Suki Mann

Author Archives: Suki Mann

21st May 2020

💷 BOUGHT: Shop Direct 7.75% November 2022

Market recovery begins…

After an early to mid-May hitting of the proverbial brick wall, credit spreads have resumed their tightening trend. In the high yield market, the Markit iBoxx index has tightened by 14bp in the month to B+641bp – or by 35bp against the mid-May wide. There will be no miracle ratchet tighter because a lot of bad news is still to come, but we are unlikely going to witness a massive blowout in spreads either. We anticipate a steady tightening in credit spreads as macro recovers.

We’ve had more than what could be deemed a spate of issuance, too, with €3.8bn HY debt issued in the euro-denominated market, although we did have Sappi pull their deal as market volatility abruptly ended their ambitions. We don’t doubt that they will be back.

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19th May 2020

📊 Landmark: IG Issuance at €200bn

And still lots to play for… Equities’ performance for May to date is about flat. In credit, IG total returns (iBoxx) are at -1%, and the same in HY while the AT1 market is showing -2.2%. iBoxx index spreads are +10bp, -3bp and +40bp, respectively, in May so far. Yet the corporate bond market is […]
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18th May 2020

🌅 And the outlook is bright(ening)

Economic engine revving up… Markets are looking at that glass as half-full. As the world economy begins to re-open and we generate greater levels of activity, the hope is that we are picking ourselves up off the floor and moving on – in a sustainable upward trajectory. The data through May will be dire, but […]
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17th May 2020

⚖️ Delicately poised

Credit market feeling some heat… The Q1 data is out of the way. And as bad as that quarter was (ending with Eurozone GDP coming in at -3.8%), it was mostly all as expected. April’s numbers are worse (we had US industrial production and retail sales fall off a cliff on Friday), May’s data will […]
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14th May 2020

HY Strategy: CMD Portfolio Performance Mid-May 2020

Market Overview

The corporate bond market has made a good comeback of late, mostly evident in the investment grade primary sector. The issuance pace is running at record levels and while April’s monthly deal flow was in itself a record (€57bn), May’s current total suggests it could even surpass that.

Importantly, the reopening of the investment grade market has provided somewhat of a boost to high yield primary. After having drawn a complete blank in the Feb 20 – 15 April period, we’ve since had around €5bn of issuance. Verisure reopened the market, but the likes of Netflix, Stada, Nokia and Synlab have followed.

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13th May 2020

🇩🇪 Germany Inc. steps up the pace

Indigestion and too rich, but still gluttonous… Primary credit markets continue to burst at the seams. It’s not often, in crisis conditions, that we get a HY borrower rated in the mid-single-B area manage to print an upsized deal (from €400m) of €850m! In the IG non-financial market, corporate treasury department suspicions lurk as to […]
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11th May 2020

No let up in primary splurge

Low hanging fruit being picked off… It’s like the charge of the light brigade. Another day, another plethora of borrowers looking for money. And markets trying to trade through the May/June macro weakness. We even have the high yield borrower becoming less of an oddity on the screens. We have failed to witness a spectacular, […]
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10th May 2020

🗞️ Looking beyond the first half

Data and markets diverge… There was no shock but certainly a bit of awe. And plenty of headlines about the post-war high 14.7% US unemployment rate and the record loss of over 20 million non-farm jobs in April. Markets, though, are looking beyond it – because that was all well-telegraphed. The numbers in Europe through […]
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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.

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

6th May 2020

⚡ The Power of the Dark Side

It can dominate your destiny… The screens were awash with deals. Surely we’re not looking at breaking the monthly record for IG non-financial deals, which stands at €57bn, again? The deal flow smacks of desperation. But it could be, that CEOs and the like have looked at the outlook (order books, forward orders) – added […]
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