High Yield : UGI Int.: Safe Haven in Our Universe

Today we are expanding our coverage by adding a BB+ credit, UGI International (UGII) , to Natixis €HY portfolio that has an average credit rating of B-. UGII is a European subsidiary of US-based holding company UGI Corp , an international distributor and marketer of energy products and services including natural gas, propane, butane, and electricity . The paper gives a quick introduction to LPG market, thoroughly covers the business model of UGII outlining main strengths and weaknesses , and concludes with relative value analysis. LPG distribution is a mature market in Europe . Although the industry faces long-term structural decline fuelled by public shift towards renewable energy and zero carbon emission, UGII is adopting to the changing world : n ew renewable initiatives (bio-LPG) coupled with operating efficiency programs help maintain margins and the top-line. UGII is a leading European player having 20%+ market share in the countries it operates in . Historically the growth has been supported by extensive M&A activity that will continue on opportunistic basis. The management has clearly a good track record in transaction execution . There are still some geographies that are less concentrated. For instance, Italy is very fragmented, while Eastern Europe is rather not and UGII is the l argest distributor of LPG in France, Austria, Belgium, Denmark, Luxembourg and Norway and one of the largest distributors of LPG in Poland, Hungary, the Czech Republic, Slovakia, the Netherlands and Sweden . UGII is highly concentrated i n France that accounts for 50% of revenue . Globally, African LPG market is growing 4-5% per annum that potentially might be of interest to UGII and its parent in the medium term . FCF generation is variable, but ample from one year to another . The volatility of the top-line is well offset by pass - through clauses in contracts and comprehensive hedging policy in place that helps delivering stable to slightly growing margin . Credit metrics are sound and even in line with an IG credit, albeit the size, limited product offering and profitability weight on the overall credit rating. Customer base is diversified. In the past, UGI International upstreamed cash to fund an acquisition at the parent company level. In FY2019 , this dividend was financed with RCF that temporarily deteriorated the credit profile . However, from time to time the parent might inject equity to UGII to fund local M&A activity of its subsidiary. Moving on to relative value, UGI International is trading quite wide relative to the index. Considering a solid fundamental profile coupled with aggressive accommodative policy conducted by major central banks, we think there is great potential that spreads of UGI 3.25% 2025 will tight en over the next 6-12 months. Notes are trading to call in November 2021 with 1.9 1 % YTW, which is very attractive for a BB+ name in the current environment.