Klöckner Pentaplast : Focus Emission

We recommend subscribing to the issue at a yield above 7%.The best comparable bonds are in our view ARGID 6 5/8% 5/8 09/15/2023 and VERALL 8 ¼% 03/15/2022 PIK toggle notes, although we prefer the former. The implied YTM and YTW indications are quite low, given KP’s distress history, non-existing recovery prospects and due to the fact that KP is not a frequent bond issuer. Therefore we require some premium.Our recommendation is driven by our view that there is realistic and low hanging synergy potential from the Linpac transaction, the ability to generate material free cash flows once cash restructuring costs have been spent and that SVP could seek an IPO in the short- to medium-term which could result in a significant de-leverage of the group.Having said this, the latter might be also a strategy by management to bait fixed income investors. In fact, if there won’t be an IPO or current equity valuations deteriorate, which in turn makes a listing unattractive or impossible for SVP, there will be a significant refinancing risk that will continuously rise if the PIK toggle notes coupon will be accrued instead of paid out on a cash basis. Rising interest rates could also present a hurdle for KP’s credit story as the current interest coverage at pro forma c.2.3x is extremely low, constraining the nonetheless sound setup of KP. This needs also be taken into account in light of the recovery potential of the PIK toggle notes, which are virtually non-existent. Raw material price inflation and KP’s inability to – at least temporary – pass through these costs burdens to clients is a risk pocket that needs to be monitored as cost savings can only offset the margin eroding effect to limited extent, albeit this has worked out fine for KP in the last few years.>