Rallye : Rallye Back to the euro-denominated senior debt market

Publication date 22/05/2017 09:56 - Writing date 19/05/2017 11:47 - Equity data - Reco: Reduce - Target: € 13 - Equity Analyst: Laurence Hofmann - [email protected] - +33 (0)1 44 51 86 82 - ESG Analyst : Nicolas Jacob - Corporate Governance : High risk (4) - / - / - - / - - - After three years of absence, Rallye announced its comeback to the euro-denominated senior bond market with an issue of € 350m over five years with a yield of 4.375%. The group seized the opportunity created by an improved financial situation after a rise in the Casino share price and the optimism sparked by the French presidential election. A perfect timing knowing that market conditions deteriorated after wards against the backdrop of concerns over the US and Brazil. - >The new 2023 issue has met with great success - Rallye issued a new unsecured senior bond of € 350m over five years (due in January 2023) to pre-finance the repayment of its 5.00% 10/2018 Rallye bond. The price talk initially referred to as "low 5%" represented a highly broad pickup of 290bp vs. the yield of the Rallye 2021 (3.10%) while the yield difference was 90bp between the Rallye 2019 and Rallye 2021 (although it is fair for the gap to be slightly smaller on the short part of the curve). Unsurprisingly, demand was strong (final order book of € 2.6bn), which led to a tightening of the final yield to 4.375% and an increase in the size, from € 300m to € 350m. We estimated the new issue was attractive from 4.00% (see Morning credit of 16/05/17).By strengthening the liquidity of the group, this new issue has also reassured the market leading to arbitrages towards the short end of the Rallye curve on the secondary market and a spread tightening of 30bp on Rallye 2018, to 0.9% and on Rallye 2019 to 1.8%.Thanks to this operation, the liquidity position becomes comfortable until 2019 inclusive, in the absence of new issue. - So far, we believed that the liquidity of Rallye made it possible to ensure repayment of maturities until 2018 inclusive, without any new issue. By our calculations, Rallye will be able, after the new bond issuance, to refinance all its maturities by 2019 inclusive via its credit facilities if the Casino share does not fall beneath € 24.90 at constant commercial paper outstanding. This price represents a discount of 53% to the current share price. In the highly conservative case where commercial paper should also be refinanced on credit lines, the financing requirement would be covered if the Casino share remained above € 36.2 (i.e. -31% vs. the current share price).We recommend to Buy the new issue and upgrade our recommendation to Buy & Hold on the Rally 2019. - Given the improvement in the liquidity situation until 2019, we are upgrading our recommendation on the Rallye 2019 bond from Neutral to Buy&Hold (YTM: 1.8%) and maintaining our recommendation at Buy&Hold on the Rallye 2018 bond (YTM: 1%) and the Rallye 2020 put 2018 exchangeable bonds (YTP: 1.9%) We are also recommending to Buy the new Rallye 2023 (YTM: 4.3%) given the interesting pick-up (+120bp) on the Rallye 2021 bond (3.20%) for which we are maintaining our Neutral recommendation.