Rallye : Affordable access to the bond market again

Wednesday 18 January 2017 - Equity data - Reco: Reduce - Target: € 13 - Equity Analyst : Laurence Hofmann - [email protected] - +33-1 44 51 86 82 - ESG Analyst : - - Corporate governance: - - / - / - 7 March 2017: full-year earnings - - - - The price of the 2021 Rallye bond recently exceeded par value, its best performance since August 2015 (it had previously risen to almost 108% in March 2015). We provided an update on the issuer and changed our recommendations. Although Rallye's credit quality has increased slightly, the single most important development is, in our view, the yields at which the bonds are trading which could implicitly enable the group to return to the primary bond market for a benchmark-sized issue at a decent cost; yields not seen for a year and a half (although the group does not need any significant refinancing until October 2018). This potential flexibility in terms of liquidity resolves the main issue facing Rallye. - > - Good performance of Rallye bonds since late November - The Rallye's notes have performed nicely since last November (-148bp spread on the Rallye 2021), buoyed by broad growth in the bond market (100bp tightening on the JPM 'B' index) and the increase in the Casino share price (+25% since the beginning of December). In addition, the two bonds issued by Rallye (non-dilutive convertible and small issuance in CHF) and the increase in commercial paper outstandings (+€ 211m between end-June and end-December) have improved liquidity somewhat. - The main issue of limited access to the bond market at a decent cost is subsiding. We are raising our credit opinion to Positive - At the current Casino share price (€ 51.7), Rallye's LTV ratio remains high at 93% and existing liquidity is still adequate to meet debt repayments until 2018 but not thereafter (provided that the Casino share does not fall), without any new issue. Although these characteristics are not yet sufficient to alter our 'B' in-house rating, we are raising our outlook to Positive vs. Stable to reflect a new factor: The 2021 Rallye notes now offer a yield of 3.9%. Such a level has not been seen since August 2015 and, after a year and a half of blockage, implicitly offers the prospect of a return to the bond market at a cost that is not detrimental to the group's financing costs (average coupon of 3.7% currently, but 4.2% excluding convertible/exchangeable notes, including 5% on the Rallye 15/10/18 maturity). Although it may seem somewhat premature to issue a new bond when the group has no financing needs until year-end 2018, an issuance to exploit opportunities on current interest rates remains feasible. - Consequent changes to our recommendations - In view of secondary market yields and the liquidity profile, we recommend a buy-and-hold strategy on the 2018 put on the 2020 Rallye exchangeable notes (3.3% yield to put) offering a highly attractive yield in the curve and, to a lesser extent, the Rallye 2018 straight bond (1.9% yield).We are upgrading our recommendation on the 2019 Rallye notes to Neutral vs. Reduce (2.4% yield, somewhat expensive compared with other single-B bonds in the market but without significant downside risk). Likewise, we are raising our recommendation to Neutral vs. Reduce on the 2021 Rallye on the basis of a 3.9% yield, which is broadly consistent with a 'B' rating estimate. Note that any new issuance could throw secondary market spreads out of kilter and create attractive entry points on the issuer in a context of enhanced liquidity.