Salt mobile : All work deserves to be rewarded

Early last week Salt Mobile announced plans to fund an exceptional dividend of CHF 500m to its majority shareholder NJJ Capital. Backed by a successful FY 2016, Xavier Niel's personal holding company aimed to recover equity invested in the acquisition of the Swiss operator in February 2015. At the same time, the group took advantage of market conditions to refinance its FRN MATTER E3m+375bp through a new euro-denominated floater. Salt financed these two transactions by issuing new debt (CHF 686m) and using part of its cash on hand. - > - The transaction required prior approval to waive covenants on its existing notes that in fact limited: 1. Restricted payment to about CHF 120m in 2017 (vs. CHF 500m envisaged), and 2. Consolidated net leverage to a maximum 4.5x (vs. 5.0x pro forma the transaction). Salt therefore sent a consent solicitation to its bondholders, as they alone had the right to decide whether to waive or not current covenants. To ensure their support, the operator proposed a consent fee, the amount of which depended on the seniority of the bonds held and the premium received on the number of bondholders tendering to the offer. Last Thursday, the creditors responded favorably to the consent solicitation. We had advised bondholders to accept the consent solicitation. Given that Salt needed only a simple majority (50% of bondholders + 1 vote), the transaction was very likely to succeed. Conversely, reluctant bondholders ran the risk of not being compensated for weaker pro forma credit metrics. - Rating agencies reacted differently to the announcement of the dividend recap. Moody's lowered the outlook on Salt's B2 rating to Negative from Stable to reflect the group's more aggressive financial policy and higher leverage. Separately, S&P maintained its B/Stable rating, deeming that the deterioration in the financial profile was offset by a clear improvement in earnings and FCF generation in last year. - For our part, we are revising our credit opinion to Positive vs. Stable and our market recommendation to Neutral vs. Buy to reflect post-deal releveraging. Despite the recovery since the arrival of NJJ Capital, Salt is expected to increase its marketing spend further to underpin sales and increase capex to finance its long1eawaited development of the fixed-line business.