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7th May 2020

💷 BOUGHT: NewDay 7.375% February 2024

The BoE has forecast a 14% contraction in the UK economy for 2020 and as much as a 30% in Q2 before roaring back into life in 2021 with a 15% bounce back. So, a painful, temporary collapse but a V-shaped recovery. Across the Eurozone and US, we are witnessing similar patterns with manufacturing and services activity at record lows.

Risk markets have already started to look beyond the economic malaise which will be inflicted in Q2. Equities are holding relatively firm, taking on the incoming macro and corporate earnings data on the chin somewhat. The credit markets have seen record levels of monthly issuance IG and we are seeing the beginning of a thaw in the high yield primary markets.

Credit spreads generally recovered hard following the initial pandemic-driven lockdown weakness, but even in the high yield market, the weakness was nowhere close to the levels seen at the height of the 2008 financial crisis. So we appear to have found a floor reflecting the expectation that markets will recover into H2 as lockdowns are relaxed and we hopefully avoid a second-wave virus shock. High yield spreads/prices have barely moved for several weeks.

Trading into that narrative, we took a look at the NewDay bonds and added a position to our holdings of HY debt, for the reasons listed below. The 18% yield to maturity was also a driver for our investment.

Also see: Our bond portfolio

Business Overview

NewDay (ticker: NEMEAN) is a leading UK credit card issuer – specialising in ‘near-prime’ and prime customers. ‘Near-Prime’ is defined as those who may find it difficult to access credit from mainstream lenders, and it is estimated that between 10-14m UK adults are ‘near-prime’ which is approx. 20-25% of the UK adult population.

100% of the company’s revenues are generated in the UK. Competition for the ‘near-prime’ segment comes from Capital One and Vanquis Bank. NewDay is regulated by the Financial Conduct Authority (FCA).

Business Segments

The group operates ‘own-brand’ credit cards – issued from NewDay’s brands ‘Aqua’ and ‘Marbles’ and ‘co-brands’ credit cards – which are cards issued via corporate partners.

These ‘co-brands’ are often issued by retail stores and online retailers (House of Fraser, Debenhams and Arcadia Group: which includes Topman, Topshop, Miss Selfridge, Burton, Dorothy Perkins and Amazon).

Historically, revenues between ‘own brand’ and ‘co-brand’ have been slightly skewed towards ‘own brand’ but over the past 3 years, its share of FY revenue has been decreasing: FY17 (61% of revenues attributed to ‘own brand’), FY18 (60%) and FY19 (58%).

Source: NewDay FY 19

Ownership

NewDay is owned by private equity firms: CVC (45%) Cinven (45%) with management owning the rest of the company (10%). It was acquired by CVC and Cinven in October 2016 from Varde Partners for £1bn.

Capital Structure and Liquidity

  • £2,103m Asset-Backed Bonds due in 2020
  • £608m Variable Funding Notes due in 2026
  • £30m Super Senior RCF due in 2022
  • £150m Senior FRN due 2023
  • £275m Senior Notes due 2024Net leverage is 1.9x (down from 2.6x from Q319).

Latest Financials – March 2020

NewDay FY19 results: +15% growth year-on-year on receivables to £3,026m from £2,623m in FY18. Adjusted EBITDA increased to £144m for FY19 from £82m in FY18. Income increased 14% year-on-year, mainly driven by own-brand cards (£676m in FY19 from £591m in FY18.

Net leverage decreased to 1.9x from 2.6x in Q3’19. Provisions also decreased to £20.9m for FY19 from £35.7m in FY18.

Credit Positives

  • Into 4th year of a 9-year agreement with Amazon which diversifies the co-brand business away from troubled retailers
  • NewDay is a leader in the ‘near-prime’ market and provides an important part in the lending mechanism
  • Low leverage with strong year-on-year receivables growth
  • Cash generative business model

Credit Negatives

  • Negative headlines regarding near-prime/sub-prime lenders mean that NewDay is the focus of FCA consumer action and regulation
  • Impairments could rise as economic conditions worsen for consumers (FY19 impairment 11.6% down from 13.0% in FY18)
  • The company has impending ABS maturities and other obligations due in 2020 (£719m) and 2021 (£886m)
  • Recession and unemployment will affect consumer spending and could lead to less customer credit transactions

Corporate Structure

Links/References