Loxam : Update in the wake of Loxam's interest in Lavendon

Wednesday 30 November 2016 - - - - Following Loxam's announcement early week of its interest in Lavendon, the LOXAM bonds shed 1.5 to 2 pts and slipped 2 pts further midweek after S&P placed on creditwatch negative. - The fall in Loxam's bond prices stemmed from the prospective releveraging with the envisaged acquisition of Lavendon (EV of at least € 600m) immediately after taking over Hune (approx. € 115m) and buying back shares (around € 100m). There is also the possibility of a bidding war between Loxam and TVH which has already submitted an offer for Lavendon. But we believe Loxam's management will remain cautious and we do not see it paying over the odds or increasing leverage above 4.5x. - At this juncture, we are lowering our Credit Opinion to Negative from Stable to reflect potential pressure on the rating in the event of a takeover bid on Lavendon. We are reiterating our Neutral recommendation on the 2021 (mid YTW of 1.8% on the 1st call date in 2017) and 2023 secured notes (mid YTW of 3.6% at maturity), despite the repricing in recent days (which could have warranted a Buy recommendation), because if the Lavendon acquisition materialises and if Loxam is downgraded to 'B+', these notes could be further exposed temporarily to “forced sellers” (given theit move into the Single-B category). - In contrast, we reiterate our Buy recommendation on the 7% 2022 notes (YTW of 5.1% with mid-price at 106.25%), which, in our view, currently provides the best opportunity to take positions in the credit, because: - - If Loxam launches a bid for Lavendon, this paper (7% coupon) will most likely be repaid at its first call in July as part of an overall refinancing, which would today equate to a Yield-to-Call of above 4% (based on a ask price at 106.75%). Moreover, if Loxam is downgraded 'B+' vs. 'BB-', we believe this note will be less affected by the change of category (since it is already rated 'B'). - - But if Loxam renounces to acquire Lavendon, investors will have "locked" their yield. The yield could even be higher if the group considers that it is not attractive enough to refinance the bond so early, at its first call date. If the notes were to be called, say, in July 2019 (when the call price falls to 101.75%), then the Yield-to- Call would be about 5% over three years (based on the ask price), compared with an average of 3.6% for comparable bonds with repayment over the same period. - >