Iliad : New bond offering

Publication date 18/04/2018 14:34 - Writing date 18/04/2018 14:32 - Equity data - Reco : Buy - Target : 320.00 EUR - Equity Analyst : Alexandre Iatrides - [email protected] - +33 (0)1 44 51 81 44 - ESG Analyst: xxx - Corporate Governance: Opportunity (2) - / - / - - - - - / - - - - - - - - - - - - - - - - > - Iliad is preparing a benchmark offering of long three-year and seven1eyear notes - Natixis and Société Générale are the leads on this offering the proceeds of which will be used for general purposes, according to the group. We believe that it will mainly be used to finance negative FCF (forecast of -€ 883m in 2018) and the recent 31.6% interest taken in eir – Ireland's incumbent telecom operator – for € 320m.. - Reiterating our Stable credit opinion but lowering our shadow rating to 'BBB' vs. 'BBB+' - Operating results continued to be strong in France despite lower subscriber net adds in fixed-line and the mobile business has become the principal growth driver of both sales and EBITDA in France. Group sales in 2018 should find support in the launch of the mobile business in Italy slated to take place before summer, and we believe the group should succeed in developing a viable business in this market, albeit with an EBITDA losses at start-up.FCF burn is the main black spot and will likely be significant this year (-€ 883m forecast vs. 1e€ 730m in 2017) because of investments in France and Italy, in both the network and in spectrum acquisition. Factoring in the 31.6% stake acquired in eir for € 320m, we calculate leverage of 1.9x at the end of 2018 vs. 1.4x at end-2017. The projected deterioration in debt metrics this year is already reflected in the downward revision of our shadow rating to 'BBB'. - We recommend subscribing to the new offering at MS+60bp (long 3Y) and MS+115bp (7Y). Buy recommendation on existing notes - We reiterate our Buy recommendation on the 2022 and 2024 notes which retain their appeal. The 2024 notes (Ytm of 1.6%, Asw+105bp) offer a pick-up of c. 50bp over the average spread of 'BBB' rated bonds with similar maturities (55bp) and their spread is at the upper end of non-rated bonds with a 'BBB' shadow rating (i.e. 84bp for SEB 2024 and 100bp for Plastic Omnium 2024)Based on the spread of existing notes, we recommend subscribing to:• the 2021 notes at MS+60bp (i.e. a yield of c. 0.6%), as against MS+70bp for the 2022 notes which is about a year longer.• the 2025 notes at MS+115bp (i.e. a yield of c. 1.75%) to benefit from a spread premium of 10bp over the 2024 notes for six additional months of maturity.The initial price talk is MS+75bp for the long 3-year tranche and MS+135 bp for the 7-year tranche. The IPT is wide and we expect a tightening of conditions from these levels.