CGG : Debt restructuring fairly favourable to holders of the straight bonds but based on a persistently uncertain outlook

After examination of the agreement in principle on the debt restructuring programme and given that our estimated recovery rate on the straight bonds is higher than the current market price, we are raising our recommendation to Neutral vs. Reduce on the 2020 bonds. To sum up: 1/ there may be no value in selling the bonds at this level before recovering shares with potentially higher value; and 2/ these shares should be sold in a timely manner before the group's liquidity shrinks too much. We are maintaining our Reduce recommendation on the convertible bonds (OCEANEs) given a potentially smaller upside (estimated recovery rate vs current market price). - Note, however, that the validity of our analysis depends on the CGG shares being sold at a limited discount (possible share overhang after the lock-up period – unspecified at this juncture – upon completion of the restructuring). Additionally, minor changes to the parameters for the enterprise value calculation (EBITDA and EV/EBITDA multiple) have a significant impact one way or the other on the calculation of recovery rates. - Our conclusions also depend on: 1/ the opening of an accelerated financial safeguard procedure (our assumption) today to avoid a cessation of payment situation and a trigger of events of default/cross default (because the 30-day grace period for unpaid interest on the 2020 bonds ends today); and 2/ approval of the plan by creditors and shareholders, but we have few misgivings about this given the balance of power in voting committee meetings which will be examined more closely in this report. - In the medium term, however, although the post-restructuring leverage ratio will likely be respectable, cash burn continues to attract genuine attention. Given a post-restructuring cash position estimated at just over $ 500m at end-2017, if business does not pick up sharply (recurring FCF after restructuring estimated at -$ 153m annually), the group can hold out only for a little more than two years (i.e. early 2020) at the end of which cash burn will reach the covenant level on the senior secured debt (minimum liquidity of $ 185m). And CGG would again hit the wall ... - >Support factors - - A world leader in land & marine seismic exploration services, and related equipment.- The GGR division (multi-client database operation and data processing) is a profitable business.- Given the market environment, CGG has reduced and continues to downsize its operations on several levels (e.g. job cuts, fleet reduction and capex cuts); The fleet is to be placed in a separate entity co-owned by Eidesvik.Points to watch - - Capex budget cuts by major customers, attributable to falling oil prices;- In 2015 the group completed an exchange offer on dollar-denominated bonds for a secured term loan facility which further subordinated holders of euro-denominated bonds.- Inauspicious 2017 outlook: the group anticipates in 2017 similar operating results to those in 2016, albeit with weaker cash generation (no positive variation in the WCR). Given a lag in the market recovery, the group's results will probably prevent it from generating the cash flow needed to service current debt in the years ahead.- An unsustainable balance sheet in the medium term. As a result, the group announced a debt restructuring plan aimed at full equitisation of straight and convertible bonds.