Loxam : Loxam set to acquire Lavendon for around € 720m after rival TVH declines to sweeten bid.

Monday 30 January 2017 - - - - Barring new developments, the acquisition of Lavendon is expected to be completed within the next few days. Thereafter, Loxam's rating is likely to be downgraded to 'B+' in the coming months (logically just prior to launching the bond offering). On Friday afternoon, when TVH declined to sweeten its bid, Loxam bonds all fell by 1-2 pts in anticipation of a forthcoming downgrade and are stabilising at these current levels. - > - - Until the group returns to the bond markets within two to three months, we are reiterating our Neutral recommendation on the 2021 and 2023 notes. Near term, their prices could continue to remain under pressure given: 1/ flowback of paper onto the market, led by investors who do not want to own notes rated in the single-B category; and 2/ repricing resulting from the new issue premium (as such, the 2023 notes are more at risk in our opinion). All told, we still believe that Loxam is pursuing a sound strategy and that once these acquisitions are digested, the group's credit profile will be enhanced, not least because it will be far less exposed to France's construction sector. Hence, in relation to comparable 'B+' bonds, we believe their fair price is not far off. The closest peer is, in our opinion, the secured EUROCA 2021 notes (rated B1/B+), which offer a negative YTW currently, as it is calculated on the assumption of a call being exercised within 10 days. However, if the yield is re-calculated on the basis of a refinancing in July 2019 (when the call price drops to 100%), then the yield would be 3.1%. By comparison, the YTW of the Loxam 2021 notes is still calculated on the first call date in July 2017, but assuming that these bonds will not be refinanced for the time being (this will depend on the market's ability to absorb a large issuance volume, bearing in mind that refinancing the acquisition loan is a top priority), the yield in July 2019, when the call price falls to 100%, would be 3.2%, which is finally in line with the pricing of Europcar notes. - - Regarding the 2022 notes, we are lowering our recommendation to Neutral vs. Buy pending the upcoming bond offering which might offer a more attractive entry point on the credit. Despite a Negative credit opinion, we technically maintained a Buy recommendation in our Special Comment of 30 November 2016, arguing that with a YTW of over 5% at the time, the investment was still attractive relative to other single-B papers, and that these notes were less likely to be impacted by a downgrade of Loxam's rating if Lavendon were taken over (already rated in the single-B category). We are still convinced that among the three existing Loxam notes, these offer the most attractive risk-return trade-off and that, even assuming a downgrade to 'B-', the notes have a better relative value than a number of similar bonds. The bonds are currently trading at between 105.25 and 105.75%. At the ask price, the YTW is 5.2%, calculated on the 23 July 2019 call date. By comparison, the YTC of the EUROCA 2022 paper (B3/B-), calculated at the same period, would be around 4.2%.