Safilo : In Hollandia veritas?

>Initiation of coverage with a Reduce reco. on the 2019 CB - We are initiating the coverage of Safilo with a Negative credit opinion (due to the liquidity issues) and a Reduce recommendation on its 2019 convertible bond. This credit-like CB trades at a ytm of c. 6-7%, i.e. more attractive that all bonds in the “single B” category with a short-term maturity. However, the investment-case is very binary and event-driven (dependent, in our view, on the support of: 1/ Safilo’s reference shareholder HAL and 2/ the group’s main banks) The upside potential (from a cash price of c. 94% to par within 1 year) is nothing compared to the material downside in the event of a debt restructuring (recovery could be around 32% in a very depressed scenario). To sum-up, the current discount does not reflect the refinancing risk in our view.Support factors - - #2 player in the global wholesale frames market (but far behind Luxottica)- Good geographical diversification- Expected growth overall in the industry thanks to demographic, economic and social factors (especially in the emerging markets)- Supportive reference shareholder (HAL) historically-speaking Points to watch - - Limited size compared to the leader Luxottica- Very poor operating performances in 2017 (notably impacted by the loss of the Gucci licence)- Anticipated termination of the licensing agreements with LVMH following the creation by the latter of a JV with Marcolin- Weak liquidity position and high refinancing risk in the short-term (will the July 2018 RCF be rolled out? Will HAL support the company? At what conditions for CB holders?)- The 2019 CB is subordinated to the RCF in our understanding since it is only guaranteed by Safilo S.p.A. and does not benefit from the guarantee of Safilo U.S.A. Inc.