Indra Sistemas : Issuance Focus

Indra Sistemas intends to issue a EUR-denominated fixed rate, senior unsecured straight bond with a maturity of 6-7 years and a minimum size of EUR 300m. This is going to be the first straight bond to be issued by the company. The pricing of the latter will also be helpful for the valuation of Indra’s convertible bonds. We note that the prospectus is very light in terms of provisions (it is closer to an Investment-Grade prospectus than to a HY one).The proceeds will be used for refinancing and other general corporate purposes. In more details, the CFO said during the credit lunch in Paris that the proceeds will be used to: i/ repay the remaining amount outstanding on the 2018 convertible bond (EUR 155m) and ii/ repay part of the bank debt (EUR 100m due in 2018 and EUR 170m due in 2019 – part of this bank debt will be rolled out). The idea behind this straight bond issue is to diversify the sources of financing. Indra did not want to issue a new CB for now because shares underlying the outstanding convertible bonds represent already approximately 16% of the share capital (the group considers that it will have more leeway in this regard when the 2018 CB will be repaid).Bonds of non-rated issuers on which the credit research team has a shadow rating in the ‘BB’ category are: Louis Dreyfus Commodities 4.0% 02/2022 (ytw of 2.3%), Air France-KLM 3.75% 07/2022 (ytw of 1.7%) and Orpea 2.625% 12/2024 (ytw of 2.6%). Bonds officially rated BB (our shadow rating on Indra) by agencies trade at an average ytw around: i/ 2.50% for those with a work-out date in 6 years, and ii/ 2.75% for those with a work-out date in 7 years. To this, we should add a premium for the absence of rating (usually between 20 and 40 bp). We therefore recommend subscribing to the new issue above an issuance yield of 2.75% for a maturity of 6 years and 3.00% for a maturity of 7 years.Besides, we now adopt a Neutral recommendation on the October 2018 CB which now displays a ytm close to zero.We maintain our Buy recommendation on the 2023 convertible bond 2021 put. Though the latter also shows negative yields (ytm of -0.1% and ytp of -0.9%), on the basis of the current CB price of 107.5%, a normalized volatility of 27% and a borrow cost of 50 bp, the implied credit spread comes out at c. 192 bp, which is not expensive (the average level for BB-rated straight bonds with a workout date around October 2023 is c. 190 bp). Concerning the stock, though there is a limited upside potential in the short-term according to our equity analyst (2018 is going to be a transition year), the free cash flow is expected to increase materially in 2019, which could positively impact the stock price. Note that, since we initiated the coverage of the 2023 CB in early 2017 with a Buy recommendation, its price increased from 95.4% to c. 107.5% currently.>