SMCP : Likely scenario for SMCP’s planned IPO

Publication date 26/06/2017 09:16 - Writing date 22/06/2017 15:37 - / - End-August 2017: Q2 2017 results - - - - After SMCP’s announcement on its proposed IPO, we are reviewing the different clauses and possible outcomes for the bond debt. - >SMCP is considering a  listing on Euronext Paris  - SMCP announced on 22 June that it was considering a public listing of its shares on Euronext Paris, with the strategic support of its majority shareholder Shandong Ruyi. The group provided no other details at this juncture, apart from the fact that Shandong Ruyi intends to maintain its position as a majority shareholder of SMCP and that a public listing would support the group’s global development and visibility.A sale of a minority stake accompanied with a capital increase seems to be a plausible scenario - While a sale of holdings by Shandong Ruyi (82% of the share capital) would surprise us as the group acquired its stake less than a year ago, an exit of other shareholders seems more credible, especially for KKR which holds a residual 10% stake, ahead of founders and management (8%). Even so, a 10% free float would appear somewhat limited in the event of a simple sale of KKR shares and it is possible that a capital transaction is organised concurrently to reduce debt in part and increase free cash flow to support future expansion plans.We are maintaining our Positive credit opinion and Neutral recommendation on the 2023 SMCP (Hold) and we are adopting a Reduce recommendation on the 2022 SMCP FRN bond. - To recap all the scenarios that we propose following the announcement of the IPO project: 1/ in the absence of a capital increase: no impact on debt; 2/ in the event of a capital increase: the worst case scenario would be a partial repayment of the 2023 note for up to 40% at 105.875% using the equity clawback clause. In such case, the improvement in risk indicators would at least partially offset the impact of the acquisition on the bond price (the price of the remaining outstandings could gain about 1 pt compared to the current price, based on the yield-to-call 2019 of BB issuers). The more favourable case scenario, namely a 100% repayment of the 2023 bond via the equity clawback for up to 40% and the make-whole for 60% gives a theoretical price that is close to the current price (between 109.6% and 110% depending on the timing vs. 109.8% currently). In this context, we reiterate our Neutral recommendation on the 5.875% 2023 SMCP bond.The 2022 FRN bond seems to be slightly more at risk. It is trading at 103.1% while it is callable at 101% from May 1, 2017. We calculated at this price, the break-even point could be reached if the call takes place from November 2017 (but an IPO could occur earlier: for example, Maisons du Monde announced its plans early March 2016 but completed its IPO on 27 May 2016). We are adopting a Reduce recommendation on the SMCP FRN 2022 bond.