Plastic Omnium : Issuance Focus

Plastic Omnium is preparing a new offering of € 500m notes with a seven-year maturity (2025). We estimate the group's rating at BBB/stable. In the secondary market, the Plastic Omnium 2020 issue trades on a spread of ASW+29bp and Plastic Omnium 2024, ASW+125bp. After spread tightening of 10bp between its issuance in June 2017 and the end of 2017, the Plastic Omnium 2024 paper got off to a difficult start in 2018, seeing its spread widen by 40bp since the beginning of the year (vs. +17bp for the JPM BBB 5-7 Y index) including +10bp after the announcement of the acquisition of 33.33% of HBPO in early March and +30bp since early May after the announcement of the preparation of a new issue. Prior to this latest announcement, the spread of the 2024 Plastic Omnium paper was ASW +93bp, in line with our estimated stable 'BBB' rating, especially with regard to non-rated bonds: the 2024 Groupe Seb (BBB/estimated stable: ASW+93bp), the 2024 Fromageries Bel (BBB+ estimated stable: ASW+75bp) and the 2024 Ingenico notes (BBB- estimated stable: ASW+120bp). A 30bp spread widening over the past fifteen days appears somewhat excessive for a proposed issuance and begins in our opinion to integrate M&A risks. By comparison, the proposed issuance of Iliad's 2025 paper at the end of April (estimated BBB/stable) caused the spread to widen by 10bp to ASW+105bp for the existing 2024 IIiad paper. Iliad's 2025 paper was issued with a generous premium of 30bp for an additional year of maturity at MS+135bp (i.e. a premium of 40bp vs. the spread of the 2024 Iliad paper before the issue was announced), with a likely similar M&A risk. If we apply this type of premium to the 2024 Plastic Omnium notes, we estimate the fair price of the forthcoming 2025 Plastic Omnium bond issue at around +133bp (ASW+93bp +40bp), which would partially integrate the M&A risk.The acquisition risk has to be taken into account (it could at the very most lead to one or two-notch revision in our shadow rating if it materialised today). That said, we find it fairly difficult to price in an accurate way at this juncture as the company believes it is fairly limited in 2018-19, which could therefore continue to boost its credit metrics. We advise to subscribe at ms+150bp and above i.e. on a BBB- shadow rating basis, which would ultimately represent a premium of 55bp vs. the spread of the 2024 Plastic Omnium before announcing the new issue and price in the M&A risk more comfortably. Note that such a level would also be an attractive premium vs. 'BBB' rated issuance spreads in the sector such as the Valeo 2024 issue (Baa2/BBB: ASW+34bp), Valeo 2026 (Baa2/BBB: ASW+56bp) and Hella 2024 notes (BBB: ASW+37bp).Lastly, in a more reassuring way, we are convinced that in the event of a major M&A deal, the group, known for its cautious family-run governance, will never take the risk of increasing its leverage to 3x, unless the target has an excellent quality with a high potential of fast deleveraging.>