Europcar : Update on the issuer

We maintain a Stable opinion on Europcar and a Neutral recommendation on its bonds at their current yield levels. The 5.125% EC Finance 2021 (B2/B+) has been callable since 15 January 2017, and given the favourable conditions on the primary market in recent months, we would not be surprised if Europcar sought fresh funding soon to prepay the paper (call at 103.844%, with at least 10 days' notice). The unsecured 5.75% Europcar 2022 (B3/B-) note trades at a YTW of about 3.9% in the case of repayment in July 2018, while its YTM stands at 4.7%. This appears fairly valued to us, despite the low rating of the bonds, taking into account the Europcar’s relatively defensive profile. - - >Support factors - - European leader in the car rental market (19% market share) and one of only three international players along with Hertz and Avis. In 2016 the group posted consolidated sales of € 2.1bn and “Corporate” EBITDA of € 254m.- A business model well balanced between business (44% of sales in 2016) and leisure customers, and less exposed to airport rentals (around 40% of sales vs. nearly 70% for Hertz and Avis), traditionally more competitive and more cyclical.- A flexible cost structure to adapt to business cycles, through dynamic, low-risk management fleet. Europcar has shown that it can quickly right size its fleet to meet demand, as investment decisions are made only a few months in advance, whilst agreements with manufacturers help reduce or increase vehicle holding periods as required. Thanks to buy-back agreements, Europcar also incurs precious little risk of losing value on the second-hand market, given that more than 90% of its vehicles are purchased under these agreements (vs. less than 50% for Hertz and Avis).- Thanks to the "Fast Lane" transformation programme, the Corporate EBITDA margin has doubled in six years.- The capital increase carried out under the IPO in 2015 helped the group slash Corporate debt substantially (i.e. excluding fleet-related financing), with a Corporate net debt/EBITDA ratio below 1x since then (vs. 2.7x before the IPO). Points to watch - - Business concentration on a small number of European countries. Germany, the UK and France account for around 65% of sales.- Highly competitive environment which may exert pressure on prices. Europcar seeks to stand out from the pack through its higher quality offering and extensive branch network.- The group is open to acquisitions. Europcar aims to generate additional sales of € 500m by 2020 through external growth, which should focus primarily on franchise buyouts and targeted acquisitions to bolster its positions. Depending on the pace of acquisitions, management believes that these could be financed by debt and has no objection to the corporate net debt/EBITDA ratio rising above 2-2.5x (vs. 1x currently).