Soitec : An investment-case that has paid off and still an interesting carry

In a Credit Focus published on 9 July 2015, we upgraded our recommendation on the 2018 Soitec convertible bond from Neutral to "Speculative" Buy. At that time, the instrument was trading at a cash price (unit trading) of € 1.70 (66% of par), which implied a yield to maturity of around 25%. - Our investment case was based on the fact that a recapitalisation would take place via a capital increase and/or a restructuring of the convertible bond. This recapitalisation has indeed taken place (two capital increases of a total net amount of € 145m) and the CB is currently trading at a cash price of € 2.75 (mid price), i.e. 107% of par. Its price has thus increased by 62% since our change of recommendation. - Operationally, interim results (closing in September) were above expectations and the FY EBITDA margin target was lifted. On the debt side, the balance sheet is now much healthier with a ratio of net debt/EBITDA from continuing operations of 0.9x at end September 2016. - Factoring in our equity analyst’s cash flow forecasts and the group's debt repayment schedule, we have calculated that the group would be able to repay the 2018 convertible bond outstanding without new refinancing measures. - We are therefore adjusting our recommendation to Buy & Hold (vs. "Speculative" Buy): facially, the 3.3% yield to maturity based on an ask price of € 2.78 does not seem to be excessively attractive. However, we do not know of any short-term bond in our coverage universe that is issued by a company which has cash (looking ahead) to repay the aforesaid bond and offering a yield of over 3% with a comparable credit risk. - >