Steinhoff : Focus Emission

Steinhoff intends to issue a euro-denominated benchmark (= EUR 500m) senior unsecured inaugural straight bond with a maturity between 6 and 9 years. The issuer is Steinhoff Europe AG and the bonds will be guaranteed by Steinhoff International Holdings NV (rated Baa3 by Moody’s). The guarantee will be pari passu with the guarantor's senior unsecured debts.The management said that it expects the straight bonds to have the same rating as the guarantor. It is also currently thinking about applying for a rating at another credit agency than Moody’s. We were also told that the group intends to be a “repeat issuer” on the euro straight bonds market.The issuer of the upcoming inaugural straight bond, i.e. the Austrian holding Steinhoff Europe AG, holds all the group’s investments outside Africa and the US. Recall that Europe and Australasia represented 59% of group revenue in H1-2016/17. We understand that holders of straight bonds will be closer to the European & Australasian assets than, for example, holders of convertible bonds (issued by Steinhoff Finance Holding GmbH, an Austrian holding located above the issuer of the upcoming straight bonds). The straight bond issue will, to a certain extent, slightly “juniorize /subordinate” convertible bonds holders.The issuer intends to use the net proceeds for general corporate purposes, mainly to refinance existing bank debt in our understanding.On a relative-value basis, peer bonds with a workout date around 6 years from today (2023) trade at an average YTW of c. 1.2% in our sample (see relative-value tables on page 5) and peer bonds with a workout date around 9 years from today (2026) trade at an average YTW of c. 1.8%. We therefore recommend subscribing to the new issue as from a ytm of 1.5% for a 6-year tranche or 2.0% for a 9-year tranche.As for the valuation of the existing convertible bonds, we will focus our analysis on the two instruments that have a more mixed profile, i.e. the 2022 and 2023 CBs. On the basis of: i/ a borrow cost on the stock of 25bp, ii/ a normalized volatility on the stock of 28% for the 2022 CB and 30% for the 2023 CB, and iii/ the current stock price and CB market price levels, we calculate that the 2022 and 2023 CBs have implied credit spreads of 219 bp and 225 bp, respectively. Assuming that: i/ the new straight bond is a 6-year tranche (i.e. maturing in 2023), ii/ its fair asw-spread is c. 80 bp, and iii/ that we should add c. 50 bp (which is a conservative assumption for an IG name) to this spread to take into account the somehow “structural subordination” of the CBs compared to the new straight bond (therefore leading to a theoretical credit spread for the 2023 CB of 130 bp), we can conclude that the two CBs are cheap at these levels. In other words, the 2022 and 2023 CBs, which display a good carry (ytm of 1.5% and 1.7%, respectively), do not price in the value of conversion option in our view. We therefore maintain our Buy recommendation on the 2023 CB and raise our recommendation from Neutral to Buy on the 2022 CB.>