Orpea : Issuance Focus

Orpea, the European leader in retirement homes, is poised to launch its first public non-convertible bond issue. Traditionally financed by banks, the group has gradually diversified its debt by issuing its first convertible bond in 2010 and launching private bond placements in the Schuldschein and Euro PP formats from 2012. Orpea wants to raise at least € 300m from this new bond issue, with a maturity of 5-7 years. This operation will extend the average maturity of debt and generate funds for future acquisitions.The group has an excellent image in the equity and debt markets thanks to a very consistent track record of top-line and earnings growth. Not only does it operate in a lucrative sector, even if this is less and less true in France, but it has above all demonstrated its capacity to outperform peers over the long term. Its principal strengths include the stability of management and its strategy, a business model evenly balanced between organic growth and M&A (avoiding very large deals that are more expensive and riskier), a growth strategy focused on regions with strong purchasing power and a partial property ownership strategy that differentiates it from the rest of the sector. The main potential concerns for investors reside in high debt of € 4.1bn, representing leverage of 8-9x depending on what adjustments are made. However, we feel this ratio should be set against the large property portfolio conservatively valued at € 4.2bn (excluding buildings under construction), the large pipeline under development (11,000 beds, or 15% of the network, with a still negative or nil contribution) and decent coverage ratios.Orpea’s last private placements constitute a benchmark for estimating the price of the new bond. For example, the € 150m Euro PP with a seven-year maturity issued in July 2017 bears a coupon of 2.13%. Given that the new bond will be far more liquid, its yield is likely to be slightly lower.Non-listed bonds with a similar profile offer an average yield of 1.6%. The Eurofins 2024 bond (BB+ estimated), which yields 1.8% for an almost one-year less maturity, is the closest comparable. The laboratories group also operates in the healthcare sector and has a number of similarities (leadership position and excellent track record). Its operational risk profile is a little weaker (more competitive and more cyclical markets), but the laboratory group is less indebted. On these bases, a coupon of between 1.75% and 1.875% seems “fair” to us and we recommend subscribing from these levels. >