Capital measure makes investors’ day; call of 2021 SSN in 2017 and redemption of 2018 convertible expected

On 29 November 2016, SGL Carbon SE (SGL) announced it will use its existing authorized capital against cash contributions with shareholders' indirect subscription rights to increase its share capital by issuing 30m new ordinary bearer shares. The new shares will be offered to existing shareholders at a ratio of 40:13 and at a subscription price of € 6.00 per new share, providing net proceeds of c.€ 173.2m. - SGL intends to use these proceeds – together with the net proceeds from the sale of the graphite electrodes (GE) business – to redeem the convertible notes due in 2018 (nominal € 240m) and the senior secured notes (SSN) due 2021 (nominal € 250m), thereby strengthening its capital structure, improving leverage and earnings capacity. - SGL has received firm subscription commitments from its major shareholders SKion GmbH (owned by business magnate Susanne Klatten) and Bayerische Motoren Werke (BMW). Each committed to participate in the capital increase according to their existing shareholdings. A syndicate of banks have underwritten and will sell the subscription rights relating to the shareholders Volkswagen AG and Voith GmbH, who will not participate in the capital measure, in the near term in a market-sensitive manner, SGL said. The proceeds will be realised in Dec 2016. - Credit Opinion: This capital measure, which comes earlier than we expected, is very positive for SGL’s credit profile. Cash of c.€ 156.9m at end-Q3 16, the anticipated cash contribution from the GE sale to Showa Denko of at least € 200m, € 100m (we assume) from the sale of the Cathodes, Furnace Linings (CFL) / Carbon Electrodes (CE) businesses, and the equity measure’s net proceeds would total c.€ 630.1m. This compares to the company’s capital market indebtedness of nominal € 657m (not including other debt, pensions and other financial commitments). After reasoning in our Oct 2016 update that we would see a positive rating impact from the asset sale, we now find that the recovery prospects of the 2020 convertible improve, assuming the 2021 SSN and 2018 convertible are redeemed. We deem it reasonable that the 2020 convertible will be aligned with SGL’s anchor rating, which we see at ‘B+’, in the medium term. Thus, we maintain our Credit Opinion at ‘CCC+’ / Positive, but intend to review the rating once the GE sale is closed. - Recommendation: Immediately after the announcement, bond prices surged strongly. The three instruments currently provide the following returns: - - 2021 SSN (assuming a call on 30 June 2017): 5.2% (call on 15 January 2017: 7.2%) - - 2020 Convertible (assuming redemption at par on 30 Sept 2020): 4.7% - - 2018 Convertible (assuming redemption at par on 25 Jan 2018): 2.7% - We maintain our recommendation: Buy on the 2021 SSN as a call e.g. in mid-2017 provides still opportunity. Also, we maintain our Buy recommendations on the 2018 and 2020 convertibles. - We would revise our view if antitrust authorities do not approve the GE sale. - >