, Talen Energy (Talen) reported its 1Q18 results.

Key points:

  • EBITDA for the quarter was at USD219m, an increase of USD110m from the prior comparative period (pcp) in 1Q17. The increase was primarily driven by price increase for both capacity and energy (+USD67m) and cost savings (+USD32m)
  • Free cash flow was at USD110m, against USD11m in pcp. In addition to the price and cost improvement, the better outcome also reflected lower capex
  • The company reiterated its 2018 mid point guidance of USD700m for EBITDA, and USD100m for free cash flow (ranges are USD625m/USD775m for EBITDA and USD25m/USD175m for free cash flow). Guidance for the FY18 is weaker than FY17 results, despite an improvement in the price environment
  • Liquidity was USD1.1bn, mainly from credit lines as the company only has USD64m of cash
  • Talen has minimal debt maturities in 2018, with USD9m due during the year. Debt maturities are also very limited for 2019 and 2020, at USD31m and USD146m, respectively
  • Market commentators have noted Talen’s aggressive cost cutting and pointed to them as a reason for some unplanned outages in late 2017. It has to be questioned if these cost reductions are sustainable in the long term.
  • There remains concerns about debt funded dividends, following the payment of a USD500m special dividend in late 2017

The following Talen bonds are available to trade:

  • Talen USD 9.50% July 2022 bond rated B+ at YTW of 10.45%pa
  • Talen USD 6.50% June 2025 bond rated B+ at YTW of 12.22%pa

Transocean JV with Hayfin Capital Management

On 9 May 2018, StreetInsider reported that Transocean Ltd (Transocean) purchased a 33.3 per cent interest in semisubmersible West Rigel, through a joint venture with funds managed and/or advised by Hayfin Capital Management LLP (Hayfin). The total purchase price for the rig was USD500m, built by Sembcorp Marine Ltd’s Jurong Shipyard Pte Ltd.

The rig, renamed the Transocean Norge, is a Moss Maritime CS60 design harsh environment semisubmersible and considered to be among the most capable newbuild semisubmersibles in the world. The purchase allows Transocean exclusive right to market and operate the rig and immediately begin engagement with customers.

The Transocean USD 9.00% July 2023 bond rated B+ is available at yield to worst of 5.95%pa (at a 15 July 2020 redemption date) for wholesale investors only.

Valeant 1Q18 results

On 8 May 2018, Valeant Pharmaceuticals International, Inc. (Valeant) reported its 1Q18 results.

Key points:

  • Revenue was USD1.99bn, a 5% decrease from USD2.11bn in the prior quarter (4Q17)
  • Gross profit was USD1.42bn, a 6% decrease from USD1.51bn in the prior quarter
  • Total Adjusted operating expense at USD679m, a 9% decrease from USD747m in the prior quarter
  • Adjusted EBITDA at USD832m, a 3% decrease from USD861m in the prior quarter
  • The segment results are as follows:

  • Repaid circa USD280m debt with cash on hand during the quarter
  • Total debt issued was USD25.57bn as of 31 March 2018, with debt maturities totalling USD25.42bn beyond 2024
  • The company raised FY18 revenue and adjusted EBITDA guidance bridge to USD8.15bn and USD3.15bn, respectively

On 10 May 2018, Reuters reported that Valeant is seeking to refinance its existing credit agreement and borrow USD3.815bn of new Term B loans under the credit agreement. The proceeds of the new term B loans and new debt securities are expected to be used to refinance the company’s outstanding Term B loans, to the effect of extending the maturity date of its revolving facility to five years from closing date. The company also intends to issue USD750m of secured debt securities and USD750m of unsecured debt.

The Valeant USD 5.50% November 2025 bond is rated BB- and available at a yield to worst of 5.17%pa for wholesale investors.

Virgin Australia research coverage

We initiate our research coverage on Virgin Australia’s (Virgin) 8.5% notes due 2019 and 7.875% notes due 2021. Please see our recommendation and credit outlook on the FIIG website.* A summary of the report is available here.

The following Virgin bonds are available to trade:

  • Virgin USD 8.5% November 2019 bond rated B- at YTW – 5.95%pa
  • Virgin USD 7.875% October 2021 bond rated B- at YTW – 7.04%pa

Please note that yield to worst is accurate as at 15 May 2018, subject to change. S&P ratings are shown.

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