SMCP : An attractive buy opportunity on the 5.875% 2023 SMCP notes

Publication date 27/10/2017 16:17 - Writing date 27/10/2017 11:17 - - / - November 2017: Q3 2017 results - - - - - - - - - - - - - - - - - - - We are raising our recommendation on the 5.875% 2023 SMCP notes to Buy. We conducted bond yield simulations assuming the bond is purchased at the current price, based on various possible repayment scenarios for the € 200 notes outstanding. We conclude that even the worst-case scenario offers an attractive yield (1.6% over 18 months) for an issuer we regard as having a BB' credit quality in the wake of the IPO. The other scenarios may even offer yields of 2.6 to 6% (excluding the exceptional best-case scenario of a redemption at the make-whole price of 112% over the next few days, a fairly unlikely scenario, we think). - > - SMCP completes IPO and partially repays debt - Following the IPO of 19 October 2017, SMCP raised € 121m (net) via a capital increase which, together with a new bank credit facility of € 250m, made it possible to: 1/ repay the entire 2022 FRN (€ 100m) on 23 October; 2/ redeem € 111.3m of the 2023 bond at 108.875% by exercising the equity clawback provision on 23 October; and 3/ repay 10% of the outstanding amount on the 2023 bond (€22.3m) at 103% on 26 October.Following these transactions, € 200m of the 5.875% 2023 notes remain outstanding. The outstanding is callable from 1 May 2019 at 102.938% (YTC of 2.2%) but is repayable one last time at 103% for up to 10% of outstandings between 1 May 2018 and 30 April 2019. Redemption before the call date is also possible at the make-whole price. - Next step for 2023 SMCP notes: rating upgrade from S&P - We expect an upgrade of the rating to 'BB' vs. 'B' at S&P. The agency placed the group's rating on positive creditwatch on 11 October, deeming that an upgrade was likely if the IPO was successful (marked improvement in credit metrics, especially as the agency included the now extinguished € 300m PIK loan in its debt calculation).As we expected, Moody's affirmed SMCP's rating at B1/stable, which is capped by Shandong Ruyi's 'B2' rating under the agency's methodology which does not authorise more than a one-notch rating differential between the two entities. - Minimum yields have become attractive again even in the most adverse repayment scenario - The 5.875% 2023 SMCP notes are currently trading at 108.25% mid. In the table on page 3 we have summarised the yields if the notes are purchased at the current price (108.25%) based on various repayment scenarios. We took into account repayment proportions by date and by the final redemption price at call or the make-whole price at various dates. It emerges that even the worst-case scenario (call on 10% at 103% in May 2018 and call on the remainder in May 2019) gives a yield of 1.6%, which is attractive for an issuer whose rating we estimate as 'BB' in the wake of the IPO.The maximum potential would be achieved in the (unlikely) scenario where the group launches a redemption at the make-whole price of 112% (+3.75 pts) over the next few days. Intermediate scenarios also give highly attractive yields of 2.6 to 6%. For these reasons, we are raising our recommendation on the 5.875% 2023 SMCP notes to Buy.