Category Archives for "Buy Bonds"

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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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

29th April 2020

CMD Bond Portfolio

We run our own creditmarketdaily.com corporate bond investment portfolio and share the results here.

+ TalkTalk 3.875% February 2025 – Bought 14th April 2020 at £98.75


+ Iceland 6.75% July 2024 – Bought 14th April 2020 at £90

  • Interest payment received 16 April 2020, reinvested at £91

+ Saga 3.375% May 2024 – Bought 17th  April 2020 at £75

  • Interest payment received 13 May 2020, reinvested at £81

+ New Day 7.375% February 2024 – Bought 27th April 2020 at £72

  • Interest payment received 6 August 2020, reinvested at £93.50

+Bought a further amount 10th September 2020 at £93.50


+ Shop Direct 7.75% November 2022 – Bought 20th May 2020 at £88


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).

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28th April 2020

Saga Bond Prospectus (3.375% 15 May 2024)

Here are the prospectus and headline details for the Saga Bond Issue with a maturity of 15 May 2024.

  • Coupon: 3.375%
  • Par value: £100

Saga Bond Prospectus: ⬇️ Download

Where Can I Buy This Saga Bond?

This Iceland corporate bond is available to buy from: WiseAlpha (minimum purchase size £100)

16th April 2020

BOUGHT: Iceland 6.75% July 2024: YTM 9.5%

The high yield market will likely see a re-opening in primary through Verisure, suggesting that investors are ready to re-enter the market, initially on a cautious and selective basis. That deal is for just €150m and a 5NC1 structure. Nevertheless, it’s the first throw of the dice for a sector otherwise bereft a new deal since 20 February.

The news flow around the sector has been difficult and the market has been in defensive fashion since the coronavirus pandemic hammered risk assets. The recent equity market revival and the Fed stimulus package which has boosted US high yield has had a positive impact on the market in Europe.

Spreads, as measured by the index have recovered almost 30% of their weakness, leaving the iBoxx index at B+646bp (-270bp). The market remains very illiquid, the ability to transact at a reasonable price on the way up or down is poor, but there are pockets of liquidity emerging and opportunities presented as a result.

We have taken a look at the UK retail/food sector and, while high yield rated entities in this sector have come under pressure as a result of the weaker sentiment towards high yield per se, the food sector has had a better time of it as the population has hoarded ahead of – and into – the lockdown.

As a retail investor looking for sub-par paper which should be ‘money good’ (in our view) offering a very good yield, at creditmarketdaily.com we have decided to take a position.  We have done this by adding the Iceland sterling issue into our new investment portfolio through the WiseAlpha platform.

Also see: Our bond portfolio

These are the reasons why we’ve chosen Iceland:

Business Description

A UK-based food retailer, with 1,013 stores (976 UK ‘Iceland’ Stores and 119 ‘Food Warehouse’ stores). The business positions itself at the value-end of the retail market and currently holds 2.2% of the UK grocery market. Competition comes from established grocery supermarkets such as Tesco, Asda and Morrisons and value-end discounter retailers such as Aldi and Lidl.

87% of Iceland’s customers are C1, C2 and DE demographic (clerical, junior administrative jobs, skilled manual workers, semi-skilled and unskilled manual occupations and unemployed) – the most of any other food retailer – therefore it occupies a unique space in the grocery market.

Business Segments

Generally, the business revenues are split into three (LTM-June-2017) equal segments:

In the frozen food segment – ICELTD holds a 15.4% market share. This is the second-largest in the UK and is a key in the company’s strategy to position itself as a differentiated value offering – in essence, in between established supermarkets and discount retailers.

Ownership

63.1% owned by Brait (first stake acquired in March 2012). 36.9% owned by management.

Capital Structure

  • £30 RCF
  • £760m existing notes
  • £62m finance leases
  • £85m cash on balance sheet

Net Leverage 5.5x (up from 4.9x y-on-y) as of January 2020.

Latest Financials – FY2020 (40 weeks ended 3 Jan 2020)

Revenue increased +2.5%, but it was a challenging quarter as a result of the UK general election. Gross profit was -14% lower at £99m (from £113m in Q3 FY19).

EBITDA declined by 8% for the same period, to £81m. Net leverage increased to 5.5x from 4.9x at Q3 FY19 (last year) to Jan 2020.

There was a large working capital outflow of £33m and this was attributed to trade payments going forward. The company said that will increase going forward as the Swindon Warehouse (which will cost an additional £6m in working capital next year) is opened, but this does add additional capacity for increased sales.

FY2020 will be less than that last year at around £50m (FY19 £63.5m). Please note these results were pre-COVID19 lockdown.

Credit Negatives

  • Extremely competitive market with new entrants Aldi and Lidl already having a larger UK Grocery market share (8.2% and 6.1% respectively).
  • Deleveraging tough as costs are driven by inflationary increases (National Living Wage).

Credit Positives

  • Uniquely positioned in the frozen food market (2nd in the UK).
  • Solid footfall as highlighted in the figures from Kantar data (ICELTD till roll was up +33.8% last month, where March was the biggest month on record for UK grocery sales) resulting from the COVID-19 lockdown.
  • Recent 4-week sales have stated ICELTD sales +11.7% year on year which is a significant increase.
  • The company appears to be well-positioned as a value brand in a recessionary/depression environment.

Iceland Corporate Structure


Links/References

  1. Our bond portfolio
  2. Iceland Prospectus
  3. Iceland website
16th April 2020

Iceland Bond Prospectus (6.75% 15 July 2024)

Here are the prospectus and headline details for the Iceland Bond Issue with a maturity of 15 July 2024.

  • Coupon: 3.875%
  • Par value: £100

Iceland Bond Prospectus: ⬇️ Download

Where Can I Buy This Iceland Bond?

This Iceland corporate bond is available to buy from: WiseAlpha (minimum purchase size £100)

14th April 2020

BOUGHT: TalkTalk 3.875% Feb 2025, YTM 4.2%

The credit market has undergone a severe repricing since the coronavirus pandemic led to lockdowns across most of the global economy. The IG market has benefited more immediately from the various stimulus packages announced, which has included additional buying by the ECB of IG debt through the CSPP.

Spreads have bounced back and we have seen a near 25% retrenchment in the high yield market as well. That comes even after Moody’s and S&P have suggested a global default rate, at year-end, of around 10%, from 3.5% currently. Clearly, there has been some forced selling.

Illiquid secondary markets have resulted in a disproportionate widening in spreads and the HY primary market has been closed since February 20, in Europe. Still, though, there are some opportunities.

As a retail investor looking for sub-par paper deemed ‘money good’ with a decent running yield, at creditmarketdaily.com we have decided to take advantage of the distress in the HY market by initiating our entry into the space.  We have done this by adding the TalkTalk issue into a new investment portfolio on the WiseAlpha platform.

Also see: Our bond portfolio

Here’s why we’ve chosen TalkTalk:

Business Description

Founded in 2003 and headquartered in Salford, Manchester TalkTalk is the leading provider of ‘value for money’ fixed line and broadband services for residential and business customers in the UK. As of February 2020, its network services covered ca.96% of UK homes and had ca.12 million customers.

The group commands a 12% market share in the residential broadband market and benefits from a low level of customer churn (~1.20% in the 3 months to Feb 2020). Broadband rivals for the UK market include BT, Sky and Virgin Media.

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