28th April 2020

💷 BOUGHT: Saga 3.375% May 2024

The credit market is recovering admirably. We look to have passed peak-virus, even if we are nowhere close to being in the clear. The stimulus packages are helping. But Q2’s earnings numbers are going to be awful in terms of earnings and macroeconomic activity continues to be depressed. But we look beyond that – and the potential for a V-recovery, at worst a shallow W-shaped return to health.

The tone is already improving. Playing into that, there is the rising tide of better equities lifting other markets. Credit spreads have already started their recovery trajectory and we see further potential for a high/low beta compression trade to continue. It’s laboured, admittedly, and will likely stay that way until we get a better handle on the recovery dynamics.

That brings us to the Saga 3.375% May 2024s. A punt? Given the devastation in the travel – and especially the cruise industry, yes. The headline risks are not to be understated. We have taken only a small position based on the view that (for the moment) the group still benefits from a good liquidity position, has suspended dividends with debt holiday/covenant waivers being negotiated for their cruise business (30% of EBITDA).

As a sophisticated investor, we have done this by adding the Saga sterling issue into our new investment portfolio through the WiseAlpha platform.

Also see: Our bond portfolio

These are the reasons why we’ve chosen Saga:

Business Description

Established in 1950, Saga (ticker: SAGALN) is a provider of insurance and travel products for the over-50s in the UK (100% of revenue is generated in the UK FY16). Insurance products include motor insurance and home insurance policies whilst the travel business offers cruises and package holidays – Saga owns two cruise ships: Saga Sapphire and Spirit of Discovery (delivered in June 2019 at a cost of €380m).

The firm has ordered a third cruise ship – Spirit of Adventure – which is due for delivery in 2020. The entire business is focused on the over-50s and this a wealthy, growing demographic (ONS 2018 Wealth Report). Further, as part of its business involves insurance – the group is regulated by the Financial Conduct Authority (FCA).

Business Segments

The group operates 2 main business segments: Insurance business (split into Broking and Underwriting) and Travel business (Tour operating and Cruises). Geographically 100% of revenues are generated in the UK.

Ownership

Publicly listed on the LSE (FTSE 250) with a market capitalization of £188.4m (as of 20 April 2020). It should be noted that on 5 August 2019, US activist investor Elliot Management took a 5% equity stake in the company with press speculation that Elliot were seeking to split the insurance and travel business.

Capital Structure and Liquidity

£160m Term Loan due in 2022
£100m RCF due in 2023 (£50m drawn-down as of 31 March 2020). £245m Ship Loan
£250m Corporate Bond due 2024
£40.9m Cash*

*£37m cash inflow expected on H1 2020 from business sales.

SAGALN calculate net-leverage excluding the ship-loan and this was 2.4x (as of 31 Jan 2020). However, when included leverage increases to 4.0x.

Latest Financials – April 2020

SAGALN reported FY19 results – (for the period ending January 2020). Revenue declined -2.2% year-on-year to £842m, with EBITDA also decreasing -7.7% for FY19 to £231m. Net leverage for FY19 was 1.7x (ex-ship) however this is now 2.4x after most recent trading update. Management said its base case for Travel revenues for FY20 was a drop of -65%, this would be devastating for SAGLN’s travel business.

Credit positives

  • Insurance business remains cash generative. Travel business only 30% of EBITDA (for FY19).
  • Liquidity is good for the moment.
  • Company suspended dividend payments.New covenants arranged – relating to its bank loan and RCF – which have been renegotiated at better terms (net-lev, exl.ship loan, ratio test of 4.75-4.0 from July 2020-Jan-2022) Debt-holiday and Covenant waiver for cruise business being negotiated.
  • Whilst cruise line industry remains challenging with COVID-19, recent news (as of 15 March 2020) that 45% of US cruise operator – Carnival’s (ticker CCL) passengers accepted ‘future cruise credits’ rather than cash refunds – indicates some undeterred demand for cruises in 2021 and 2022.

Credit negatives

  • Outlook for the cruise line industry is uncertain
  • Over-50s are the most vulnerable to COVID-19, therefore appetite for travel from this demographic may weaken post-crisis
  • Bookings for package holidays will weaken as travel restrictions remain in place from the UK to other destinations
  • Whilst bank covenants were changed – net leverage tests could still be breached as liquidity deteriorates

Links/References

Suki Mann

A 30+ year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on CreditMarketDaily.com.