Sacyr : When Spanish construction is not pure evil

>Initiation of coverage with a “Speculative” Buy reco. on 2019 CB - Following a credit roadshow organized by Oddo in Paris in April with Sacyr, we initiate the credit coverage of this name.We tried to dismantle Sacyr’s debt “black box”, notably by separating the recourse and non-recourse groups. It is true to say that there are many red flags credit-wise (notably with an important proportion of the construction’s backlog dedicated to concessions managed by Sacyr, probably some non-cash items in the concessions’ Ebitda (but far below the ones of Obrascon!), a high recourse leverage of c. 6x, a massive consolidated FCF burn due to the capital intensity of the concessions business – though the FCF generated by the businesses excluding concessions is positive! – and many intercompany loans and guarantees given by the holding). But we think that the absence of any leveraged family holding in the share capital (contrary to some of other Spanish conglomerates), the fact that there is no debt at the concession business that is guaranteed by the holding (contrary to the “non-recourse debt in process” of Abengoa for example), the recent elimination of Repsol share price risk, the rather good coverage of the holding debt by the assets, the potential new sources of liquidities (sale of Itinere notably), the significant market capitalization and the willingness of the management to find a solution for the refinancing of the 2019 CB in H2-17 are good signals for bondholders.We therefore adopt a “Speculative” Buy recommendation on the 2019 CB: this instrument offers an attractive c. 5% ytm (at ask price), which is a very decent level in the convertible bonds and high yield universe currently for such a short maturity.Strengths / Opportunities - A focus on internationalization, which has improved in the past few years (slightly more than 50% of revenue currently generated outside Spain)A backlog of EUR 26bn (compared to revenue of EUR 2.9bn in FY-16), which secures future turnoverRecent diversification of financing sources (CPs, small PPs, project bond…)Recent elimination of the risk related to Repsol share priceA rather good coverage of the holding debt by the assets (see our LTV calculation)Potential new sources of liquidities with, for example, the upcoming disposal of the stake in Itinere A significant market capitalization of EUR 1.1bn which should be considered as an “equity cushion” since it would be the basis of a potential capital increase (though it is not planned for now)The willingness of the management to find a solution for the refinancing of the 2019 CB in H2-17Weaknesses / Points to watch - High proportion of the construction’s backlog related to the concessions managed by SacyrNegative consolidated FCF generation due to the capital intensity of investments in concessionsHigh consolidated leverage of 10.3x reported and 8.2x excluding Repsol loan (which was located in a SPV), non-recourse leverage of c. 9x (Oddo estimate) and recourse leverage of c. 6x (Oddo estimate)Difficulties in this sector to calculate the cash that can really be « upstreamed » to the holding level and that is fully available