High Yield : Full Risk On!

This paper provides a complete overview of the French rental equipment sector with thorough analysis of the largest French players Loxam and Kiloutou. For those who are familiar with the sector and primarily would like to get our outlook on Covid-19 for both companies, please refer to the Covid-19 and Relative value parts of the study. The French c onstruction industry, the main end-market of the rental equipment sector (65%-70% of the revenue) , was growing since 2016 until early 2020 primarily due to (i) broad economic expansion in France , (ii) low interest rates that boosted residential and non-residential construction segments and (iii) favorable government measures. The rental equipment industry , which follows a more amplifying trend, was growing by +10% a year during the same period . The other important driver of the top-line growth over recent years in the industry was M&A activity , as t he broad network of branches and extended offering are key factors for the increasing penetration rate of the rental equipment sector and gradual switch from buying to renting . Both Loxam and Kiloutou have been active on this front albeit with different approach es : Ki l outou has been focused on bolt-ons, while Loxam did large transactions. The overall European market remain s extremely fragmented with Top-3 leading players account ing for 14% of the market , providing a big room for potential consolidation. Indeed, the coronavirus outbreak has significantly hit earnings of both companies: in early days of lockdowns , the top line declined by up to - 80% yoy on a lfl basis depending on the geography. Importantly, European countries have been differently impacted by the lockdown measures, that’s why Loxam is better positioned to cope with the crisis as it is more geographically diversified . I n June , Loxam s aw volumes recover to - 7 % yo y on a lfl basis while Kiloutou to -10% . The companies’ ability to largely cut capex and preserve liquidity is a big positive that helps navigating the downturn. However, we do expect credit metrics to deteriorate in FY2020 and to be elevated going into FY2021 as the recovery in the construction sector will take some time. W e like the underlying trends of the business, believe in management’s ability to preserve cash as they did back in 2009, which will provide a significant liquidity cushion , and see huge potential in further consolidation in Europe and increase in penetration rate . Considering a ll the fundamental factors c oupled with extremely accommodative monetary polic y , we recommend to overweight unsecured CCC+ tranches (trading at 8 80 bps in terms of z-spread) over secured notes (520bps the most attractive one) . W e prefer Loxam July 27 c22 notes. Comparing secured tranches April 26c22 of Loxam and Kiloutou 26c22 based on our estimate for the leverage in FY2021, Kiloutou appears expensive in terms of offered spread per expected leverage : 8 4 bps vs. 1 0 5 bps for Loxam.