SG HY Compass - Storm and Stress 20111205

Macro Commodities Forex Rates Equity Credit Derivatives

December 2011

Credit

Sector report

www.sgresearch.com

HIGH YIELD & X-OVER COMPASS Storm and Stress

2011’s European high yield market was a tale of two halves. We envisage 2012 could mirror that

trend, in an inverted order, with the H1 2012 market environment remaining difficult due primarily to

the euro area sovereign debt crisis and H2 2012 potentially loosening up in order to allow for a

modest amount of issuance concurrent with an improvement in market technicals.

As such, SG forecasts for iTraxx Xover are in the 850-870bp range in H1 2012 tightening toward

the 780-800bp range in H2 2012; an estimated €20 billion of 2012 European high yield supply; and, a

lower than historical average European HY issuer default rate around 2.5%.

We have a Stable credit opinion on 24 (60%) of the 40 European high yield issuers in our current

coverage universe, covered in greater detail throughout this handbook, Positive opinions on 6 (15%),

and Negative opinions on 10 (25%). Similarly, 72% of our 128 outstanding bond recommendations

carry Stable opinions while 11% and 17% are Positive and Negative, respectively.

Across these issuers we forecast, on average, improving leverage (by -0.4x) and interest coverage

(by +0.2x) with 55-60% of issuers exhibiting improving credit metrics for FY11E.

We also anticipate the number of defaults/restructurings in 2012 is likely to be in the range of 15-

20, slightly higher than the 13 per year observed in both 2010 and 2011 year-to-date.

Societe Generale (‚SG‛) does and seeks to do business with companies covered in its research reports. As a result, investors should be

aware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only

a single factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE

ANALYST(S) CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS

Head of Credit Research

Tim Barker

(44) 20 7676 7168

[email protected]

Credit Analysts

Barbora Matouskova

Pierre Bergeron

Torstein Jorstad

Alejandro Núñez

Roberto Pozzi

Juliano H. Torii, CFA

Credit Strategy

Suki Mann (Head)

Juan Esteban Valencia

Alix de Raucourt (Research

Associate)

Please see analyst

details on back page

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HIGH YIELD & X-OVER COMPASS

December 2011 2



December 2011 3

Contents

Contents ...................................................................................................................................... 3 Introduction ................................................................................................................................ 5

Overview of credit opinions and recommendations ............................................................... 9 Overview of credit opinions and credit metrics .......................................................................... 10 Overview of CDS recommendations .......................................................................................... 13 Conclusion ................................................................................................................................. 14

Market update .......................................................................................................................... 19 Market overview ......................................................................................................................... 20 Sector CDS performance ........................................................................................................... 21 Issuance and flows overview ..................................................................................................... 23 Maturity profile ........................................................................................................................... 26 Default rates and restructurings ................................................................................................. 27

Company reviews ..................................................................................................................... 29 Abengoa ..................................................................................................................................... 31 Alcatel-Lucent ............................................................................................................................ 35 Ardagh Group ............................................................................................................................ 39 Bombardier ................................................................................................................................ 43 Cable & Wireless Communications ............................................................................................ 47 Cegedim ..................................................................................................................................... 51 CMA CGM .................................................................................................................................. 55 Continental AG ........................................................................................................................... 61 Dixons Retail plc ........................................................................................................................ 65 Europcar .................................................................................................................................... 69 Fiat Industrial.............................................................................................................................. 73 Fiat Spa ...................................................................................................................................... 77 Fresenius SE & Co. KGaA ......................................................................................................... 82 HeidelbergCement ..................................................................................................................... 86 Ineos .......................................................................................................................................... 91 ITV PLC ...................................................................................................................................... 95 Kabel Deutschland ..................................................................................................................... 99 Lafarge ..................................................................................................................................... 103 Lecta ........................................................................................................................................ 109 M-Real ..................................................................................................................................... 113 Nexans ..................................................................................................................................... 118 Norske Skog ............................................................................................................................ 122 OHL .......................................................................................................................................... 127 ONO ......................................................................................................................................... 131 OTE (HELLENIC TLCM) ........................................................................................................... 135 PSA – Peugeot Citroen ............................................................................................................ 139 Renault ..................................................................................................................................... 143 Reynolds Group ....................................................................................................................... 147 Sappi ........................................................................................................................................ 151 Smurfit Kappa .......................................................................................................................... 155 Stora Enso ............................................................................................................................... 159 Sunrise ..................................................................................................................................... 163 Telenet ..................................................................................................................................... 167 TUI AG ..................................................................................................................................... 171 Unitymedia ............................................................................................................................... 175 UPC.......................................................................................................................................... 179 UPM-Kymmene........................................................................................................................ 183 Virgin Media ............................................................................................................................. 187 Wendel ..................................................................................................................................... 192 Wind Telecomunicazioni .......................................................................................................... 199

Report completed on 5 December 2011



December 2011 4



December 2011 5

Introduction

Introduction



December 2011 6

Having been a tale of two halves, the European high yield market this year certainly saw the

best of times and the worst of times. While the spring brought the market plenty of hope after

a robust second half in 2010, the winter brought it a dose of despair. As the European high

yield market closes out 2011 and prepares warily for 2012, it continues to suffer unsettling

bouts of volatility, illiquidity and disorientation with fleeting bursts of relief sprinkled in for good

measure. Although the litany of adverse factors - the weight of sovereign debt concerns,

macroeconomic uncertainty, slower economic growth, high unemployment, the negative

impact of European government austerity programmes, sapped investor and consumer

confidence, diminished credit availability, high market volatility and low visibility - are by now a

broken record, the European high yield market still manages to exhibit a silver lining to offset

that weight which could help see it through 2012. A more harmonious melody consisting of

historically low default rates, a benign maturity profile, still resilient earnings and cash flows for

most corporates, good liquidity, and improved balance sheets and credit quality overall can

serve over the next year to counterbalance, to an extent, the dissonance. Although we

acknowledge the tail risk of a euro currency bloc breakup is not insignificant over the short to

medium term, it is not our base case scenario. On the flip side, there could be some upside to

our base case view should a fundamentally deeper, more permanent solution to the eurozone

financial debt debacle materialise over the next twelve months.

We consider refinancing and liquidity risks to be comparatively low in 2012 for the large

majority of European high yield issuers under our coverage. We also expect their operating

and financial fundamentals to be relatively stable in 2012, barring extreme external shocks, as

evidenced by Stable credit opinions on 60% of the 40 issuers and 72% of the 128 bonds in

our European high yield coverage universe. Although operating performance in H2 2011 and

the guidance/outlook for 2012 has softened across some sectors of that universe, we maintain

that bolstered capital structures, liquidity, reduced M&A and shareholder return activity, and

favourable maturity schedules should contribute to a 2012 European high yield default rate in

the 2.5% area. We also note Moody’s 2012 outlook for continued modest, lower than

historical average global and European HY default rates of 2.2% and 2.0%, respectively. That

said, on the basis of the arguments above and the current visible calendar of potential

restructuring candidates, the number of restructurings in 2012 is likely to be in the range of

15-20 and on par with those in 2010 (21) and 2011 (20 year-to-date). Although this number will

probably be well below the recent peak of 54 restructurings in 2009, an extended period of

economic weakness, sustained eurozone financial stress, largely closed high yield capital

markets combined with a rising maturity wall in 2013-2015 and declining covenant headroom

could converge to precipitate, at the very least, a rise in covenant amendment and amend-to-

extend requests and potentially increased preemptive restructurings. Given most of the seven

to eight potential restructuring candidates for 2012 have bank-only debt structures

(candidates such as Thomas Cook and OTE also have high yield bonds outstanding), these

should not have as much of a direct negative impact on the high yield market as on the

leveraged loan market.

Nevertheless, although these factors could allay investors’ concerns to an extent, we

recognise that market illiquidity, investor reticence and other technical factors have aligned to

chill H2 2011 trading flows and European high yield issuance. This illiquidity has hampered

investors’ ability to effectively reposition portfolios in response to market and corporate events

in a timely fashion while sometimes forcing alternative, sub-optimal liquidations. While high

yield fund flows in the US and Europe in October and November 2011 reversed a negative

trend begun in the summer, they have yet to establish a pronounced, sustained positive trend.

In light of investors’ wariness regarding potentially increased investor redemptions, these

flows are clearly an important driver for the performance of both primary and secondary

markets. The current lack of risk appetite, high volatility and uncertainty, and investors’



December 2011 7

cautiousness are also likely to continue to be influenced by macro and sovereign debt

headline risk.

Furthermore, SG’s economics team forecasts a full recession in 2012. They forecast 0% real

GDP growth for the euro area, 2.7% global growth, 1.4% in the US and 8.1% in China. They

maintain that the single most important threat to the global economy remains the euro debt

crisis while risks from the US fiscal face-off or from the Chinese property market could also

prove disruptive to global growth. They estimate a two-thirds likelihood of: the euro area being

in recession, the US at stall speed, G4 banks’ policy rates lower for longer, and more gradual

muddling from European policymakers. Their estimation of risks is skewed 30% to the

downside, due to policy errors, and 5% to the upside due to proactive policymaking. See SG

Economics Global Economic Outlook – Back to the Brink, November 2011.

In terms of micro corporate trends, we envisage European high yield corporates also treading

choppy waters in 2012. They should be in a position to achieve this through a combination of

exposure to non-euro area markets for some, benign maturity profiles and sufficient liquidity

for most. The latter two factors underscore the absence of identifiable default or restructuring

triggers for a high majority of existing European high yield issuers. Nevertheless, at the same

time we recognise that sector-specific and idiosyncratic risks exist for a number of issuers

which could pose significant operating and financial hurdles over the coming year. These

include, among others, tightening regulatory pressure (as in the European telecoms sector, for

example) and heightened competitive pressures in a tougher economic environment. While we

grant that a number of companies in our coverage universe will continue to benefit from a

certain degree of operational and capital expenditure flexibility, we believe this is likely to be

more restrained than it has been in recent years due to the level of opex and capex cuts that

have already been effected over this period.

Due to the drivers discussed above, we anticipate lower European high yield (EHY) issuance in

2012 in the area of €20 billion (compared to nearly €31 billion year-to-date), closer to the last

decade’s historical average than the above-average issuance from 2009-2010. SG also

expects the iTraxx Xover to continue its volatile pattern of late yet be in the area of 780-800bp

in H2 2012.

Without a doubt, decisive and effective European policymaking, coupled with stronger

economic growth, a reopening of the high yield market and increased market liquidity are sure

to be on more than one Christmas wish list this year.


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December 2011 8



December 2011 9

Overview of credit opinions and recommendations

Overview of credit opinions

and recommendations



December 2011 10

Overview of credit opinions and credit metrics

We have a Stable credit opinion on 24 (60%) of the 40 European high yield issuers in our

current coverage universe. In addition, we have Positive credit opinions on six issuers (15%),

and Negative opinions on ten (25%). Similarly, 72% of our 128 outstanding bond

recommendations carry Stable opinions while 11% and 17% are Positive and Negative,

respectively. Across these issuers we forecast, on average, improving leverage and interest

coverage with 55-60% of issuers exhibiting improving credit metrics for FY11E

European High Yield and Crossover issuers: SG credit opinions and credit metrics

Company Sector Subsector SG Credit

opinion

Moody's S&P Fitch Net debt/

EBITDA

(Latest FY)

Net debt/

EBITDA

(FY11E)

EBITDA/

Net int.

(Latest FY)

EBITDA/

Net int.

(FY11E)

Abengoa 2 Industrials Paper & Pkg Negative Ba3/Stable B+/Stable BB/Stable 7.2 6.3 2.9 2.6

Alcatel-Lucent TMT Telecoms Negative B1/Stable B/Stable NR 0.7 0.7 5.0 5.4

Ardagh Group 2

Industrials Paper & Pkg Stable B2/Positive B+/Stable NR 4.1 4.6 3.1 2.5

Bombardier 1 Industrials Capital Goods Stable Ba2/Stable BB+/Stable BB+/Stable 2.1 3.3 8.8 12.4

Cable & Wireless PLC TMT Telecoms Negative Ba2/Negative BB/Negative NR 1.3 1.4 5.2 4.7

Cegedim TMT Tech Negative NR BB-/Negative NR 4.2 6.6 7.5 2.7

CMA CGM 1 Industrials Shipping Negative B3/Negative B-/Negative NR 2.0 2.2 11.2 0.3

Continental Industrials Autos Stable Ba3/Stable B+/Positive BB-/Stable 2.0 1.7 5.1 6.2

Dixons Consumer Retail Negative B1/Stable NR B/Negative 5.7 5.6 1.5 1.5

Europcar Industrials Autos Stable B2/Stable B+/Stable NR 4.7

2.7

Fiat Industrials Industrials Capital Goods Stable Ba1/Stable BB+/Negative NR 7.2 5.1 3.8 6.0

Fiat SpA Industrials Autos Stable Ba2/Negative BB/Negative BB/Negative 0.2 0.8 7.9 6.6

Fresenius SE & Co. Consumer Healthcare Stable Ba1/Stable BB/Positive BB+/Stable 3.6

2.7

HeidelbergCement Industrials Building Materials Stable Ba1/Stable BB/Stable BB+/Stable 4.3 4.1 3.8 4.0

Ineos Industrials Chemicals Stable B2/Stable B-/Positive NR 4.8 3.9 2.0 2.5

ITV TMT Media Stable Ba2/Positive BB/Stable BB/Positive 1.8 1.3 6.8 7.4

Kabel Deutschland TMT Media Positive Ba2/Stable BB-/Positive BB/Stable 3.8 3.3 2.7 3.3

Lafarge Industrials Building Materials Stable Ba1/Stable BB+/Stable BB+/Stable 4.9 4.4 4.6 3.2

Lecta 1 Industrials Paper & Pkg Stable B1/Stable B+/Stable NR 5.0 4.9 3.7 3.6

M-Real 2 Industrials Paper & Pkg Stable B3/Positive B-/Stable NR 4.1 3.9 3.5 3.4

Nexans 1 Industrials Capital Goods Stable NR BB+/Stable NR 0.6 1.0 5.1 4.7

Norske Skog Industrials Paper & Pkg Negative Caa1/Negative B-/Negative NR 6.0 5.2 1.9 3.1

OHL 2 Industrials Construction Positive Ba2/Negative NR BB-/Stable 4.6 5.0 3.1

ONO TMT Media Positive B2/Stable B/Stable B/Stable 4.9 4.6 2.5 3.3

OTE TMT Telecoms Negative B2/Negative B/Negative BB/Watch Dev 3.1 3.4 6.8 6.1

PSA - Peugeot Citroen Industrials Autos Stable Baa3/Negative BB+/Stable BB+/Positive 0.3 0.5 11.5 21.2

Renault Industrials Autos Stable Ba1/Positive BB+/Stable BB+/Stable 0.3 0.2 6.5 6.5

Reynolds Group 2 Industrials Paper & Pkg Negative B2/Negative B+/Negative NR 6.0 6.3 3.7 2.3

Sappi Industrials Paper & Pkg Stable Ba3/Positive BB-/Stable NR 2.6

3.2 3.6

Smurfit Kappa Industrials Paper & Pkg Stable Ba3/Positive BB-/Positive BB/Stable 3.9 2.7 3.4 4.0

Stora Enso 2 Industrials Paper & Pkg Stable Ba2/Stable BB/Stable BB/Stable 2.0 2.0 10.8

Sunrise TMT Telecoms Positive B1/Stable BB-/Negative NR 6.1 5.6 3.2 3.4

Telenet TMT Media Stable Ba3/Stable NR BB/Stable 2.8 3.4 4.9 4.5

TUI Consumer Consumer/Svcs Negative B3/Stable B-/Stable NR 6.5 4.8 2.6 5.4

Unitymedia TMT Media Stable B1/Stable B+/Stable BB/Stable 5.2 4.8 1.9 2.2

UPC TMT Media Stable Ba2/Stable BB-/Positive NR 4.4 4.6 4.3 3.6

UPM-Kymmene 2 Industrials Paper & Pkg Stable Ba1/Stable BB/Stable BB/Stable 2.4 2.7 15.3 41.2

Virgin Media TMT Media Positive Ba1/Stable BB/Stable BB+/Stable 3.2 2.9 3.5 3.7

Wendel Industrials Capital Goods Stable NR BB-/Negative NR n.a. n.a. 0.8 n.a.

Wind TMT Telecoms Positive Ba3/Negative BB-/Stable BB/Negative 3.9 3.9 2.5 3.1

Source: SG Cross Asset Research

NOTES: 1 Forecast figures represent reported Q2 2011 LTM 2 Forecast figures represent reported Q3 2011 LTM



December 2011 11

Bond recommendations

European High Yield and Crossover issuers: Current Buy bond recommendations (as of 1 December 2011)

Company Sector Bond reco. Currency Moody's S&P Fitch Issue (m) Coupon (%) Maturity Next call

Ardagh Glass Industrials Buy € Ba3/Positive BB-/Stable NR 300 9.250 01-Jul-16 01-Jul-13

Ardagh Glass Industrials Buy € Ba3/Positive BB-/Stable NR 825 7.375 15-Oct-17 15-Oct-14

Bombardier Industrials Buy € BB+/Stable Ba2/Stable BB+/Stable 780 6.125 15-May-21

Continental Industrials Buy € Ba3/Stable B+/Positive BB-/Stable 750 8.500 15-Jul-15 15-Jul-13

Continental Industrials Buy € Ba3/Stable B+/Positive BB-/Stable 1000 7.500 15-Sep-17 15-Sep-13

Dixons Consumer Buy £ B1/Stable NR B+/Negative 160 6.125 15-Nov-12

Dixons Consumer Buy £ B1/Stable NR B+/Negative 150 8.750 03-Aug-15 28-Dec-11

Fiat Industrial Industrials Buy € Ba2/Stable BB+/Negative NR 1000 5.250 11-Mar-15

Fiat Industrial Industrials Buy € Ba2/Stable BB+/Negative NR 1200 6.250 09-Mar-18

Fresenius SE & Co. Consumer Buy € Ba1/Stable BB/Stable BB+/Stable 275 8.750 15-Jul-15

Fresenius SE & Co. Consumer Buy US$ Ba1/Stable BB/Stable BB+/Stable 500 9.000 15-Jul-15

Ineos Industrials Buy € Caa1/Stable CCC/Positive NR 1750 7.875 15-Feb-16

ITV TMT Buy € Ba2 / Positive BB / Stable BB / Positive 189 10.000 30-Jun-14

Lafarge Industrials Buy € Ba1/Stable BB+/Stable BB+/Stable 1000 7.625 27-May-14

Nexans Industrials Buy € NR BB+/Stable NR 350 5.750 02-May-17

OHL Industrials Buy € Ba2/Negative NR BB-/Stable 700 7.375 28-Apr-15

OHL Industrials Buy € Ba2/Negative NR BB-/Stable 425 8.750 15-Mar-18 15-Mar-15

ONO TMT Buy € B2/Stable B/Stable B/Stable 295 11.125 15-Jul-19 15-Jan-14

OTE TMT Buy € B2/Negative B/Negative BB/Watch Dev 1250 5.000 05-Aug-13

OTE TMT Buy € B2/Negative B/Negative BB/Watch Dev 500 7.250 08-Apr-14

Renault Industrials Buy € Ba1/Positive BB+/Stable BB+/Stable 500 5.625 22-Mar-17

Sappi Industrials Buy € Ba2/Positive BB/Stable NR 250 6.625 15-Apr-18 15-Apr-16

Unitymedia TMT Buy € B3/Stable B-/Stable NR 665 9.625 01-Dec-19 01-Dec-14

UPC TMT Buy € B2/Stable B-/Stable NR 400 9.750 15-Apr-18 15-Apr-13

UPC TMT Buy € B2/Stable B-/Stable NR 640 8.375 15-Aug-20 15-Aug-15

Virgin Media TMT Buy £ Ba2/Stable BB-/Stable BB+/Stable 350 8.875 15-Oct-19 15-Oct-14

Wind TMT Buy € Ba2/Negative BB/Stable BB+/Negative 1750 7.375 15-Feb-18 15-Nov-13

Wind TMT Buy US$ Ba2/Negative BB/Stable BB+/Negative 1300 7.250 15-Feb-18 15-Nov-13

Wind TMT Buy € B2/Negative BB-/Stable BB-/Negative 1250 11.750 15-Jul-17 15-Jul-13




December 2011 12

European High Yield and Crossover issuers: Current Sell bond recommendations (as of 1 December 2011)

Company Sector Bond reco. Currency Moody's S&P Fitch Issue (m) Coupon (%) Maturity Next call

Abengoa Industrials Sell € Ba3/Stable B+/Stable BB/Stable 300 9.625 25-Feb-15

Abengoa Industrials Sell € Ba3/Stable B+/Stable BB/Stable 500 8.500 31-Mar-16

Alcatel-Lucent TMT Sell € B2 / Negative B / Stable NR 462 6.375 07-Apr-14

Alcatel-Lucent TMT Sell € B2 / Negative B / Stable NR 500 8.500 15-Jan-16

Ardagh Glass Industrials Sell € B3/Positive B-/Stable NR 310 7.125 15-Jun-17 15-Jun-12

Ardagh Glass Industrials Sell € B3/Positive B-/Stable NR 180 8.750 01-Feb-20 01-Feb-15

Ardagh Glass Industrials Sell € B3/Positive B-/Stable NR 475 9.250 15-Oct-20 15-Oct-15

Ardagh Glass Industrials Sell € Caa1/Positive B-/Stable NR 185 11.125 01-Jun-18 01-Jun-14

C&W PLC TMT Sell £ B1/Negative B+/Negative NR 200 8.625 25-Mar-19

Cegedim TMT Sell € NR BB-/Negative NR 300 7.000 27-Jul-15

CMA CGM Industrials Sell € B3/Negative B-/Negative NR 325 8.875 15-Apr-19 15-Apr-15

Europcar Industrials Sell € B3/Stable B-/Stable NR 425 Float 15-May-13 10-Jan-12

Europcar Industrials Sell € B2/Stable B+/Stable NR 350 9.750 01-Aug-17 01-Aug-14

Europcar Industrials Sell € Caa1/Stable B-/Stable NR 400 9.375 15-Apr-18 15-Nov-13

Fresenius SE & Co. Consumer Sell € Ba1/Stable BB/Stable BB+/Stable 650 5.500 31-Jan-16 28-Dec-11

ITV TMT Sell £ Ba2 / Positive BB / Stable BB / Positive 255 5.375 19-Oct-15

Lafarge Industrials Sell £ Ba1/Stable BB+/Stable BB+/Stable 350 6.875 06-Nov-12

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 500 5.448 04-Dec-13

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 612 5.000 16-Jul-14

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 750 6.125 28-May-15

Lafarge Industrials Sell US$ Ba1/Stable BB+/Stable BB+/Stable 550 5.500 09-Jul-15

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 500 4.250 23-Mar-16

Lafarge Industrials Sell US$ Ba1/Stable BB+/Stable BB+/Stable 800 6.500 15-Jul-16

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 750 7.625 24-Nov-16

Lafarge Industrials Sell £ Ba1/Stable BB+/Stable BB+/Stable 350 8.750 30-May-17

Lafarge Industrials Sell £ Ba1/Stable BB+/Stable BB+/Stable 200 6.625 29-Nov-17

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 500 5.375 26-Jun-17

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 1000 5.375 29-Nov-18

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 750 5.500 16-Dec-19

Lafarge Industrials Sell € Ba1/Stable BB+/Stable BB+/Stable 500 4.750 23-Mar-20

Lecta Industrials Sell € B1/Stable B+/Stable NR 598 4.087 15-Feb-14

Lecta Industrials Sell € B3/Stable B-/Stable NR 143 5.462 15-Feb-14

OTE TMT Sell € B2/Negative B/Negative BB/Watch Dev 900 4.625 20-May-16

Reynolds Group Industrials Sell € Ba3/Negative BB-/Negative NR 450 7.750 15-Oct-16 15-Oct-12

Reynolds Group Industrials Sell € Caa1/Negative B-/Negative NR 480 8.000 15-Dec-16 28-Dec-11

Reynolds Group Industrials Sell € Caa1/Negative B-/Negative NR 420 9.500 15-Jun-17 15-Jun-12

Sappi Industrials Sell € Ba2/Positive BB/Stable NR 350 11.750 01-Aug-14 01-Aug-12

Sunrise TMT Sell € B3/Stable B/Negative NR 561 8.500 31-Dec-18 31-Dec-14




December 2011 13

Overview of CDS recommendations

Our Sell CDS outnumber Buy CDS recommendations across our universe by a ratio of

2.5 to 1 and are diversified across sectors. Our four Buy CDS recommendations are more

concentrated in the Industrials sector.

European High Yield and Crossover: Current Sell 5y CDS recommendations (as of 1-Dec-11)

Company Sector SG Credit opinion CDS reco. Comment

Continental Industrials Stable Sell vs. Michelin 5y

Dixons Consumer Negative Sell Compression: 188

over XO

Fiat Industrial Industrials Stable Sell vs. Fiat SpA

Fresenius SE & Co. Consumer Stable Sell Carry: Sell > 260

ONO TMT Positive Sell

Renault Industrials Stable Sell vs. PSA Peugeot

TUI Consumer Negative Sell Speculative: 1353

over XO

Unitymedia TMT Stable Sell

Virgin Media TMT Positive Sell

Wind TMT Positive Sell Target: 1.25x XO

European High Yield and Crossover: Current Buy 5y CDS recommendations (as of 1-Dec-11)


Fiat SpA Industrials Stable Buy vs. Fiat Industrial

Ineos Industrials Stable Buy

PSA - Peugeot Citroen Industrials Stable Buy vs. Renault

Stora Enso Industrials Stable Buy

European High Yield and Crossover: Current Neutral 5y CDS recommendations (as of 1-Dec-11)


Alcatel-Lucent TMT Negative Neutral 1y CDS still too tight

Ardagh Group Industrials Stable Neutral

Cable & Wireless PLC TMT Negative Neutral Can be illiquid

HeidelbergCement Industrials Stable Neutral Should trade in line

w/Lafarge

ITV TMT Stable Neutral Too tight vs bonds

Kabel Deutschland TMT Positive Neutral

Lafarge Industrials Stable Neutral Should trade in line

w/HEI

M-Real Industrials Stable Neutral

Norske Skog Industrials Negative Neutral

OTE TMT Negative Neutral Sell June 2012

Smurfit Kappa Industrials Stable Neutral

Sunrise TMT Positive Neutral

UPC TMT Stable Neutral

UPM-Kymmene Industrials Stable Neutral

Wendel Industrials Stable Neutral




December 2011 14

Conclusion

Most of our bond universe recommendations (72%) currently have Stable credit opinions and

nearly half have Hold recommendations. In CDS, we have Sell recommendations on a third

and Neutral recommendations on just over half of covered issuers. Most recommendations

relate to €-denominated European high yield bonds but we also have recommendations on

nine each of HY Yankee bonds and sterling issues comprising a combined 14% of

outstanding recommendations.

SG Credit Research – European HY bonds denomination SG Credit Research – European HY issuer credit opinions

SG Credit Research – European HY bond recommendations SG Credit Research – European HY CDS recommendations


€, 111, 85%

US$, 9, 7%

£, 9, 7% CHF, 1, 1%

Positive, 14, 11%

Stable, 94, 72%

Negative, 22, 17%

Sell, 38, 30%

Hold, 61, 47%

Buy, 29, 23%

Sell, 10, 34%

Neutral, 15, 52%

Buy, 4, 14%



December 2011 15

European High Yield and Crossover issuers: Current bond recommendations (as of 1 December 2011)

Company Sector

SG Credit

opinion Bond reco. Currency Moody's S&P Fitch Issue (m)

Coupon

(%) Maturity Next call

Abengoa Industrials Negative Sell € Ba3/Stable B+/Stable BB/Stable 300 9.625 25-Feb-15

Abengoa Industrials Negative Sell € Ba3/Stable B+/Stable BB/Stable 500 8.500 31-Mar-16

Alcatel-Lucent TMT Negative Sell € B2 / Negative B / Stable NR 462 6.375 07-Apr-14

Alcatel-Lucent TMT Negative Sell € B2 / Negative B / Stable NR 500 8.500 15-Jan-16

Ardagh Glass Industrials Stable Buy € Ba3/Positive BB-/Stable NR 300 9.250 01-Jul-16 01-Jul-13

Ardagh Glass Industrials Stable Buy € Ba3/Positive BB-/Stable NR 825 7.375 15-Oct-17 15-Oct-14

Ardagh Glass Industrials Stable Sell € B3/Positive B-/Stable NR 310 7.125 15-Jun-17 15-Jun-12

Ardagh Glass Industrials Stable Sell € B3/Positive B-/Stable NR 180 8.750 01-Feb-20 01-Feb-15

Ardagh Glass Industrials Stable Sell € B3/Positive B-/Stable NR 475 9.250 15-Oct-20 15-Oct-15

Ardagh Glass Industrials Stable Sell € Caa1/Positive B-/Stable NR 185 11.125 01-Jun-18 01-Jun-14

Bombardier Industrials Stable Hold € BB+/Stable Ba2/Stable BB+/Stable 800 7.250 15-Nov-16 15-Nov-12

Bombardier Industrials Stable Buy € BB+/Stable Ba2/Stable BB+/Stable 780 6.125 15-May-21

C&W PLC TMT Negative Sell £ B1/Negative B+/Negative NR 200 8.625 25-Mar-19

C&W PLC TMT Negative Hold € Ba2/Negative BB/Negative NR 397 7.750 15-Feb-17

C&W PLC TMT Negative Hold £ B1/Negative B+/Negative NR 320 8.750 08-Jun-12

Cegedim TMT Negative Sell € NR BB-/Negative NR 300 7.000 27-Jul-15

CMA CGM Industrials Negative Sell € B3/Negative B-/Negative NR 325 8.875 15-Apr-19 15-Apr-15

Continental Industrials Stable Buy € Ba3/Stable B+/Positive BB-/Stable 750 8.500 15-Jul-15 15-Jul-13

Continental Industrials Stable Hold € Ba3/Stable B+/Positive BB-/Stable 625 6.500 15-Jan-16 05-Oct-13

Continental Industrials Stable Buy € Ba3/Stable B+/Positive BB-/Stable 1000 7.500 15-Sep-17 15-Sep-13

Continental Industrials Stable Hold € Ba3/Stable B+/Positive BB-/Stable 625 7.125 15-Oct-18 05-Oct-13

Dixons Consumer Negative Buy £ B1/Stable NR B+/Negative 160 6.125 15-Nov-12

Dixons Consumer Negative Buy £ B1/Stable NR B+/Negative 150 8.750 03-Aug-15 28-Dec-11

Europcar Industrials Stable Sell € B3/Stable B-/Stable NR 425 Float 15-May-13 10-Jan-12

Europcar Industrials Stable Sell € B2/Stable B+/Stable NR 350 9.750 01-Aug-17 01-Aug-14

Europcar Industrials Stable Sell € Caa1/Stable B-/Stable NR 400 9.375 15-Apr-18 15-Nov-13

Fiat Industrial Industrials Stable Buy € Ba2/Stable BB+/Negative NR 1000 5.250 11-Mar-15

Fiat Industrial Industrials Stable Buy € Ba2/Stable BB+/Negative NR 1200 6.250 09-Mar-18

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 1000 6.625 15-Feb-13

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 900 6.125 08-Jul-14

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 1250 7.625 15-Sep-14

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 1500 6.875 13-Feb-15

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 1000 6.375 01-Apr-16

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 1000 5.625 12-Jun-17

Fiat SpA Industrials Stable Hold € Ba3/Negative BB/Negative BB/Negative 600 7.375 09-Jul-18

Fresenius SE & Co. Consumer Stable Hold € Ba1/Stable BB/Stable BB+/Stable 500 5.000 31-Jan-13

Fresenius SE & Co. Consumer Stable Buy € Ba1/Stable BB/Stable BB+/Stable 275 8.750 15-Jul-15

Fresenius SE & Co. Consumer Stable Buy US$ Ba1/Stable BB/Stable BB+/Stable 500 9.000 15-Jul-15

Fresenius SE & Co. Consumer Stable Sell € Ba1/Stable BB/Stable BB+/Stable 650 5.500 31-Jan-16 28-Dec-11

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 1000 6.375 25-Jan-12

HeidelbergCement Industrials Stable Hold US$ Ba2/Stable BB/Stable BB+/Stable 750 5.250 15-Mar-13

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 1000 7.500 31-Oct-14

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 650 6.500 03-Aug-15

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 650 6.750 15-Dec-15

HeidelbergCement Industrials Stable Hold US$ Ba2/Stable BB/Stable BB+/Stable 750 6.125 15-Aug-16


HeidelbergCement Industrials Stable Hold CHF Ba2/Stable BB/Stable BB+/Stable 150 7.250 14-Nov-17


HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 500 9.500 15-Dec-18

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 500 8.500 31-Oct-19

HeidelbergCement Industrials Stable Hold € Ba2/Stable BB/Stable BB+/Stable 750 7.500 03-Apr-20




December 2011 16

European High Yield and Crossover issuers: Current bond recommendations (as of 1 December 2011) (continued)

Company Sector

SG Credit

opinion

Bond

reco. Currency Moody's S&P Fitch

Issue

(m)

Coupon


Ineos Industrials Stable Hold € Ba3/Stable B/Positive NR 300 9.250 15-May-15

Ineos Industrials Stable Buy € Caa1/Stable CCC/Positive NR 1750 7.875 15-Feb-16

ITV TMT Stable Buy € Ba2 / Positive BB / Stable BB / Positive 189 10.000 30-Jun-14

ITV TMT Stable Sell £ Ba2 / Positive BB / Stable BB / Positive 255 5.375 19-Oct-15

Kabel Deutschland TMT Positive Hold € Ba2/Stable BB-/Positive BB/Stable 500 6.500 29-Jun-18

Lafarge Industrials Stable Sell £ Ba1/Stable BB+/Stable BB+/Stable 350 6.875 06-Nov-12

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 500 5.448 04-Dec-13

Lafarge Industrials Stable Buy € Ba1/Stable BB+/Stable BB+/Stable 1000 7.625 27-May-14

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 612 5.000 16-Jul-14

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 750 6.125 28-May-15

Lafarge Industrials Stable Sell US$ Ba1/Stable BB+/Stable BB+/Stable 550 5.500 09-Jul-15

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 500 4.250 23-Mar-16

Lafarge Industrials Stable Sell US$ Ba1/Stable BB+/Stable BB+/Stable 800 6.500 15-Jul-16

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 750 7.625 24-Nov-16

Lafarge Industrials Stable Sell £ Ba1/Stable BB+/Stable BB+/Stable 350 8.750 30-May-17

Lafarge Industrials Stable Sell £ Ba1/Stable BB+/Stable BB+/Stable 200 6.625 29-Nov-17

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 500 5.375 26-Jun-17

Lafarge Industrials Stable Hold € Ba1/Stable BB+/Stable BB+/Stable 500 5.000 13-Apr-18

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 1000 5.375 29-Nov-18

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 750 5.500 16-Dec-19

Lafarge Industrials Stable Sell € Ba1/Stable BB+/Stable BB+/Stable 500 4.750 23-Mar-20

Lecta Industrials Stable Sell € B1/Stable B+/Stable NR 598 4.087 15-Feb-14

Lecta Industrials Stable Sell € B3/Stable B-/Stable NR 143 5.462 15-Feb-14

M-Real Industrials Stable Hold € B3/Positive B-/Stable NR 500 8.750 01-Apr-13

Nexans Industrials Stable Buy € NR BB+/Stable NR 350 5.750 02-May-17

Norske Skog Industrials Negative Hold € Caa1/Negative NR NR 150 11.750 15-Jun-16

Norske Skog Industrials Negative Hold € Caa1/Negative B-/Negative NR 500 7.000 26-Jun-17

OHL Industrials Positive Hold € Ba2/Negative NR BB-/Stable 700 6.250 18-May-12

OHL Industrials Positive Buy € Ba2/Negative NR BB-/Stable 700 7.375 28-Apr-15

OHL Industrials Positive Buy € Ba2/Negative NR BB-/Stable 425 8.750 15-Mar-18 15-Mar-15

ONO TMT Positive Buy € B2/Stable B/Stable B/Stable 295 11.125 15-Jul-19 15-Jan-14

OTE TMT Negative Buy € B2/Negative B/Negative BB/Watch Dev 1250 5.000 05-Aug-13

OTE TMT Negative Buy € B2/Negative B/Negative BB/Watch Dev 500 7.250 08-Apr-14

OTE TMT Negative Hold € B2/Negative B/Negative BB/Watch Dev 600 6.000 12-Feb-15

OTE TMT Negative Sell € B2/Negative B/Negative BB/Watch Dev 900 4.625 20-May-16

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 850 4.000 28-Oct-13

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 750 8.375 15-Jul-14

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 500 5.625 29-Jun-15

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 500 6.875 30-Mar-16

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 650 5.000 28-Oct-16

PSA - Peugeot Citroen Industrials Stable Hold € Baa3/Negative BB+/Stable BB+/Positive 600 6.000 19-Sep-33

Renault Industrials Stable Hold € Ba1/Positive BB+/Stable BB+/Stable 800 4.375 24-May-13

Renault Industrials Stable Hold € Ba1/Positive BB+/Stable BB+/Stable 750 6.000 13-Oct-14

Renault Industrials Stable Hold € Ba1/Positive BB+/Stable BB+/Stable 650 5.625 30-Jun-15

Renault Industrials Stable Hold € Ba1/Positive BB+/Stable BB+/Stable 500 4.625 25-May-16

Renault Industrials Stable Buy € Ba1/Positive BB+/Stable BB+/Stable 500 5.625 22-Mar-17

Reynolds Group Industrials Negative Sell € Ba3/Negative BB-/Negative NR 450 7.750 15-Oct-16 15-Oct-12

Reynolds Group Industrials Negative Sell € Caa1/Negative B-/Negative NR 480 8.000 15-Dec-16 28-Dec-11

Reynolds Group Industrials Negative Sell € Caa1/Negative B-/Negative NR 420 9.500 15-Jun-17 15-Jun-12

Sappi Industrials Stable Sell € Ba2/Positive BB/Stable NR 350 11.750 01-Aug-14 01-Aug-12

Sappi Industrials Stable Buy € Ba2/Positive BB/Stable NR 250 6.625 15-Apr-18 15-Apr-16




December 2011 17

European High Yield and Crossover issuers: Current bond recommendations (as of 1 December 2011) (continued)

Company Sector

SG Credit

opinion Bond reco. Currency Moody's S&P Fitch

Issue

(m)

Coupon


Smurfit Kappa Industrials Stable Hold € B2/Positive B/Positive BB-/Stable 218 7.750 01-Apr-15 28-Dec-11

Smurfit Kappa Industrials Stable Hold € Ba2/Positive BB/Positive BB+/Stable 500 7.250 15-Nov-17 15-Nov-13

Smurfit Kappa Industrials Stable Hold € Ba2/Positive BB/Positive BB+/Stable 500 7.750 15-Nov-19 15-Nov-14

Stora Enso Industrials Stable Hold € Ba2/Stable BB/Stable BB/Stable 750 5.125 23-Jun-14

Stora Enso Industrials Stable Hold € n.a. BB/Stable n.a. 390 5.768 07-Oct-16

Sunrise TMT Positive Hold € Ba3/Stable BB/Negative NR 371 7.000 31-Dec-17 31-Dec-13

Sunrise TMT Positive Sell € B3/Stable B/Negative NR 561 8.500 31-Dec-18 31-Dec-14

Telenet TMT Stable Hold € Ba3/Stable NR BB/Stable 300 6.625 15-Feb-21 15-Feb-16

TUI Consumer Negative NR € Caa1/Stable B-/Stable NR 450 5.125 10-Dec-12

TUI Consumer Negative NR € Caa2/Stable CCC-/Stable NR 300 8.625 Perpetual 30-Jan-13

Unitymedia TMT Stable Hold € B1/Stable BB-/Stable NR 1430 8.125 01-Dec-17 01-Dec-12

Unitymedia TMT Stable Hold US$ B1/Stable BB-/Stable NR 845 8.125 01-Dec-17 01-Dec-12

Unitymedia TMT Stable Buy € B3/Stable B-/Stable NR 665 9.625 01-Dec-19 01-Dec-14

UPC TMT Stable Buy € B2/Stable B-/Stable NR 400 9.750 15-Apr-18 15-Apr-13

UPC TMT Stable Buy € B2/Stable B-/Stable NR 640 8.375 15-Aug-20 15-Aug-15

UPM-Kymmene Industrials Stable Hold € Ba1/Stable BB/Stable BB/Stable 600 6.125 23-Jan-12

Virgin Media TMT Positive Buy £ Ba2/Stable BB-/Stable BB+/Stable 350 8.875 15-Oct-19 15-Oct-14

Wendel Industrials Stable Hold € NR BB-/Negative NR 700 4.875 04-Nov-14

Wendel Industrials Stable Hold € NR BB-/Negative NR 400 4.875 21-Sep-15

Wendel Industrials Stable Hold € NR BB-/Negative NR 700 4.875 26-May-16

Wendel Industrials Stable Hold € NR BB-/Negative NR 700 4.375 09-Aug-17

Wendel Industrials Stable Hold € NR BB-/Negative NR 300 6.750 20-Apr-18

Wind TMT Positive Buy € Ba2/Negative BB/Stable BB+/Negative 1750 7.375 15-Feb-18 15-Nov-13

Wind TMT Positive Buy US$ Ba2/Negative BB/Stable BB+/Negative 1300 7.250 15-Feb-18 15-Nov-13

Wind TMT Positive Buy € B2/Negative BB-/Stable BB-/Negative 1250 11.750 15-Jul-17 15-Jul-13

Wind TMT Positive Hold US$ B2/Negative BB-/Stable BB-/Negative 2000 11.750 15-Jul-17 15-Jul-13

Wind TMT Positive Hold € B3/Negative B/Stable B+/Negative 325 12.250 15-Jul-17 15-Jul-13

Wind TMT Positive Hold US$ B3/Negative B/Stable B+/Negative 625 12.250 15-Jul-17 15-Jul-13




December 2011 18



December 2011 19

Market update

Market update



December 2011 20

Market overview

Both cash and CDS levels in H2 2011 reversed gains made in H1 2011 reverting to levels last

seen in late 2009, for cash, and significantly above 2010 levels for CDS. While spread levels

have yet to reach the dramatic heights witnessed in 2009, they are currently approximately

50% in cash and nearly 100% higher in CDS than at the start of 2011. Moreover, reflecting in

part eurozone crisis concerns, the YTW spread premium for European €-denominated high

yield over US $ high yield has been on average 102bp in the second half of 2011. While we

flag this relative value in EHY over US HY, we also envisage this differential persisting for at

least another half-year period in 2012.

In terms of total returns, European high yield underperformed comparable US fixed income

segments as well as € investment-grade corporates. However, it outperformed most global

equity asset class segments aside from the S&P 500 which it trailed by nearly 3%. For

European high yield bonds, while all industrial sectors, like cash indices overall, were negative,

the TMT sector was the best performing due both to a higher average carry and to lower

comparative capital losses. The Consumer sector was the worst performing subsector of the

European HY cash index year-to-date.

US HY vs Euro HY bonds YTW (1-Jan-09 to 30-Nov-11) CDX NA vs iTraxx Euro Xover (1-Jan-10 to 30-Nov-11)

Source: SG Cross Asset Research Source: SG Cross Asset Research, Markit, Bloomberg

Total returns comparison (1-Jan-11 to 30-Nov-11) € HY bond returns by sector (1-Jan-11 to 30-Nov-11)

Source: SG Cross Asset Research, Markit, Bloomberg, LCD Source: SG Cross Asset Research, Markit, Bloomberg

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

Eur

-U

S H

Y Y

TW

(%

)

YT

W (

%)

US HY YTW Euro HY YTW Euro - US HY YTW

300

400

500

600

700

800

900

1,000

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-

10

Aug

-10

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-

11

Aug

-11

Sep-1

1

Oct-

11

Nov-1

1

CD

S 5

y (

bps)

CDX NA HY 5Y GEN EUR XO 5Y GEN

-16.4

-6.3

-3.7

-0.9

-0.4

1.4

1.5

2.0

4.2

6.7

8.9

Euro Stoxx 50

FTSE 100

€ HY Corp.

S&P 500

Euro Lev. Loan

US HY Corp.

US Lev. Loan

€ IG Corp. (non-Fin.)

Global EM Corp ($)

US IG Corp.

US Treasuries

To

tal R

etu

rn Y

TD

(%

)

4.6%

3.4%

3.8%

3.9%

5.2%

-8.3%

-10.3%

-10.3%

-7.8%

-6.0%

iBoxx EUR HY -3.7%

Consumer -6.9%

Energy -6.4%

Industrials -3.9%

TMT -0.9%

CarryCapital gain/loss

Total Credit Return



December 2011 21

Sector CDS performance

The sectors encompassed by the issuers under our CDS coverage underperformed the iTraxx

Xover 5y index. Each of those subsectors – Consumer, Industrials and TMT – saw their CDS

spreads at least double over the year from January levels while the iTraxx Xover widened by

84%. From the coverage universe, OTE (314%) and Fiat SpA (+229%) gapped out the most

while Smurfit Kappa (10%) and Fresenius SE (+31%) widened the least, in percentage terms.

Absolute CDS performance (2010-2011) Rebased CDS performance (vs 1/01/10) YTD CDS performance (YTD % chg)

Source: SG Cross Asset Research, Bloomberg Source: SG Cross Asset Research, Bloomberg Source: SG Cross Asset Research, Bloomberg

5y CDS performance – Consumer (2010-2011 YTD)

Company Sector 01-Jan-10 31-Dec-10 03-Jan-11 28-Nov-11

Jan-Dec 10

(% chg)

Jan-Nov 11

(% chg)

Dixons Retail PLC Consumer 699 591 607 1,093 -15.5 80.1

Fresenius SE & Co KGaA Consumer 194 202 202 265 4.4 31.1

TUI AG Consumer 975 546 542 1,566 -44.0 189.0

AVERAGE 3 622 446 450 975 -18.4 100.1

Source: SG Cross Asset Research, Bloomberg

5y CDS performance – Industrials (2010-2011 YTD)

Company Sector 01-Jan-10 31-Dec-10 03-Jan-11 28-Nov-11

Jan-Dec 10

(% chg)

Jan-Nov 11

(% chg)

Ardagh Packaging Finance Plc Industrials

901

Bombardier Inc Industrials 182 221 216 504 21.3 133.3

Continental AG Industrials 352 317 318 468 -10.0 47.3

Fiat Industrial SpA Industrials

918

Fiat SpA Industrials 307 334 327 1,074 8.9 229.0

HeidelbergCement AG Industrials 264 274 272 530 3.6 94.7

Ineos Group Holdings Ltd Industrials 1,409 711 711 1,140 -49.5 60.2

Lafarge SA Industrials 165 229 230 515 38.8 124.0

M-real OYJ Industrials 1,033 452 452 1,024 -56.2 126.5

Norske Skogindustrier ASA Industrials 945 807 807 2,110 -14.6 161.3

Peugeot SA Industrials 236 211 213 611 -10.6 186.4

Renault SA Industrials 244 201 204 521 -17.4 155.8

Reynolds Industrials 86 342 339 664 296.8 95.8

Smurfit Kappa Funding PLC Industrials 358 259 259 285 -27.7 9.9

Stora Enso OYJ Industrials 324 224 224 415 -30.8 85.0

UPM-Kymmene OYJ Industrials 257 241 239 410 -6.2 71.4

Wendel SA Industrials 341 280 278 537 -17.8 93.2

AVERAGE 17 434 340 339 743 8.6 111.6


200

300

400

500

600

700

800

900

1,000

CD

S 5

y (

bp

s)

EUR XO 5Y GEN ConsumerIndustrials TMT

-50

0

50

100

150

CD

S 5

y (

% c

ha

nge

)

XO 5Y GEN ConsumerIndustrials TMT

1.1

-18.4

8.6

40.3

84.0

100.1

111.6

101.0

-50.0 0.0 50.0 100.0 150.0

XO GEN

Consumer

Industrials

TMT

CDS 5y (% change)

Jan-Nov 11 Jan-Dec 10



December 2011 22

5y CDS performance – TMT (2010-2011 YTD)

Company Sector 01-Jan-10 31-Dec-10 03-Jan-11 28-Nov-11 Jan-Dec 10

(% chg)

Jan-Nov 11

(% chg)

Alcatel-Lucent/France TMT 588 648 653 1,651 10.3 152.7

Cable & Wireless Comm plc TMT 259 457 457 795 76.4 73.9

ITV PLC TMT 274 261 260 360 -4.6 38.5

Kabel Deutschland TMT 367 270 268 460 -26.4 71.4

Ono Finance II PLC TMT 922 1,021 1,022 1,534 10.7 50.2

Hellenic Telecommunications TMT 102 447 448 1,857 339.4 314.1

Sunrise Communications Hldg TMT

804

Telenet Communications NV TMT

230

Unitymedia GmbH TMT 462 455 453 685 -1.5 51.3

UPC Holding BV TMT 515 538 538 804 4.4 49.4

Virgin Media Finance PLC TMT 388 360 358 510 -7.0 42.4

Wind Acquisition Finance SA TMT 534 539 538 1,432 0.9 166.1

AVERAGE 12 441 500 500 927 40.3 101.0




December 2011 23

Issuance and flows overview

While in theory a weak issuance period in H2 2011 and relatively high investor cash balances

(in some cases 10% or higher) should lead to investors capitalising on value in the secondary

market, we also acknowledge investors’ caution given the uncertain macro climate. We also

remain of the view that it is the primary issuance tail that wags the secondary market dog and

with a pipeline of issuers awaiting a clear market issuance window this can only be a matter of

time. 2011’s high yield issuance trend demonstrated once again the fractious nature of the

European high yield market. In 2011, 62% (€19.0bn) of the year-to-date €30.9 billion of

European high yield issuance came in the three months spanning March-May and 85%

(€26.1bn) was issued in the first half. Average monthly issuance in H1 2011 was €4.3bn

(€6.3bn in March-May) contrasted with just under €1.0bn per month over the 1 July –

30 November period. In fact, a higher volume of European high yield bonds (€5.9bn) were

issued in May 2011 alone (the second highest issuance month after March) than in the five

months beginning in July (€4.8bn). Notwithstanding the issuance deceleration in H2 2011, the

issuance volume in H1 2011 was enough to make 2011 issuance the second-highest volume

level over the last eight years eclipsed only by last year’s record €41.9bn. By sector,

Industrials (36%), Telecoms (23%), Consumer Non-Cyclicals (19%) and Consumer Cyclicals

(12%) accounted for 90% of 2011 issuance volume. By country, Italy (17%), Germany (16%)

and France (16%) comprised nearly half of EHY 2011 issuance. For 2012, SG forecasts new

European high yield supply in the area of €20bn with more issuance coming in H2 2012 than

in H1 2012. SG also anticipates redemptions of around €10bn, comparable to the 2010

amount. We also expect fund flows into the asset class to continue to fluctuate and remain

negative on an LTM basis at least into the end of H1 2012. However, issuance and fund flows

into European high yield could surprise on the upside should fundamentally deeper and more

permanent reforms and policies materialise to resolve the eurozone financial crisis in a more

convincing fashion than that observed to date. Given the pent-up supply pipeline, we could

witness in 2012, as in 2011, significant amounts issued during a market window lasting at

least a few months. Although the amount of EHY bonds maturing in 2012 is modest compared

to later years, we anticipate issuers will nonetheless seek to address early their 2013

maturities as well as opportunistically tap the market. Investors’ receptiveness will

undoubtedly depend not only on issuer quality and issue pricing but also the extent to which

market technical factors outweigh wider systemic and idiosyncratic concerns.

European High Yield annual supply (2004-2011) European High Yield monthly supply (2011)

Source: SG Cross Asset Research Source: SG Cross Asset Research, Markit, Bloomberg

15.2 14.5

29.2

25.5

0.0

26.5

41.9

30.9

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 2008 2009 2010 2011

(€bn)

2.8

2.0

9.0

4.1

5.9

2.3

3.1

0.0

0.9

0.10.6

0

5

10

15

20

25

30

35

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

% o

f T

ota

l Y

TD

(€bn)

Issue amount (€bn, LHS) % of Total YTD (RHS)



December 2011 24

US High Yield fund flows (2010-2011 YTD)

Source: SG Cross Asset Research, AMG

European High Yield fund flows (2011)

Source: SG Cross Asset Research, J.P. Morgan

-2

2

6

10

14

18

22

26

30

34

38

42

46

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

Jan

-10

Fe

b-1

0

Apr-

10

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct-

10

Dec

-10

Jan

-11

Fe

b-1

1

Mar-

11

Apr-

11

Ma

y-1

1

Jun

-11

Au

g-1

1

Se

p-1

1

Oct-

11

Nov

-11

($ b

n)

($m

)

weekly flow ($m) Cumulative flow (rhs)

19

2

40

4

104 1

48 171

56

164

85

16

80

15

202

-20

-101

-17

0

42

-50

13

-83

-22

-139

-602

-29

3

-128

-54

-116

-16

4

-14

4

-199

-77

-71

208

73

27

2

-27

-29

-58

-1,000

-750

-500

-250

0

250

500

750

1,000

1,250

1,500

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

Mar-

11

Apr-

11

Ma

y-1

1

Jun

-11

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

(€m

)

(€m

)

weekly flow (€m) Cumulative flow (rhs)



December 2011 25

Performance of selected 2011 European High Yield issues

Issue date Issuer Coupon Maturity Launch bid price Bid @ 30-Nov-11 % Chg 1-mth

% Chg from

launch

08-Jan-11 CIRSA 8.75% 01-May-18 100.50 76.00 -14.5 -24.5

14-Jan-11 LABFP 8.50% 15-Jan-18 100.00 77.00 -14.5 -23.0

17-Jan-11 AGROK 10.00% 07-Dec-16 107.80 93.00 -2.5 -14.8

20-Jan-11 PEUGOT 4.00% 01-Oct-13 100.60 98.74 -2.0 -1.9

20-Jan-11 PEUGOT 5.00% 01-Oct-16 100.80 90.91 -5.9 -9.9

20-Jan-11 LBTYA 6.38% 01-Jul-20 100.00 90.00 -4.5 -10.0

21-Jan-11 ONOSM 11.13% 01-Jul-19 100.00 78.50 -8.5 -21.5

26-Jan-11 FMEGR 5.25% 01-Feb-21 100.00 99.00 -0.5 -1.0

09-Feb-11 TNETBB 6.63% 01-Feb-21 100.00 92.88 -4.6 -7.1

10-Feb-11 PIREL 5.13% 01-Feb-16 99.66 92.80 -5.2 -6.9

22-Feb-11 EDCON 9.50% 01-Mar-18 100.00 77.00 -10.5 -23.0

25-Feb-11 FDCSJ 8.75% 01-Mar-18 100.00 86.50 -8.5 -13.5

07-Mar-11 FIIM 5.25% 01-Mar-15 100.00 86.25 -10.3 -13.8

07-Mar-11 FIIM 6.25% 01-Mar-18 100.00 80.50 -10.8 -19.5

08-Mar-11 UCBBB 7.75% 01-Mar-49 99.50 93.00 -4.0 -6.5

08-Mar-11 RIFP 5.00% 01-Mar-17 99.60 102.30 -1.5 +2.7

08-Mar-11 GROHE 5.17% 01-Sep-17 100.00 88.00 -4.0 -12.0

18-Mar-11 OBRAS 8.75% 01-Mar-18 100.00 94.50 -5.3 -5.5

23-Mar-11 KABLBW 7.50% 01-Mar-19 100.00 97.75 -5.0 -2.3

23-Mar-11 KABLBW 5.47% 01-Mar-18 100.00 96.00 -2.0 -4.0

23-Mar-11 KABLBW 9.50% 01-Mar-21 100.00 96.00 -5.0 -4.0

24-Mar-11 ONTEX 5.34% 01-Apr-18 100.00 89.00 unch -11.0

24-Mar-11 ONTEX 7.50% 01-Apr-18 100.00 88.00 -8.0 -12.0

24-Mar-11 ONTEX 9.00% 01-Apr-19 100.00 71.00 -15.0 -29.0

29-Mar-11 FIAT 6.38% 01-Apr-16 100.00 80.50 -10.8 -19.5

31-Mar-11 HDDGR 9.25% 01-Apr-18 99.74 58.00 -10.0 -41.7

04-Apr-11 HTOGA 7.25% 01-Apr-14 99.67 67.00 -9.3 -32.7

05-Apr-11 SAPSJ 6.63% 01-Apr-18 100.00 83.00 -6.0 -17.0

07-Apr-11 KIONGR 7.88% 01-Apr-18 100.00 72.00 -13.0 -28.0

07-Apr-11 KIONGR 5.54% 01-Apr-18 100.00 73.00 -5.0 -27.0

11-Apr-11 MWDP 6.75% 01-Apr-18 99.32 91.13 -0.6 -8.0

13-Apr-11 FREENT 7.13% 01-Apr-16 99.49 102.25 -0.3 +2.8

14-Apr-11 CMACG 8.88% 01-Apr-19 100.00 36.50 -8.5 -63.5

14-Apr-11 BOPRLN 9.75% 01-Apr-18 99.38 80.00 -8.0 -19.4

15-Apr-11 GT 6.75% 01-Apr-19 100.00 91.00 -2.0 -9.0

06-May-11 BEZINC 8.88% 01-May-18 100.00 74.50 -4.0 -25.5

06-May-11 HECKKO 9.50% 01-May-18 98.75 60.00 -18.0 -38.8

11-May-11 REFRLN 7.38% 01-May-18 100.00 91.00 -6.0 -9.0

11-May-11 REFRLN FRN 01-May-18 100.00 88.00 -10.0 -12.0

12-May-11 F 4.75% 01-Jan-15 99.88 95.00 -4.8 -4.9

12-May-11 STYRO 7.63% 01-May-16 100.00 67.00 -14.0 -33.0

12-May-11 PAJFP 8.88% 01-Jun-18 99.35 68.00 -8.0 -31.4

13-May-11 ODEON FRN 01-Aug-18 100.00 90.00 -7.0 -10.0

24-May-11 RXLFP 7.00% 01-Dec-18 99.99 93.50 -4.8 -6.5

07-Jun-11 NSINO 11.75% 01-Jun-16 99.49 63.00 +16.5 -36.5

08-Jun-11 TNETBB 5.34% 01-Jun-21 100.00 96.00 -2.0 -4.0

09-Jun-11 ORGAU 7.88% 01-Jun-18 99.96 88.00 -6.0 -12.0

10-Jun-11 KABEGR 6.50% 01-Jun-18 100.00 101.50 -1.0 +1.5

17-Jun-11 KINOVE 10.00% 01-Oct-18 100.00 88.50 -4.5 -11.5




December 2011 26

Performance of selected 2011 European High Yield issues (continued)

Issue date Issuer Coupon Maturity Launch bid price Bid @ 30-Nov-11 % Chg 1-mth

% Chg from

launch

05-Jul-11 FIAT 6.13% 01-Jul-14 100.00 89.50 -7.5 -10.5

05-Jul-11 FIAT 7.38% 01-Jul-18 100.00 77.00 -13.0 -23.0

06-Jul-11 SOLARW 6.38% 01-Jul-16 99.48 51.00 -9.0 -48.5

06-Jul-11 ONOSM 8.88% 01-Dec-18 99.00 85.00 -9.5 -14.0

08-Jul-11 GEF 7.38% 01-Jul-21 100.00 99.00 unch -1.0

08-Jul-11 BNRGR 5.50% 01-Jul-18 99.32 97.75 -1.8 -1.6

20-Jul-11 CAPSUG 9.88% 01-Aug-19 100.00 100.00 -2.0 unch

26-Jul-11 BROCCO 10.00% 01-Aug-18 100.00 93.00 -10.0 -7.0

08-Sep-11 FMEGR 6.50% 01-Sep-18 98.60 107.00 -1.5 +8.4

28-Sep-11 HEIGR 9.50% 01-Dec-18 99.30 102.75 -6.8 +3.5

03-Nov-11 EOFP 9.38% 01-Dec-16 99.50 97.75 - -1.8

04-Nov-11 NORCEL 10.75% 01-Sep-19 95.00 87.00 - -8.0

TOTAL 61 7.10%

99.90 85.57 -6.5 -13.1


Maturity profile

The maturity schedule for European high yield issuers in both 2012 and 2013 is relatively light.

When added to solid liquidity profiles for the majority of issuers, we note the absence of hard,

identifiable default or restructuring triggers for a high majority of existing European high yield

issuers. Since the peak of the LBO boom in 2006-7, a number of companies who issued

during that period have either repaid outstanding debt from sale proceeds or extended

maturity profiles via amend-to-extend exercises. Others, however, still retain the initial capital

structures from that period and face rising maturities over the 2014-2015 horizon.

European High Yield and maturities (notional value, 2012-2015)


6.4

9.8

21.6

14.4

2.4

7.3

20.1

35.2

0

5

10

15

20

25

30

35

40

2012 2013 2014 2015

(€m

)

Bonds Lev. Loans



December 2011 27

Default rates and restructurings

We anticipate a continued low level of HY corporate defaults in Europe next year at 2.5% of

issuers. This rate is lower than the historical average and reflects to a large extent the

reinforced balance sheets European HY corporates have shored up through maturity

extensions, deleveraging, increased liquidity and improving earnings/cash flow over the past

three years. Issuers’ refinancing operations, combined with lower than average debt financing

rates (despite higher spreads than in the pre-2008 period) and generous covenant structures

also contributed to lower than expected default rates in 2010. Although Moody’s baseline

2012 forecasts for global, US and European default rates are at similar levels to those of 2011

in the 1.5-2.5% range, Moody’s cautions that European HY default rates could rise in 2012 to

the 5% area if the eurozone financial crisis is not contained. Once again, mercurial European

policymaking is a big wild card. Across industries over the coming year, Moody’s expects HY

default rates to be highest in the Consumer Transportation sector in the U.S. (5.2%) and the

Media (Advertising, Printing & Publishing) sector in Europe (6.7%). Other sectors with high

expected default rates in Europe include Paper Products and Services. Notwithstanding these

expected low default rates, in the context of continued European macro and financial markets

uncertainty, we anticipate in H1 2012 a continued shift up from unsecured and subordinated

to secured parts of issuer capital structures, where expected recoveries are materially higher.

To date in 2011, there have been thirteen restructurings which is comparable to the number in

all of 2010 (also 13) but significantly lower than the recent peak of 54 in 2009. Credits

considered distressed have numbered twenty thus far this year, similar to 2010’s twenty-one

yet about a fifth of 2009’s 97. Among 2011’s thirteen restructurings, nine have loan-only debt

structures including: Regency (€680m), Endemol (€2.4bn), Vivacom (€1.6bn), Pfleiderer

(€750m), Peacock Group (€775m), Panrico (€350m), Alma Consulting (€535m), Ferretti (€550m)

and Desmet Ballestra (€253m). The remaining four – Travelport, Novasep, SEAT and eircom –

have leveraged loan/HY bond structures.

The number of restructurings in 2012 is likely to be in the range of 15-20, slightly higher

than those in 2010 and 2011. Amongst the identifiable restructuring candidates for 2012,

five of seven also have loan-only structures, including: Marken, Kloeckner Pentaplast,

Materis, European Directories and Eurotaxglass. Thomas Cook and OTE are two

candidates whose debt structures include a combination of leveraged loans and high

yield bonds. Although the total number of restructurings in 2012 will probably be well

below the recent peak of 54 restructurings in 2009, an extended period of economic

weakness, sustained eurozone financial stress, largely closed high yield capital markets

combined with a rising maturity wall in 2013-2015 and declining covenant headroom

could converge to precipitate, at the least, a rise in covenant amendment and amend-to-

extend requests and potentially increased preemptive restructurings. Given most of the

seven to eight potential restructuring candidates for 2012 have loan-only debt structures,

these should not have as much of a direct negative impact on the high yield market as on

the leveraged loan market.

Global high yield default rates, issuer-weighted (2008-2012E)

(%) 2008 2009 2010 2011 LTM 2011E 2012E

Global 4.4 13.1 3.2 1.9 1.4 2.2

US 4.9 14.1 3.3 1.6 1.4 2.4

EU 2.1 11.3 1.9 2.1 2.2 2.0

Source: SG Cross Asset Research, Moody’s Investors Service



December 2011 28

Global high yield default rates (2008-2012)


Global high yield default rates (1920-2011)


Global credit loss rates (1982-2010)


13.1

14.1

1.4

11.3

2.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2008 2009 2010 2011 LTM 2011E 2012E

Global US EU

15.4

6.1

8.8

10.0

1.6

10.3

1.0

13.1

1.9

2.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1920

1922

1924

1926

1928

1930

1932

1934

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Defa

ult

ra

te (

%)

2.8%

6.3%

6.0%

8.1% 8.3%

0.9%

2.3%

3.1% 3.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Cre

dit lo

ss

ra

te (%

)

High Yield Inv. Grade All



December 2011 29

Company reviews

Company reviews



December 2011 30



December 2011 31

Industrial Conglomerates

Abengoa

Credit Opinion Company profile

Abengoa is an engineering and technology group focused on renewable energy, environmental

services and information technology. The group operates through a mix of fully-owned private

companies, part-quoted businesses, and non-recourse project finance operations. Initially a

Spanish engineering and construction business, Abengoa has expanded into renewable energy

and other activities over the past few years using debt, partly non-recourse to the parent

company. Based in Seville, Spain, the company was set up in 1941 and is 56%-owned by

Inversión Corporativa, a private company controlled by four founding families. It is listed in

Madrid.

The group has recently made progress made in terms of net leverage, down to 2.7x at the

corporate level thanks to recent disposals and a capital increase. These actions have allowed

Abengoa to maintain its high cash pile, now hovering around €3.9bn (pro forma). As cash is not

being used to pay down debt, gross leverage stays high at 10.4x, however.

Strengths Good degree of stability of earnings and cash flows

Focus on renewable resources

Leverage still very high but stabilising

Large amount of liquidity on balance sheet

Weaknesses Corporate profits largely depend on self-sponsored projects

Very high leverage, unlikely to decrease until at least 2013

Strongly negative free cash flow on a consolidated basis

Heavy debt maturity schedule

Group structure

Source: Company Data / SG Cross Asset Research

Negative

Corporate Ratings

LT Outlook MDY Ba3 Stable

S&P B+ Stable

Fitch BB Stable

Bonds price evolution

CDS spread evolution

n/a

Share price


Market cap.(€m) 1,575

Bloomberg Ticker ABG_SM_Equity

Analysts

Roberto Pozzi

(44) 20 7676 7152 [email protected]

Barbora Matouskova



aware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a

single factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE


80

85

90

95

100

105

110

115

120

ABGSM 9.625% 2015 ABGSM 8.5% 2016

Price MA 100

14

17.5

21

24.5

2010 2011



December 2011 32

Abengoa - Eurobonds

Issuer Size CPN Maturity MDY S&P Fitch Price YTW Z-spread Next call Price Reco

ABENGOA SA 300 9.625 25/02/15 Ba3 B+ BB 103 8.3 677 NC NC Sell

ABENGOA SA 500 8.500 31/03/16 Ba3 B+ BB 97 9.2 750 NC NC Sell


Abengoa - Financial data

Revenue split

EBITDA split

Debt maturity profile

Debt structure

Main shareholders

Founding family 56%

Free float 39%

Management 3%

Board 2%


E&C45%

Concessions

7%

Industrial production

48%

E&C32%

Concessions

34%

Industrial production

34%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Liquidity Rest of 2011

2012 2013 2014 Thereafter

Capital increase Disposal proceeds

Cash Corporate share of capex

Bonds and loans Convertible bonds

0

2000

4000

6000

8000

10000

12000

2005 2006 2007 2008 2009 2010 Sep-11

Non recourse debt

Recourse debt



December 2011 33

Sr unsec 9.625% Feb 15

Bond Covenants

Ranking/Security/Guarantee Unsecured debt of the issuer, guaranteed by certain subsidiaries on an unsecured basis

Call schedule Non-callable

CoC 101%

Debt test Net debt / EBITDA <3.0x

Main carve-outs: non-recourse financing, existing syndicated loans (€1.8bn)

Restricted payments 50% of cumulative net income less 100% of loss

Law English law


Sr unsec 8.5% Mar 16

Ranking/Security/Guarantee Unsecured debt of the issuer, guaranteed by certain subsidiaries on an unsecured basis

Call schedule Non-callable

CoC 101%

Debt test Net debt / EBITDA <3.0x

Main carve-outs: non-recourse financing, existing syndicated loans (€1.8bn)


Law English law




December 2011 34

Latest research published on 16 November 2011

Abengoa – Leverage down but free cash flow still negative

We maintain our sell recommendations on Abengoa’s notes following its Q3 results

published yesterday. Management highlighted the progress made in terms of net leverage,

down to 2.7x at the corporate level thanks to recent disposals and a capital increase. These

actions have allowed the group to maintain its high cash pile, now hovering around €3.9bn

(pro forma). As cash is not being used to pay down debt, gross leverage stays high at 10.4x,

however. The 9.625% and 8.5% notes have gained 3-4 points since our last update and are

currently quoted at around 103.5 and 98¾ (Ask) respectively (YTW 8.3% and 8.85%). The

8.5% notes are still trading towards the high end of the 84-105 range of the last 12 months.

At a similar yield we currently prefer OBRAS 8.75%.

Consolidated LTM EBITDA was €928m, up from €874m in June but below the €1bn

reported in Q1. At the corporate level, LTM EBITDA of €568m was unchanged from June but

stayed well below the €650-725m reported in previous updates. Both at the group and

corporate levels the lower results partly reflect recent disposals, thus making it difficult to

gauge organic growth. Management raised the EBITDA guidance for 2011 to €1.05bn from

€960m. However, most of the increase reflects changes in accounting principles applied on

the solar plants (IFRIC 12). While refraining from giving any guidance for 2012, management

expects EBITDA in a €1.3-1.4bn range in 2013. The recent disposals and capital increase

allowed Abengoa to increase the cash on its balance sheet and reduce net leverage, while

gross debt remained unchanged. Consolidated reported net leverage improved from 6.8x in

June to 6.3x. At the corporate level, the improvement was even stronger with net leverage at

2.7x from 4.6x. As defined in the loan covenant, net leverage is 0.2x (pro forma), according to

management, versus a covenant of <3.0x. Abengoa reported €3.9bn of cash and short-term

financial investments, of which €3.2bn is at corporate level. Capex needs and debt maturities

amount to €485m in Q4, €1.4bn in 2012 and €1.6bn in 2013.

Abengoa generated €641m of cash during the first nine months of 2011, thus covering

29% of its capex and interest costs (€2.2bn combined) at consolidated level, marginally

below the 32-34% shown in 2009 and 2010. However, the group still has to fund €1.3bn of

capex in Q4, which could make it harder to keep funding a third of capex+interest this year

despite a seasonally strong last quarter. That said, on the call we understood that

management expects net debt to remain broadly unchanged by year end, implying limited

negative free cash flow in Q4 although this could include the proceeds from disposals and

the capital increase. The remaining funding needs of the group have so far been covered by

working capital inflows (€614m) and borrowings (around €1bn). The net working capital of the

group has further increased to €2.7bn including trade payables worth €5.1bn. Abengoa has

not yet published a cash flow statement for its corporate (recourse) activities. Based on

€568m of reported corporate EBITDA in the last twelve months and after interest expenses of

€220m, the company is funding one-third of its €872m equity injections into the projects it

sponsors.



December 2011 35


France-based Alcatel-Lucent is one of the world’s largest manufacturers of

telecommunications equipment. The company is involved in almost all segments of the telecom

equipment market, including support services and turn-key solutions.

The company was formed by the merger of France-based Alcatel and US-based Lucent in

2006. The difficulties in integrating its two legacy 3G technologies left it weakened in 3G/4G

mobile data. The company continues to struggle to find a niche between the low-cost Chinese

vendors such as Huawei and ZTE and sector leader Ericsson. With the company closing its

sixth consecutive year of cash burn, spanning both the economic and the technological cycle,

we think there is a strong case to be made that its current ‚end to end‛ footprint is economically

unfeasible. The company’s strength, and possibly the most profitable units, is mainly in the

fixed-line products of the old Alcatel. However, with the sale of Genesys, management is clearly

indicating that it prefers to sell its few profitable units that it has left to buy time for a hoped-for

turnaround, instead of addressing its overextended footprint.

Alcatel-Lucent recently downgraded its FY2011 guidance as a result of more cautious capex

spending from operators. The sector as a whole is highly sensitive to business confidence and

the economic environment, and Alcatel-Lucent can be considered one of the most vulnerable

because of its concentration in ‚lower-priority‛ fixed-line equipment and weak cash flows. The

new EUR2016 bonds do not enjoy a subordinated upstream guarantee from Alcatel-Lucent

USA (the former Lucent) but have much stronger covenant language. As the former Lucent part

is probably a much weaker standalone credit and holds the bulk of the EUR1.2bn pension

liabilities (separate financials are not disclosed), we believe the upstream guarantees add

minimal credit improvement to the EUR2014s. The bonds are rated lower than the corporate

family rating (CFR) by Moody’s on subordination to the pension fund and subsidiaries’ debt.

Group structure

Negative

Corporate ratings

LT ST Outlook MDY B1 NP Stable

S&P B B Stable

Fitch NR NR NR

Bonds spread evolution


Share price



Bloomberg Ticker ALAFP.

Analysts

Juliano H Torii, CFA







$94m 2.875% Conv/Put/Call Jun 23

$880m 2.875% Conv/Put/Call Jun 25

Brandes, Dodge & Cox

Alcatel Lucent SAThe Issuer

Reference entity (EUR CDS)

Alcatel Lucent USA Inc (100%)

Reference entity (USD CDS)

EUR490m 6.375% Senior bond Apr14

Free float

EUR500m 8.5% Senior bond 2016EUR1,000m 5% Convertible Jan 15EUR96m Floating 2011 extendable to 2016

EUR96m Floating 2012 extendable to 2016

EUR1,400m RCF undrawn 2012-2013 unknown covenants

Alcatel Lucent Canada Inc Alcatel Lucent Submarine Networks

Compagnie Financiere Alcatel Lucent

Alcatel Lucent Participations

Other operating subsidiaries


Senior$300m 6.5% Conv/Put/Call Jan 28$1,360m 6.45% Conv/Put/Call Mar 29

Subordinated guarantee from Alcatel Lucent

Subordinated guarantee from Alcatel Lucent USA Holdings

SubordinatedUSD Lucent Technologies Capital Trust due 2017 (EUR615m equivalent)

0

200

400

600

800

1000

1200

Alcatel-Lucent EUR2014 ASW Alcatel-Lucent EUR2016 ASW

0

200

400

600

800

1000

1200

1400

1600

1800

Alcatel-Lucent 5yr CDS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Alcatel-Lucent

Communications Equipment

Alcatel-Lucent



December 2011 36

Alcatel-Lucent - Bonds

Issuer Rating MDY Rating S&P Rating Fitch Amount (€m) Coupon Maturity Call date Reco

Alcatel SA B2 / Negative B / Stable NR / NR 462 6.375% 07 Apr 2014 - Sell

Alcatel SA B2 / Negative B / Stable NR / NR 500 8.500% 15 Jan 2016 - Sell


Alcatel-Lucent - Financial data

Revenue split

EBIT split

Debt maturity profile – Q311

Debt structure

Jun-11 EURm %

Bonds 3,886 88.2

Loans and other 518 11.8

Main shareholders

Brandes Investment

Partners 10.20%

Fidelity International 5.20%

Credit Agricole 2.70%

Alcatel-Lucent 2.60%

CDC 2.10%


(in € millions) 2005 2006 2007 2008 2009 2010 2011e 2012e 2013eGroup revenues 11,219 12,282 17,792 16,984 15,157 15,996 15,836 14,646 14,646Change % 9.3% 9.5% 44.9% -4.5% -10.8% 5.5% -1.0% -7.5% 0.0%EBITDA 1,536 1,318 1,566 1,707 913 1,281 1,473 1,274 1,274Margins % 13.7% 10.7% 8.8% 10.1% 6.0% 8.0% 9.3% 8.7% 8.7%Cash interest -23 -98 -152 -192 -172 -257 -272 -282 -318Cash taxes -15 -71 -73 -123 -89 -117 -95 -95 -95+/(-) other cash items -654 -389 -1,153 -1,054 -1,128 -1,043 -853 -853 -853FFO 844 760 188 338 -476 -136 253 44 8Changes in WC -234 -409 -212 -131 471 10 -370 -28 -28CF from operating activities 610 351 -24 207 -5 -126 -117 16 -20CapEx -593 -684 -842 -901 -691 -692 -681 -659 -659As % sales -5% -6% -5% -5% -5% -4% -4% -5% -5%

RCF (CFO - CapEx) 17 -333 -866 -694 -696 -818 -798 -643 -679As % sales 0% -3% -5% -4% -5% -5% -5% -4% -5%Disposals/(acquisitions) 416 1,005 986 -51 1,766 196 1,089 0 0FCF (before div + buybacks) 433 672 120 -745 1,070 -622 291 -643 -679Dividends -26 -219 -366 -7 -4 -4 -72 0 0Buybacks 18 25 1 0 0 0 12 0 0Shareholder remuneration -8 -194 -365 -7 -4 -4 -60 0 0As % of FCF's -2% -29% -304% 1% 0% 1% -21% 0% 0%

New debt YTD/(redemptions) -645 -505 -760 -250 -243 432 -969 -11 0Net cashflows -11 1,460 -1,446 -678 977 119 -713 -654 -679Cash and equivalents 5,257 6,717 5,271 4,593 5,570 5,689 4,976 4,322 3,643Gross debt reported 3,798 6,209 5,000 4,982 4,684 5,312 4,308 4,297 4,297Net debt/(cash) -1,459 -508 -271 389 -886 -377 -668 -25 654EBITDA/interest coverage 66.8 13.4 10.3 8.9 5.3 5.0 5.4 4.5 4.0FFO/gross debt % 22.2% 12.2% 3.8% 6.8% -10.2% -2.6% 5.9% 1.0% 0.2%Net debt-to-EBITDA x -0.9x -0.4x -0.2x 0.2x -1.0x -0.3x -0.5x 0.0x 0.5xGross debt-to-EBITDA x 2.5x 4.7x 3.2x 2.9x 5.1x 4.1x 2.9x 3.4x 3.4xOperating leases (NPV) 811 1,278 1,129 1,083 984 877 877 868 860PBO (tax adjusted) 791 21 -1,824 279 547 335 788 788 788Other (sold receivables) 0 0 0 0 0 0 0 0 0Adjusted net debt 143 791 -966 1,751 644 836 997 1,631 2,302Adjusted gross debt 5,400 7,508 4,305 6,344 6,214 6,525 5,973 5,953 5,945RCF/adj. gross debt 0.3% -4.4% -20.1% -10.9% -11.2% -12.5% -13.4% -10.8%and back againFFO/adj. gross debt 15.6% 10.1% 4.4% 5.3% -7.7% -2.1% 4.2% 0.7% 0.1%Adj. Net debt-to-EBITDA x 0.1x 0.6x -0.6x 1.0x 0.7x 0.7x 0.7x 1.3x 1.8xAdj. gross debt-to-EBITDA x 3.5x 5.7x 2.7x 3.7x 6.8x 5.1x 4.1x 4.7x 4.7x

Other 1%

Enterprise 9%

Services 18%

Carriers 72%

0

Carriers -137%

Other -11%

Enterprise 115%

Services 133%

69 11 0383

712

2,240

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011 2012 2013 2014 2015 2016>



December 2011 37

Bond Covenants

Alcatel-Lucent - Covenants

ALU - 6.375% due 2014 ALU - 8.5% due 2016

Bond €462m 6.375% senior notes due 07/04/2014 €500m 8.5% senior notes due 15/01/2016

Issuer Alcatel SA Alcatel SA

Coupon Annually Semi-annually (27 Jan/27Jul)

Mandatory deferral No No

Ranking within issuer Pari passu vs other unsecured unsubordinated debt -

subordinated to secured debt

Pari passu vs other unsecured unsubordinated debt -


Ranking vs. other debt Unsubordinated and unsecured Unsubordinated and unsecured

Guarantees Subordinated upstream guarantee from Alcatel Lucent

USA Holdings No

Negative pledge Yes (negative pledge) Yes (liens)

Cross default Yes for any bond or guarantee >€100m Yes for any bond or guarantee >€100m

Redemption before call No No

Call schedule None None

Tax redemption In whole at 100% In whole at 100%

Change of control No

Yes at 101%, triggered by acquisition of more than 50%

of voting stock, asset disposals or certain changes to

Board of directors

Limitation on debt No Yes, if fixed charge coverage above 2x, but allows

EUR750m of debt by any restricted subsidiary

Asset disposals No Yes, but can apply proceeds to capex or R&D

Restricted payments No Yes

Transaction with affiliates No No

Change in covenant No Yes




December 2011 38


Alcatel-Lucent - Guidance downgrade, no 2011 cash breakeven as clients cut

capex into Q4

We are taking profits on our Buy CDS/Sell X-Over and maintain our Sell on the bonds.

SG Bond Recommendation: We are taking profits on our Buy CDS vs X-Over as we see

limited catalysts for further CDS widening in the next two months following today’s significant

movement. However, the bonds, such as the EUR2016 (ASW 767bp), are still too expensive.

We believe Q4 is likely to be very weak and would consider resetting shorts on the CDS

ahead of FY11 results. We believe the Dec 12 CDS should be relatively safe as a result of the

proceeds from the Genesys disposal, but still do not like the risk/return of selling the 1yr (600-

800bp) outright – 1000bp would look more reasonable. The Jun 2013 CDS could be at risk as

a result of loan maturities in Apr 2013 as well as the ongoing cash burn.

SG Credit Opinion: We maintain our Negative credit opinion. Revenues dropped 6.8% on

a reported basis, significantly underperforming both Ericsson (+17%) and NSN (+3%

excluding acquisitions). While ‚adjusted operating profit‛ saw yoy improvement, as we

previously discussed in our 15 Feb 11 note, this measure has minimal correlation with

underlying cash flow as it excludes several key recurring items. Indeed, while the company

blames the significant yoy deterioration of cash flow from operations (CFO) on working capital

and inventories especially, CFO before working capital (FFO) also deteriorated to EUR-26m in

Q311 from EUR+54m in Q310. And the company warned that Q4 is likely to be weak as

customers cut capex on the back of macroeconomic uncertainties. The company no longer

expects cash flow breakeven for FY11, and while it intends to reach this in 2012, it refused to

provide details on how to get there. The pension deficit increased to EUR1,213m from

EUR49m in June 2011.

Management notes that clients in the US and Europe, hesitant to increase capex under the

current economic conditions, have prioritised mobile capex at the expense of fixed, which

impacted Alcatel-Lucent disproportionally. We previously warned that Alcatel-Lucent was

unlikely to be a mobile broadband story, and we expect its underperformance to continue.

Today’s results confirm our view that, given the heavily-loaded Q4 seasonality of the sector,

full year guidance is not much more than a wild guess until mid-Q4.

With the company running into the sixth consecutive year of cash burn, spanning both the

economic and the technological cycle, we think there is a strong case to be made that its

current ‚end to end‛ footprint is economically unfeasible. Unfortunately, the company today

once again refused to consider the possibility of a break-up. We believe the current policy, of

liquidating the few remaining cash-generating assets such as Genesys to buy time, is

especially problematic for creditors on instruments longer than one year. We are also

concerned that the company’s cash flow improvement plans seem mostly reliant on the

reduction of working capital requirements, which is unsustainable unless revenues shrink.

Having said that, from the information released today, it seems that the sale of Genesys was

a relatively good deal. While it takes at least EUR377m of revenues, EUR58m of operating

profit and EUR82m of FFO (2010 figures) out of a company that is still heavily cash flow

negative, the multiples do not look bad. It is difficult to see what is in it for Permira, but we

suspect the biggest downside for Alcatel-Lucent might be on growth. The enterprise division,

thanks to Genesys, was the only product line to experience yoy revenue growth in Q311.


http://www.sgresearch.com/p/en/2/1358/0/1D5C476EE2C7742BC1257838003F6B75.html?sid=eb375f0f239068c9dc195f6180943820


December 2011 39


Ardagh is one of Europe's largest manufacturers of packaging products focused on glass

and metal cans. Since 2002, the group has grown via debt-funded acquisitions, the largest of

which were Rexam Glass in 2007 for €660m and Impress in 2010 for €1.7bn. After the

acquisition of Impress, the company announced its intention to list in the US, though plans have

stalled due to market conditions. The group has traditionally funded its operations through the

capital markets and more limited banking facilities. Since 2009, it has issued secured notes, and

currently has a 50/50 mix between secured and unsecured lending. Though the acquisition of

Impress in 2010, Ardagh’s debt has increased three-fold – including assumed debt - whilst

leverage has deteriorated by only half a notch. Earlier this year, the group has also refinanced

and increased the size of its pay-in-kind notes. The group is privately owned by its chairman,

Paul Colson.

Strengths

Leading supplier of glass containers and metal cans in Europe

Focus on stable end markets, predominantly for the food, beer and spirits sectors

Long-standing relationships with multinational customers including Diageo, Carlsberg and

Coca-Cola Schweppes

Good geographic and product diversification

Robust pricing power underpinned by pass through clauses for main raw materials

Good geographic and product diversification

Reasonably reliable financial policy, owner/managers focused on long term growth

Weaknesses Mature, low growth industry, with overcapacity and substitution risks

Volatile raw material costs, particularly UK natural gas

Relatively high customer concentration, but reduced after Impress takeover

Capital intensive, lumpy and unpredictable capex

Acquisitive growth strategy

Complex group and capital structure

Group structure


Stable

Corporate ratings

LT Outlook MDY B2 Positive

S&P B+ Stable

Fitch NR NR



Share price


Market cap.(m)

Bloomberg Ticker ARGID

Analysts

Roberto Pozzi


Barbora Matouskova






50

60

70

80

90

100

110

120

9.25% 16 7.375% 177.125% 17 8.75% 209.25% 20

0

200

400

600

800

1000

1200

1400

Sep-11 Oct-11 Oct-11 Oct-11 Oct-11 Nov-11 Nov-11 Nov-11

Packaging

Ardagh Group



December 2011 40

Ardagh Group - Bonds

Issuer Issue Size Coupon Maturity Mdy S&P Price Yield Z-spread Next call Next call Reco

ARDAGH GLASS FINANCE 300 9.250 01/07/16 Ba3 BB- 105.3 7.6 564 104.6 01/07/13 Buy

ARDAGH PACKAGING FINANCE 825 7.375 15/10/17 Ba3 BB- 98.8 7.5 535 103.7 15/10/14 Buy

ARDAGH GLASS FINANCE 310 7.125 15/06/17 B3 B- 88.8 9.5 756 103.6 15/06/12 Sell

ARDAGH GLASS FINANCE 180 8.750 01/02/20 B3 B- 91.3 10.1 790 104.4 01/02/15 Sell

ARDAGH PACKAGING FINANCE 475 9.250 15/10/20 B3 B- 94.3 10.1 784 104.6 15/10/15 Sell

ARD FINANCE SA 185 11.125 01/06/18 Caa1 B-

105.6 01/06/14 Sell


Ardagh Group - Financial data

Revenue split

EBIT split


Debt structure

Main shareholders

Paul Colson (Chairman) 21%

Yeoman (Mr Colson) 39%

Niall Wall 13.5

Other mgmt. 9%


Glass packaging

62%

Metal packagnig

38%

Glass packaging

56%

Metal packagnig

44%

0

200

400

600

800

1,000

1,200

1,400

Liquidity 2010-13 2014 2015 2016 2017 2018

CCLs Cash Notes Banks

0

500

1000

1500

2000

2500

3000

3500

2007 2008 2009 2010 Sep-11

PIKs High yield notes

Unsecured notes Secured notes

Bank debt



December 2011 41

€300m 9.25% 2016s, €825m 7.375% 2017s, $350m 7.375% 2017s Snr secured notes

Ranking/Security/Guarantee Senior secured debt of the issuer

Guaranteed on a senior secured basis by the parent and certain subsidiaries

Call schedule From 1 July 2013 at 104 .625%, from 1 July 2014 at 102.3125%, from 1 July 2015 at 100%

CoC 101%

Debt test Fixed charge cover >2x


Law State of New York


€310m 7.125% 2017s, €180m 8.75% 2020s, €475m 9.25% 20s, $450m 9.125% 20s Snr unsecured notes

Bond Covenants

Ranking/Security/Guarantee Unsecured debt of the issuer

Guaranteed on a senior unsecured basis by the parent and on a senior subordinated basis by certain subsidiaries

Call schedule 7.125% 2017s

8.75% 2020s

€ 9.25% 20s

$ 9.25% 20s

CoC 101%







December 2011 42


Ardagh Group – Stay secured

Ardagh’s 7.375% secured notes have gained 9 points over the past three months,

outperforming the less liquid 9.25% secured notes and all the unsecured notes, although

the latter have staged a strong recovery in the past month. The company’s recent quarterly

results confirmed that the group is not entirely immune to volatile input costs. However, at

4.5x, total net reported leverage remains in the 4-5x range where it has been for the past

five years. With broadly stable fundamentals and limited M&A risk, we maintain our Stable

Credit Opinion. Despite the solid fundamentals, the recent recovery in valuations leaves little

room for further outperformance. We thus change our recommendation to Hold from Buy on

the secured notes and to Sell from Hold on the unsecured and the PIK notes.

In Q3, Ardagh reported EBITDA of €155m compared to €160m a year ago (pro forma for

the Impress acquisition). Net reported debt excluding the PIKs rose to €2.57bn from

€2.93bn in December resulting in a net reported leverage of 4.6x, up from 4.1x in December

and 4.5x in June. The increase in net debt in the first nine months is essentially due to

higher sales volumes and a seasonal working capital build-up. Some markets are seeing

softer demand while temporary supply issues have affected the seafood business. Overall,

however, the food markets are holding up well and the glass business is benefitting from

export sales with volumes up 5% despite a slowdown in beer consumption during the

summer. Anecdotally, customers have substantially destocked since 2009 and run much

lower inventories, which should make the enlarged Ardagh group even more stable than in

the previous downturn. The weaker areas are the specialties, essentially points and

coatings, which are unsurprisingly weaker given their construction exposure but small in the

context of group activities.

While the glass packaging division posted slightly higher earnings yoy from €69m to

€71.3m, on stable margins of 21.6%, metal packaging was down to €83.7m from €91.1m a

year ago with margins down to 14.7% from 16.5% reflecting volume and product mix

effects. Price increases of 6% were sufficient to offset 20% higher tinplate costs this year.

On the metal side, after the 20% increase seen this year tinplate costs are expected to

remain flat or slightly decrease in 2012. Despite reduced pressure on tinplate, management

continues to see strong inflation in key raw materials, especially energy, but remains

confident it will be able to offset this via price increases and cost savings. The company has

hedged 60% of its energy requirements for next year and is currently negotiating price

increases with customers, hinting at high single-digit to low double-digit increases.

Despite progress being made on the metal division footprint review, the planned €15m

savings will not be entirely achieved this year, though the target €15m annual savings in

each of the next three years is unchanged. We estimate around €100-120m of free cash

flow in Q4 largely offsetting the outflow in the first nine months. Capex for 2012 should be a

bit higher than this year, which is in turn a bit lower than the run rate of €180m. The

guidance for cash taxes in 2012 is around €50m, and a bit lower this year. M&A activity is

likely to remain bolt-on only, with the indicative size the same or below Fi.Par (€150m in

sales).



December 2011 43


Based in Montreal, Bombardier operates through two main segments: Aerospace and

Transportation. Sales of close to $18bn in FY11 were split broadly between the two divisions,

but Transportation was more profitable. The group benefits from more than 62,000 employees

around the world. Bombardier is predominantly Europe-focused, with some 48% of sales and

47% of employees based there, largely owing to the heavy European bias of the Transportation

division. North America is also important (29% of sales) with the remainder derived from Asia-

Pacific (18% of sales).

Strengths Leading market positions in most of its core markets

Strong order book, mainly in Transportation

Excellent liquidity management

Increasing presence in growing Asian markets

Weaknesses Inherent cyclicality of its end-markets, mainly commercial aircrafts

Fierce competition in the business jet market

High level of debt

Execution risk related to CSeries aircraft programme

Group structure

Stable

Corporate ratings

LT ST Outlook MDY Ba2 NR Stable

S&P BB+ NR Stable

Fitch BB+ NR Stable

Bonds z-spread evolution

CDS 5Y spread

Share price (CAD$)

Source: SG Cross Asset Research,

Bloomberg, Markit

Market cap.(C$m) 7,461

Equity Ticker BBD/B CN

Analysts

Barbora Matouskova


Roberto Pozzi







Bombardier Aerospace

OpCo

Bombardier Transportation

OpCo

Bombardier Inc.Issuer

Reference EntitiyHoldCo

$151m 6.750% Sr Unsecured callable due 2012

$162m 6.300% Sr Unsecured callable due 2014€785m 7.250% Sr Unsecured callable due 2016$650m 7.500% Sr Unsecured callable due 2018$850m 7.750% Sr Unsecured callable due 2020

€780m 6.125% Sr Unsecured callable due 2021CAD150m 7.350%Sr Unsecured callable due 2026$250m 7.450% Sr Unsecured callable due 2034

$750m RCF (committed, undrawn, unsecured) due June 2014

Free float: 100%

100% directly

0

200

400

600

800

1000

Z-s

pre

ad

(b

ps

)

BBDBCN 7.25 16 EUR

BBDBCN 6.125 21 EUR

BBDBCN 7.35 26 CAD

iBoxx HY Global

iBoxx € HY Industrial

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

(600)

(400)

(200)

0

200

400

600

800

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

BBDBCN CDS USD SR 5Y CorpCDX HY CDSI GEN 5Y SPRD CorpBBDBCN - CDX HYBBDBCN / CDX HY (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

(CA

D$

)

Aerospace & Defense

Bombardier



December 2011 44

Bombardier bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Jul-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%)

Next

call Rec

BBDBCN 6.75 12 US$ BOMBARDIER INC Senior

Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 550 151 102.00 179 2.3 n.a.

NR


Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 500 162 106.50 281 3.5 n.a.

NR

BBDBCN 7.25 16 € BOMBARDIER INC Senior

Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 800 785 105.90 204 3.6 3.6

15-Nov-

12 HOLD


Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 650 650 109.50 412 5.7 n.a.

NR


Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 850 850 110.75 418 6.1 n.a.

NR

BBDBCN 6.125 21 € BOMBARDIER INC Senior

Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 780 780 96.82 422 6.6 n.a.

BUY

BBDBCN 7.35 26 CAD BOMBARDIER INC Senior

Unsec.

BB+

STABLE NR

BB+

STABLE 3.1 150 150 n/a n/a n/a n.a.

NR


Unsec.

BB+

STABLE

Ba2

STABLE

BB+

STABLE 3.1 250 250 101.63 473 7.3 n.a.

NR


Bombardier - Financial data

Revenue split (Jan-11)

EBIT split (Jan-11)

Liquidity vs debt maturity

Debt structure

(in CAD$m) Total %

Bonds (Sr. Unsec.) 4,449 100%

Main shareholders

Fidelity 8.9%

McLean Budden 5.3%

Pyramis 4.1%

BlackRock 1.6%

CI Investments 1.6%


in $m FYE January Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211

Debt protection measures Gross debt / EBITDA 2.7x 2.4x 2.0x 2.0x 2.2x 2.3x 2.5x 2.6x 2.9x 3.2x 3.4x 3.2x 3.2x 3.1x

Net debt / EBITDA 0.1x 0.0x 0.3x 0.2x 0.7x 0.8x 0.7x 0.5x 0.6x 1.3x 1.5x 0.3x 0.7x 1.0x

Adj. net debt / EBITDA 0.9x 0.8x 1.1x 1.2x 1.8x 2.1x 2.5x 2.2x 2.4x 3.5x 3.9x 2.1x 2.8x 3.3x

FFO/Adj. net debt 77% 92% 76% 71% 47% 38% 32% 35% 32% 20% 19% 38% 29% 26%

FCF after dividend LTM 2,590 1,996 1,171 141 -1,226 -1,323 -1,028 -443 160 -430 -632 387 206 -310

EBITDA / Net interest 4.4x 5.0x 5.6x 6.5x 6.6x 7.0x 7.4x 6.9x 6.7x 6.5x 6.3x 8.8x 10.7x 12.4x

EBITDA -Capex / Net interest 3.1x 3.4x 3.9x 4.4x 4.2x 4.2x 4.1x 3.4x 2.9x 2.0x 1.5x 2.2x 2.7x 2.5x

P&L data

Sales 4,789 4,932 4,571 5,429 4,471 4,946 4,597 5,352 3,119 4,079 4,015 5,372 4,661 4,747

growth yoy (%) 21% 22% 8% 3% -7% 0% 1% -1% -30% -18% -13% 0% 49% 16%

Sales LTM 18,328 19,219 19,562 19,721 19,403 19,417 19,443 19,366 18,014 17,147 16,565 16,585 18,127 18,795

growth yoy (%) LTM 20% 21% 17% 13% 6% 1% -1% -2% -7% -12% -15% -14% 1% 10%

EBITDA recurring 461 495 454 574 355 436 388 417 331 331 332 466 399 374

EBITDA margin 9.6% 10.0% 9.9% 10.6% 7.9% 8.8% 8.4% 7.8% 10.6% 8.1% 8.3% 8.7% 8.6% 7.9%

EBITDA LTM 1,628 1,781 1,909 1,984 1,878 1,819 1,753 1,596 1,572 1,467 1,411 1,460 1,528 1,571

EBITDA margin LTM 8.9% 9.3% 9.8% 10.1% 9.7% 9.4% 9.0% 8.2% 8.7% 8.6% 8.5% 8.8% 8.4% 8.4%

Int exp -79 -82 -80 -66 -55 -58 -57 -60 -59 -51 -55 -1 -36 -35

Interest expense LTM -368 -359 -342 -307 -283 -259 -236 -230 -234 -227 -225 -166 -143 -127

Taxes -43 -39 -39 -41 -56 -50

Taxes LTM -162 -175 -186

Cash flow data

FFO 397 465 429 382 302 370 338 213 265 231 310 377 326 310

Working capital 235 -267 -503 -229 -965 -197 -80 571 -245 -507 -202 1,449 -434 -987

Cash flow from operations 632 198 -74 153 -663 173 258 784 20 -276 108 1,826 -108 -677

Capex -94 -120 -152 -255 -169 -162 -189 -285 -249 -290 -240 -315 -302 -398

Free cash flow before dividend 538 78 -226 -102 -832 11 69 499 -229 -566 -132 1,511 -410 -1,075

Dividend -8 -50 -48 -41 -5 -80 -48 -57 -5 -93 -49 -50 -5 -100

Free cash flow after dividend 530 28 -274 -143 -837 -69 21 442 -234 -659 -181 1,461 -415 -1,175

capex (% of sales) 3% 3% 3% 3% 4% 4% 4% 4% 5% 6% 6% 7% 6% 7%

Debt data

ST debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0

LT debt 4,419 4,363 3,883 3,952 4,041 4,210 4,301 4,162 4,543 4,633 4,824 4,635 4,892 4,793

Gross debt 4,419 4,363 3,883 3,952 4,041 4,210 4,301 4,162 4,543 4,633 4,824 4,635 4,892 4,793

Cash on b/s 4,295 4,277 3,251 3,470 2,687 2,804 3,020 3,372 3,531 2,776 2,725 4,195 3,856 3,226

Net debt 124 86 632 482 1,354 1,406 1,281 790 1,012 1,857 2,099 440 1,036 1,567

Trade receivables 232 169 194 209 243 237 340 554 585

Off-B/S sale and leaseback facilities 103 174 180 179 234 211 216 161 113

Operating leases 367 386 408 408 445 481 473 452 476 482

Pension deficit 1,400 1,400 1,400 1,889 1,603 1,769 2,324 1,899 1,899 2,314 2,459 1,630 2,109 2,403

Adj. net debt 1,524 1,486 2,032 2,371 3,324 3,896 4,356 3,471 3,744 5,129 5,479 3,078 4,336 5,150

Trans -

Rolling

Stock,

C$6,400m

, 36%

Trans -

Systems,

C$1,390m

, 8%

Trans -

Svcs,

C$1,308m

, 7%

Aero -

Mfg,

C$6,503m

, 37%

Aero -

Svcs,

C$1,564m

, 9%

Aero -

Aircraft,

C$547m,

3%

Aerospace (BA), C$602

m, 57%

Transportation (BT),

C$448m, 43%

3,950

153

1,526

1,092

656858

1,085

402

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

(CA

D$

m)



December 2011 45

Bond Covenants

Bombardier covenants summary

Bond BBDBCN 6 3/4 12 BBDBCN 6.3 14 BBDBCN 7 1/4 16

BBDBCN 7 1/2 18 BBDBCN 7 3/4 20 BBDBCN 6 1/8 21 BBDBCN 7.35 26 BBDBCN 7.45 34

Issuer BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

BOMBARDIER

INC

Currency US$ US$ €

US$ US$ € CAD US$

Coupon 6.75%, 01-Nov

& 01-May

6.3%, 01-Nov &

01-May

7.25%, 15-May

& 15-Nov

7.5%, 15-Sep &

15-Mar

7.75%, 15-Sep

& 15-Mar

6.125%, 15-

May & 15-Nov

7.35%, 22-Jun

& 22-Dec

7.45%, 01-Nov &

01-May

Coupon step-up N N N

N N N N N

Ranking Sr Unsecured Sr Unsecured Sr Unsecured

Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured

Guarantees N N N

N N N N N

Negative pledge Y N Y

N N Y N N

Anti-layering Y Y Y

Y Y Y Y Y

Cross-default N N Y

N N Y N N

Redemption before call N N N

N N N N N

Call schedule

15-Nov-11 103.625

15-Nov-12 102.417

15-Nov-13 101.208

15-Nov-14 100.000

Tax redemption Y N Y

N N Y N N

Change of control N N Y, 101.000

Y, 101.000 Y, 101.000 Y, 101.000 N N

Make-whole call +37.5 N +50

+50 +50 +50 N N

Equity clawback N N N

N N N N N

Equity cure N N N

N N N N N

Limitation on debt N N N

N N N N N

Asset sales /

Conveyance Y N N

N N N N N

Limit Sale &

Leasebacks N N N

N N N N N

Restricted payments N N N

N N N N N

Transactions with

affiliates Y N N

N N N N N

Merger/Sale

restrictions N N N

N N N N N

Restriction on activities Y N N

N N N N N

Limitation on sub debt N N N

N N N N N

Financial reporting N N N

N N N N N

MAC clause N N N

N N N N N




December 2011 46

Latest research published on 01 September 2011

Bombardier – Focus on execution

SG Bond Recommendation: We still like Bombardier’s credit story based on the company’s

resilient results in Transportation and continuously impressive liquidity position. Although

investment grade ratings are not a realistic prospect yet, they remain management’s ultimate

target. We therefore continue to recommend investors Buy Bombardier 6.125% 2021s

(Ba2/BB+) at an indicative cash price of 93 and a yield of 7.1%.

Stronger than expected headline figures…: Bombardier yesterday reported strong headline

figures with sales and EBITDA both beating market expectations. Sales at $4.7bn were 17%

higher yoy and 6% above consensus with $2bn (+8%) coming from Aerospace and $2.7bn

(+26%) from Transportation. EBITDA stood at $374m up 9% compared to last year and 6%

above consensus boosted by a strong contribution from the Transportation division (+26%)

while Aerospace experienced a 10% decline due to a still difficult regional jet market.

…but hit on cash flow due to deferrals in the regional markets: The slower-than-expected

pick up in the regional jet market affected the company’s cash flow which saw a significant

outflow with free cash flow after dividend at a negative $1.2bn, almost twice the level of last

year. This was mainly caused by large uses of working capital (-$1bn) and to a lesser extent

an increase in Aerospace capex. However there were two offsetting factors: 1) the release of

around $700m of cash collateral as the company renegotiated its LoC facilities at better

terms; 2) Bombardier’s continuously well managed liquidity with a new 3yr $750m RCF

(unsecured) signed in June in addition to $3.2bn of cash and no significant maturity before

2016. This is also well above the $1bn targeted minimum liquidity level for each of the

company’s divisions.

Negative free cash flow in the range of $1bn-$1.5bn in 2011e: While H2 is typically better for

free cash flow generation, we do not expect a complete reversal. For the full year, we

currently expect negative free cash flow in the range of $1bn to $1.5bn which would bring the

adjusted net debt/EBITDA and FFO/adjusted net debt to around 3x and 26%, respectively,

slightly below 3.3x and 26% reported at the end of July, respectively.

Focus on execution: The main challenge remains the outlook for the regional jet market and

the launch of the C-Series in 2013-14, the success of which could be material for the

company and certainly for its aim to regain investment grade ratings. At the end of July,

Bombardier had signed 133 firm orders and 119 options which compares to 90 and 90 at the

end of last year.



December 2011 47


UK-based Cable and Wireless Communications (CWC) is a multinational telecom operator

with strong concentration in emerging markets. The old Cable & Wireless was renamed CWC in

March 2010 after spinning off its Cable and Wireless Worldwide (CWW) corporate telecoms

arm. The company is heavily dependent on Panama and the English-speaking Caribbean.

Cable & Wireless Communications (CWC) is having a difficult year as a result of the ongoing

economic crisis in its core Caribbean region, which is struggling as a result of a sharp decline in

tourist spending in 2008/2009 that has not fully recovered. As CWC is effectively the former

telecom monopolist in most of its key markets, it has also underperformed local competitors as

its position of dominance, especially in fixed line, is gradually eroded. As its aggressive

shareholder remuneration policy was predicated on continued growth across the business, and

the company refuses to cut the dividend, the slowdown is leading to a significant deterioration

of credit metrics. We believe the C&W GBP Aug 2012 bonds are not currently covered by

CWC’s USD270 undrawn credit lines and the projected cash balance in March 2012 at the

parent company level, and the company might need to borrow and upstream more cash to

repay it. We see risks for the other bonds, especially for the structurally subordinated C&W

GBP2019s.

While the Sable bonds and loans are secured on the shares of some subsidiaries, the legacy

BGP C&W bonds enjoy no such protection and are effectively subordinated. The complex web

of country subsidiaries and local minorities make it difficult to upstream cash even in the best of

times, and expose CWC to political, exchange rate and repatriation risk in economic crises.

Emerging market-focused telecom operators usually tolerate much less debt than operators in

mature markets because of their significantly higher operating risk, and CWC is no exception.

S&P notes that the Sable credit facilities contain both maintenance and incurrence covenants.

Group structure

Negative

Corporate Ratings

LT ST Outlook MDY Ba2 NP Negative

S&P BB B Negative

Fitch NR NR NR



Share price


Market cap.(£m) 886

Bloomberg Ticker CWLN.

Analysts








Cable and Wireless ltdThe Issuer

Reference entity (EUR CDS)

£200m unsecured bonds Mar 2019

Cable and Wireless (West

Indies) Ltd

£200m unsecured bonds Aug 2012£46m secured loan

C&W Jamaica ltd (82%)

Companhia de Telecomunicacoes de Macau (51%)

Cable and Wireless

International

C&W Panama SA (49%)

C&W (Barbados) (81%)

Monaco Telecom SAM (49+6%)

TSTT Trinidad and Tobago (49%)

Dhiraagu (Maldives) (52%)

$331m of debt$273m of cash

Roshan (Afghanistan) (37%)

Fintel (Fiji) (49%)

St Kitts (77%)

CWI Group Ltd

Sable Holding Ltd

Cable & Wireless Communications plc

Shareholders

Sable International

Finance Ltd

The Issuer

$500m CoC Senior Secured Notes Feb 2017$100m draw able term loan (undraw n) Oct 2016

$500m CoC Secured Credit Facilities Oct 2016 ($330m draw n as of Sep 2011)

$41m of cash

Guarantor of the Sable Int $500m CoC SSN

Security and Guarantor of the Sable Int $500m CoC SSN

Security and Issuer of the Sable Int $500m CoC SSN

BTC (Bahamas) (51%)

0

100

200

300

400

500

600

700

800

900

Sable USD2017s ASW C&W GBP2019 ASW

0

100

200

300

400

500

600

700

800

C&W CDS

0.0

10.0

20.0

30.0

40.0

50.0

60.0

CWC

Telecommunication Operators

Cable & Wireless Communications



December 2011 48

Cable & Wireless - Bonds


C&W plc (£) B1 / Negative B+ / Negative NR / NR 200 8.625% 25 Mar 2019 - Sell

Sable International Finance Ltd Ba2 / Negative BB / Negative NR / NR 397 7.75% 15 Feb 2017 - Hold

C&W plc (£) B1 / Negative B+ / Negative NR / NR 320 8.75% 08 Jun 2012 - Hold


Cable & Wireless - Financial data

Revenue split

EBITDA split

Debt maturity profile – Sep 11

Debt structure

Sep 11-carrying USDm %

Loans at Opcos 331 19.0

Sable bond 491 28.2

Sable loans 330 19.0

C&W Plc bonds 541 31.1

C&W loans 46 2.6

Main shareholders

Orbis 13.55%

Newton Investment

Management 11.87%


(in $ millions) FY 03/09 FY 03/10 FY 03/11 FY 03/12e FY 03/13e FY 03/14e

Group revenues 2,447 2,345 2,440 2,829 2,891 2,921

Change % -4.2% 4.1% 16.0% 2.2% 1.1%

EBITDA 921 908 872 890 902 900

Margins % 37.6% 38.7% 35.7% 31.5% 31.2% 30.8%

Cash interest (net) -99 -98 -108 -118 -144 -87

Cash taxes -131 -105 -115 -123 -147 -83

+/(-) Other cash items -167 -150 -188 -189 -122 -122

FFO 540 550 488 484 537 593

Changes in WC 27 -52 -24 -23 0 0

CF from operating activities 567 498 464 461 537 593

CapEx -337 -310 -354 -409 -404 -402

As % sales -13.8% -13.2% -14.5% -14.5% -14.0% -13.8%

RCF (CFO - CapEx) 230 188 110 51 133 191

As % sales 9% 8% 5% 2% 5% 7%

Disposals/(acquisitions) -17 19 45 -153 0 0

FCF (before div + buybacks) 213 207 155 -102 133 191

Dividends -393 -412 -320 -371 -373 -373

Buybacks 5 23 -30 -70 0 0

Shareholder remuneration -388 -389 -350 -441 -373 -373

As % of FCF's -182% -188% -226% 434% -281% -195%

New debt YTD/(redemptions) 480 78 115 77 -311 0

Net cashflows 305 -8 -194 -202 -552 -182

Cash and equivalents -consolidated 581 573 379 177 -374 -557

Cash and equivalents - ex trapped at subsidiaries 379 371 113 -96 -647 -830

Gross debt reported 1,183 1,237 1,373 1,746 1,435 1,435

Net debt (unadjusted) 804 866 1,260 1,842 2,082 2,264

Fully consolidated

net debt-to-ebitda - SABLE x 0.3x 0.8x 1.4x 2.1x 2.3x

gross debt-to-ebitda SABLE x 0.8x 0.9x

net debt-to-ebitda - C&W Plc x 0.9x 1.0x 1.4x 2.1x 2.3x 2.5x

gross debt-to-ebitda C&W Plc x 1.3x 1.4x 1.6x

ebitda/interest coverage 9.3 9.3 8.1 7.5 6.2 10.3

FFO/net debt 67.2% 63.5% 38.7% 26.3% 25.8% 26.2%

Proportionally consolidated

net debt-to-ebitda - SABLE x 0.5x 1.2x 2.3x 3.3x 3.7x

gross debt-to-ebitda SABLE x 1.1x 1.4x

net debt-to-ebitda - C&W Plc x 1.3x 1.4x 2.2x 3.3x 3.7x 4.1x

gross debt-to-ebitda C&W Plc x 1.9x 2.0x 2.4x

ebitda/interest coverage 6.4 6.2 5.2 4.7 3.9 6.4

FFO/net debt 45.9% 42.5% 25.1% 16.4% 16.0% 16.1%

Operating leases (NPV) 132 137 132 132 132 132

Employee benefit obligations 46 114 32 51 51 51

Other 342 795 189 189 189 189

Adjusted net debt 1,324 1,912 1,613 2,213 2,454 2,636

Fully consolidated

Adj. net debt-to-ebitda SABLE x 0.8x 1.2x 1.8x 2.5x 2.7x

Adj. Gross debt-to-EBITDA SABLE x 1.2x 1.3x

Adj. net debt-to-ebitda C&W Plc Ex-guarantees x 1.3x 1.4x 1.8x 2.5x 2.7x 2.9x

Adj. Gross debt-to-EBITDA C&W Ex-guarantees Plc x1.7x 1.8x 2.0x

Adj. net debt-to-ebitda C&W Plc x 1.4x 2.1x 1.8x 2.5x 2.7x 2.9x

Adj. Gross debt-to-EBITDA C&W Plc x 1.8x 2.5x 2.0x

FFO/adj. net debt 40.8% 28.8% 30.3% 21.9% 21.9% 22.5%

FFO/gross net debt 31.7% 24.1% 28.3% 22.8% 29.7% 32.8%

Proportionally consolidated

Adj. net debt-to-ebitda SABLE x 1.2x 1.8x 2.9x 4.0x 4.3x

Adj. Gross debt-to-EBITDA SABLE x 1.9x 2.0x

Adj. net debt-to-ebitda C&W Plc Ex-guarantees x 1.9x 2.2x 2.9x 4.0x 4.4x 4.8x

Adj. Gross debt-to-EBITDA C&W Ex-guarantees Plc x2.5x 2.8x 3.1x

Adj. net debt-to-ebitda C&W Plc x 2.1x 3.1x 2.9x 4.0x 4.4x 4.8x

Adj. Gross debt-to-EBITDA C&W Plc x 2.7x 3.8x 3.1x

FFO/adj. net debt 27.9% 19.2% 19.6% 13.6% 13.5% 13.9%

FFO/gross net debt 21.7% 16.1% 18.3% 14.3% 18.4% 20.2%

35%

25%

15%

25%

Revenues

Caribbean

Panama

Macau

Monaco & Island

36%

24%

14%

25%

1%

Proportionate EBITDA

Caribbean

Panama

Macau

Monaco & Island

Other

0

200

400

600

800

1,000

1,200

FY2012 FY2013 FY2014 FY2015 FY2016>loans bonds



December 2011 49

Bond Covenants

CWC - covenants

C&W 8.75% due 2012 C&W 8.625% due 2019 SABLE 7.75% due 2017

Bond GBP200m 8.75% Senior Unsecured

Notes due 06/08/2012

GBP200m 8.625% Senior

Unsecured Notes due 25/03/2019

USD500m 7.75% Senior Secured

Notes due 15/02/2017

Issuer CABLE AND WIRELESS LTD CABLE AND WIRELESS

INTERNATIONAL FINANCE BV

SABLE INTERNATIONAL FINANCE

LTD

Coupon Annually Annually Semi-annually

Ranking within issuer Unsecured and unsubordinated,

effectively pari passu to the C&W

2019 notes and loans

Unsecured and unsubordinated,

effectively pari passu to the C&W

2019 notes and loans

Senior, Secured on the shares of

Sable Holding Ltd, CWI Group Ltd

and Cable and Wireless (West

Indies) Ltd, effectively pari passu to

the Sable secured credit facilities

Ranking vs. other debt Structurally subordinated to all debt

of the issuer's subsidiaries,

structurally and effectively

subordinated to the Sable 2017 notes

Structurally subordinated to all debt

of the issuer's subsidiaries,

structurally and effectively

subordinated to the Sable 2017

notes

Structurally subordinated to all debt

of the operating subsidiaries,

structurally and effectively senior to

the CABLE AND WIRELESS PLC

and CABLE AND WIRELESS

INTERNATIONAL FINANCE BV

bonds and loans

Guarantees No Unconditionally and irrevocably

guarantee by CABLE AND

WIRELESS PLC

Guaranteed by CWI Group Ltd,

Cable and Wireless (West Indies)

Ltd, Sable Holding Ltd, CABLE AND

WIRELESS LTD and Cable &

Wireless Communications Plc

Negative pledge No No Yes

Cross default Yes Yes Yes

Redemption before call No No Yes

Call schedule None None Feb15 2014-Feb15 2015: 103.875%,

Feb15 2015-Feb15 2016: 101.938%;

Feb15 2015-Feb15 2016: 100.000%

Tax redemption No No Yes

Change of control No No Yes

Limitation on Debt No No Yes, debt/preferred stock

incurrence covenants: ratio of non

guarantor (operating subsidiary

debt) to EBITDA of less than 0.75x

and the ratio of consolidated senior

secured/non-guarantor to EBITDA

of less than 3x.

Asset disposals No No Yes

Restricted payments No No No

Transaction with affiliates No No No

Change in covenant No No No




December 2011 50

Latest research published on 26 May 2011

Cable & Wireless - FY11 results - Growing risk on cash flow weakness and

aggressive payouts – Sell 2019s, Closing Buy on Sable

Closing Buy on the Sable bonds, Sell GBP2019 bonds.

SG Bond Recommendation: We expect leverage is likely to increase significantly at the Sable

level on the back of cash burn, refinancing of the GBP2012 bond and rising debt at the operating

subsidiaries. The GBP2019 bonds are at even greater risk of subordination and a weak business

performance, though they tend to be more illiquid. In our view, at an ASW of 460bp they are too

expensive vs the Sable bonds (ASW 493bp).

SG Credit Opinion: We maintain our Negative credit opinion. Not only is C&W unable to

grow fast enough to avoid significant deterioration in credit metrics, as we feared, but group

EBITDA could contract again this year. The weakness is concentrated in the Caribbean, the

region where CWC’s proportional ownership is the highest at 80%, vs 49% for Panama, 51%

for Macau and 67% for Monaco and Islands. While we were already concerned about the sharp

deterioration in credit metrics at the C&W Ltd level - the level of the legacy GBP 2012 and 2019

bonds – we are now even becoming concerned with the Sable bonds (USD2018s). C&W has

again raised debt at its operating subsidiaries level – debt we understand would have seniority

over even the Sable bonds on the EBITDA of each subsidiary. In April (after the balance sheet

date), it also drew on USD180m of its USD500m credit line to pay for BTC – debt that is at the

same level of the Sable bonds. With the outlook of stable/declining EBITDA and an increase of

up to USD50m in capex, we project RCF (CFO-Capex) of USD169m in F2012 – not enough to

cover its dividend, let alone the USD70m left to do on its USD100m share buyback programme.

With the company still hoping for a recovery in FY2013 EBITDA, we believe CWC will draw on

its credit lines to help pay for the GBP2012 bond, increasing debt further at the Sable level, with

unadjusted proportional net debt/EBITDA hitting 2.1x in March 2012 (see the attached tables).

We estimate CWC’s cash and undrawn credit lines will not be enough to meet the GBP2012

maturity on their own at the current speed of cash burn, and we expect to see a refinancing at

the Sable level as long as the primary high yield market remains exceptionally easy. We believe

it is very unlikely that the company will see any need or motivation to restructure in 2012.

As we feared, CWC is so far refusing to review its shareholder remuneration policies

despite much worse-than-expected trading conditions and the deterioration of credit metrics

to levels that are very aggressive for emerging market telecom standards in an environment

where EBITDA has stagnated. Even disposals, as discussed today by management, seem

destined to be channelled to shareholder remuneration, as was the case with C&W Bermuda.

Given management’s clear preference for such a policy, we are concerned by the board’s

ability to question it, and we note that three of the board’s eight seats are occupied by

management. We believe the company will try to pursue this policy until late 2012, when the

need to refinance both the 2012 bonds and the 2013 RCF should expose its unsustainability,

absent a major recovery in the Caribbean, of which we are very sceptical. However, if funding

conditions remain relaxed, CWC’s management might be tempted to pursue this policy into

2013 and beyond, which would increase the risks for both the Sable and the legacy GBP

bonds.



December 2011 51


Cegedim is the world leader in Customer Relationship Management (CRM) solutions for the

healthcare sector. In the core CRM and strategic data division, Cegedim works closely with

pharmaceutical companies to provide marketing solutions, market research studies, patient

studies, database access and compliance solutions. In the Healthcare professionals division,

the company provides software products designed to help pharmacists, doctors and

paramedics manage their workflow, including the digitisation of records of both patients and

practitioners. In the Insurance & Services division, the company provides CRM services, data

flow and electronic payments to health insurers.

The acquisition of Dendrite in May 2007 led to an increase in leverage, which convinced the

company to raise capital in December 2009 following the 08-09 crisis and brought the French

state’s FSI as the second largest shareholder. Cegedim’s track record of high organic and

acquisition-driven growth was interrupted in late 2010 and 2011 as a result of software

implementation problems in its core CRM division and the continued reduction on the total

number of pharma sales representatives in developed markets, which are Cegedim’s main

corporate users. Profits and cash flows were severely impacted by Cegedim’s difficulties, and

the bonds were downgraded twice to BB- since issuance.

While the company expects a recovery in H212 following the resolution of its software

implementation problems in H111, we suspect the company might risk a covenant breach of

the loans on H112 numbers, or even in H211 numbers following the very weak Q3 11 results..

The company stated that it closed June 2011 at a leverage ratio of 2.6x and a coverage ratio of

5.1x for the purposes of the calculation of the covenants – vs a limit of 3x and 4.5x respectively.

In June, the company refinanced its secured loans with unsecured ones- hence the tight

covenants – and these are now at the same level as bonds.

Group structure

Negative

Corporate Ratings

LT ST Outlook MDY NR NR NR

S&P BB- NR Negative

Fitch NR NR NR



na

Share price


Market cap.(€m) 210

Bloomberg Ticker CGM_FP

Analysts








FCB

EUR45m 2014 unsecured loan owed to FCB

EUR80m Jun 2016 unsecured RCF (undrawn)EUR200m Jun 2016 unsecured amortizing loan EUR300m 2015 bond

Cegedim SA

(voting rights 64%)(economic interest 52%)

Operating subsidiaries

0

200

400

600

800

1000

1200

1400

Cegedim EUR2015 ASW

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Cegedim

IT Services

Cegedim



December 2011 52

Cegedim - Bonds


CEGEDIM SA NR / NR BB- / Negative NR / NR 300 7% 27 Jul 2015 - Sell


Cegedim - Financial data

Revenue split - 2010

EBIT split - 2010

Debt maturity profile – Jun 11e

Debt structure

Jun 2011 EURm %

Loans (unsecured) 200 36.7

Bonds 300 55.1

RCF (undrawn) 80 -

Subordinated FCB

loan

45 8.3

Main shareholders

FCB (Labrune family) 52.00%

FSI 15.00%

Alliance Healthcare 10.00%


(in EUR millions) FY08 FY09 FY10 FY11e FY12e FY13eGroup revenues 849 874 927 904 875 864Change % 3.0% 6.0% -2.5% -3.2% -1.2%EBITDA 138 152 140 91 91 97Margins % 16.2% 17.4% 15.1% 10.0% 10.4% 11.2%Cash interest -44 -31 -19 -33 -33 -31Cash taxes -8 -4 -15 -19 -19 -19+/(-) other cash items 17 19 20 20 14 10FFO 102 135 127 58 52 57Changes in WC 20 0 -12 3 0 0CF from operating activities 122 135 115 62 52 57CapEx -67 -31 -33 -33 -32 -31As % sales -7.9% -3.6% -3.6% -3.6% -3.6% -3.6%RCF (CFO - CapEx) 56 104 82 29 21 26As % sales 6.5% 11.8% 8.9% 3.2% 2.4% 3.0%Disposals/(acquisitions) -8 -12 -56 -22 0 0FCF (before div + buybacks) 47 92 26 7 21 26Dividends -8 0 -14 -14 -14 -14Buybacks 0 175 0 0 0 0Shareholder remuneration -8 175 -14 -14 -14 -14As % of FCF's 17.7% -190.8% 54.2% 204.1% 66.7% 54.7%New debt YTD/(redemptions) -12 -198 -1 -11 -40 -40Net cashflows 36 28 -42 -41 -33 -28Cash and equivalents 94 121 79 38 5 -23Gross debt reported 697 525 550 545 505 465Net debt (reported) 603 404 471 507 500 488EBITDA/interest coverage 3.1 4.8 7.5 2.7 2.7 3.1FFO/net debt 17.0% 33.5% 26.9% 11.5% 10.5% 11.6%Net debt-to-EBITDA x 4.4x 2.7x 3.4x 5.6x 5.5x 5.0xOperating leases (NPV) 94 91 78 78 78 78PBO tax adjusted 12 14 17 17 17 17Other off B/S 0 0 0 0 0 0Adjusted gross debt 803 630 667 640 600 560RCF/adj. gross debt 6.9% 16.4% 12.3% 4.6% 3.5% 4.6%FFO/adj. gross debt 12.7% 21.5% 19.0% 9.1% 8.7% 10.1%Adj. gross debt-to-EBITDA x 5.8x 4.2x 4.8x 7.1x 6.6x 5.8xAdjusted net debt 709 509 588 602 595 584RCF/adj. net debt 7.8% 20.3% 13.9% 4.8% 3.5% 4.4%FFO/adj. net debt 14.4% 26.6% 21.5% 9.7% 8.8% 9.7%Adj. net debt-to-EBITDA x 5.2x 3.4x 4.2x 6.6x 6.6x 6.0xAdj. net debt-to-ebitda excluding EUR40m of trapped cash x 5.4x 3.6x 4.5x 7.1x 7.0x 6.4xNet debt/EBITDA estimated for covenants of Jun 11 loans/RCF - breaches at 3x 2.4x 3.4x 3.4x 3.2xEBITDA/interest estimated for covenants of Jun 11 loans/RCF - breaches at 4.5x 9.3x 4.0x 4.0x 4.5x

38.4%

41.7%

19.9%

CRM and strategic data Healthcare professionals

Insurance and services

47.5%

34.2%

18.3%

CRM and strategic data Healthcare professionals

Insurance and services

20 40 40 40 40 20

300

0

25

50

75

100

125

150

175

200

225

250

275

300

325

350

375

2011 2012 2013 2014 2015 2016

Bond EUR300m 7% due 27-Jul-15

EUR80m Jun 2016 RCF

Loan EUR 200m due 2016



December 2011 53

Bond Covenants

Cegedim – Bonds outstanding

CGMFP 7% due 2015

Bond €300m 7% Senior Notes due 27/07/2015

Issuer CEGEDIM SA

Coupon Semi-annually (27 Jan/27Jul)

Ranking within issuer Pari passu vs other unsecured unsubordinated debt (FCB loan and Cegedim’s new loans and RCF)

Ranking vs. other debt Structurally subordinated to all debt of the issuer's subsidiaries. Debt of subsidiaries cannot exceed 15% of group

consolidated debt

Guarantees No

Negative pledge Not to create or permit security interest on any asset or revenue to secure any indebtedness without granting the

same security and ranking to the bonds

Anti-layering Yes

Cross default Yes for any present or future indebtedness for borrowed monies or guarantee if aggregate amount >EUR30m

Redemption before call No

Call schedule None

Tax redemption Principal amount + accrued interest

Change of control Yes, if rating downgrade or negative rating event occurs during change of control period

Limitation on Debt Yes, if `on latest annual or half-yearly consolidated financial statements

Asset disposals Restrictions if Senior Net Debt/Consolidated EBITDA >3.5x and other conditions

Restricted payments No

Transaction with affiliates No

Change in covenant Suspension of Limitation on Debt, Asset Disposals and Limitations on Subsidiary Debt as long as company is

investment grade and no Event of Default occurs




December 2011 54


Cegedim - Sudden and sharp deterioration of sales, imminent risks to covenants

- Sell

We maintain our Sell on the EUR2015 bonds.

SG Bond Recommendation: The bonds trade at an ASW of 875bp and yield of 11.6%.

While we believe the bonds are now close to fair value, we remain sellers until we see the full

cycle of further rating downgrades and potential covenant breach playing out. We see further

risks for the ratings and the covenants. Cegedim, considering its sensitivity to the

macroeconomic environment and the secular difficulties of the pharmaceutical marketing

segment, still demands a premium for its higher business risk profile and telecom-like credit

metrics without the support of a telecom-like business.

SG Credit Opinion: We maintain our Negative credit opinion. Reported revenues declined

by 6.7% (-5.6% like for like), a significant deterioration vs the +2.2%/-0.7%lfl performance of

1H11. All segments saw trends turning sharply negative from an already weak 1H11. The core

CRM division, for example, saw yoy revenue contraction of 8.6% reported/-6.2% lfl from 0%

/+0.3% lfl in 1H11, while Healthcare professionals saw contraction of 7.1%/-7.3%lfl from

+1.1/-3/3% in 1H11. This is much worse than the flattish performance expected. With the

significant deterioration of the macroeconomic environment in the past two months, we can

expect a poor Q4 for a company that is still very sensitive to the state of business confidence

in the pharma sector. Because of Cegedim’s limited short-term cost flexibility, we expect

most of the revenue weakness to filter down to EBITDA and cash flow, and now see a breach

of the Net debt/EBITDA as possible even on the 2H11 numbers. While the company might

avoid a covenant breach on 2H11 by relaxing its cost capitalization policies in order to boost

the covenant EBITDA, we believe it could be difficult to avoid a breach 1H12 numbers.

Cegedim says that the recent deterioration in the economy is leading to hesitation on

marketing expenditures from pharmaceutical companies, which is hitting the CRM division.

While Cegedim continues to report a pickup of new contract wins following the resolution of

its software implementation problems in 1H11, it warns that we are unlikely to see any major

revenues boost from it until 2H12. The covenant breach might not be problematic if creditors

have reasons to believe that a turnaround is very likely and just around the corner, but we

suspect that the 2012 economic slowdown could more than offset the new contracts.

The focus will now begin to shift to what kind of support, if any, can be expected from its

major shareholders. The controlling shareholder FCB – the holding company of the founder –

has just extended the maturity of its EUR45m loan to Cegedim to June 2016 from May 2014

The French state’s FSI, which entered the company in 2009 in the last round of Cegedim’s

debt-motivated capital increase, is perceived by many investors as a potential source of

lender of last resort. In our experience of covering French bankruptcies such as Thomson

(now Technicolor), the probability of an effective state rescue for French companies are

usually overestimated, especially by French investors. It often fails to draw the crucial

distinction between saving a company’s own continued existence including jobs and

technologies, and saving its bondholders. While we believe most governments would have an

incentive to act to avoid a disorderly liquidation of a technology-based exporting company,

we believe saving creditors would in most cases add significant costs to the task without any

material upside.



December 2011 55


CMA CGM is the third largest container shipping line in the world. The group operates on a

global scale with a fleet of 396 container ships, of which it owns 91, and charters 71 on a long-

term basis and 234 short-term. Container shipping represents the bulk of group revenues and

EBITDA. Other activities are mostly closely related to the core business activity, and include in-

land transport of containers, storage, agency fees, sales and repair of containers.

CMA’s weak Q2 results and a slower-than-expected recovery in freight rates suggest that

leverage will significantly increase before year-end from around 3x at the end of June.

Management’s guidance for sequentially flat EBITDA in Q3 and only modest increases in

freight rates in Q4 mean that leverage could more than triple before year-end. Whilst banks

are likely to be supportive, a covenant breach appears all but certain now as are credit rating

downgrades. On the positive side, liquidity should remain under control with the company

having enough cash and limited outflows well into 2012.

Strengths Efficient operations, economies of scale thanks to size

Most modern fleet in the industry

Limited capex needs and new orders

No major debt maturities until the end of 2012

Adequate liquidity going into 2011 yearend

Weaknesses Container shipping is a highly cyclical industry

Extremely low revenue visibility

High leverage, short-term oriented debt maturity profile

Limited free cash flow generation in 2011

Covenants breach likely Q411

Group structure


Negative

Corporate Ratings

LT Outlook MDY B3 Negative

S&P B- Negative

Fitch NR NR



na

Neptune Orient’s share price


Market cap.(m)

Bloomberg Ticker

Analysts

Roberto Pozzi


Barbora Matouskova






20

40

60

80

100

Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

CMACG 8.75% 19 HPL 9% 15

0

0.5

1

1.5

2

2.5

Marine

CMA CGM



December 2011 56

CMA CGM - Bonds

Issuer Size Coupon Maturity Mdy S&P Price Yield Z-spread Next call Next call Reco

CMA CGM 325 8.875 15/04/19 B3 B- 39.2 28.5 2,630 104.4 15/04/15 Sell


CMA CGM - Financial data

Revenue split

Volumes split


Debt structure

Main shareholders

Jacques Saadé and

family 98%


Containers shipping

91%

Other transportation

5%

Logistics2%

Other activities

2%

Asia-Europe

37%

Transpacific13%

Australasia4%

Translatlantic

2%

Latam & Caribbean

15%

Africa15%

Other14%

0

500

1,000

1,500

2,000

2,500

3,000

LiquidityJun-12 Jun-13 Jun-14 Jun-15 Jun-16 Beyond

0

1000

2000

3000

4000

5000

6000

7000

8000

2005 2006 2007 2008 2009 2010 Jun-11

Redeemable bonds Senior notes

Other debt Finance leases

Bank debt Bank overdrafts



December 2011 57

Bond Covenants

€325m 8.75% 2019

Ranking/Security/Guarantee Senior unsecured debt of the issuer

Pari passu with other unsecured debt

Effectively subordinated to vessel (lease) financing

Call schedule From 15 Apr 15: 104.438, 15 Apr 16: 102.219, 15 Apr 17 100

CoC 101







December 2011 58


CMA CGM – Liquidity under control but freight rates remain low

Recommendation: CMA’s weak Q2 results and a slower-than-expected recovery in freight

rates suggest that leverage will significantly increase before year-end from around 3x at the

end of June. Management’s guidance for sequentially flat EBITDA in Q3 and only modest

increases in freight rates in Q4 mean that leverage could more than triple before year-end.

Whilst banks are likely to be supportive, a covenant breach appears all but certain now as are

credit rating downgrades. On the positive side, liquidity should remain under control with the

company having enough cash and limited outflows well into 2012. Given the lack of earnings

visibility even at this low point and absent a sustained market rally, we see limited upside in

holding the notes even at current levels. We therefore change our recommendation on the

CMACG 8.875% notes to Sell from Hold.

CMA has completed its planned disposals and had cash of $941m on balance sheet at the

end of July. Revenues rose by 7% yoy to $3.71bn in Q2 reflecting higher volumes but slightly

lower average freight rates including the fuel surcharge. Reported EBITDA fell 51% yoy to

$351m due to higher operating costs and a tough yoy comparison. Excluding gains on

disposals, underlying EBITDA was $40m versus $669m in Q210 and $281m in Q111.

Management guided towards sequentially flat EBITDA in Q3 but expect a significant

improvement in Q4.

CMA’s volume growth remained strong at 9.9% yoy to 2,531 million TEU in Q211 and

9.1% in H111, above the industry average estimated at around 8%. The percentage of

volumes generated on the Asia-Europe & Med lines was 34% in H111 versus 37% in the year

ago period, with Asia to North Europe representing less than 10% of overall volumes. The

remaining two-thirds of the volumes were relatively evenly split across other regions.

Consultants estimate that container shipping will grow between 6% (Global Insight) and

9% (Clarkson) in 2011 though uncertainty about demand is increasingly reflecting

expectations of subdued consumer spending both in the US and in Europe this year and,

potentially, beyond. Clarkson recently reduced its forecast for the Asia-Europe route to 5.1%

from 6.2%.

Aside from slowing trade growth, capacity expansion remains the main concern for

container shipping. Transportation capacity rose 4.7% in H111 and is expected to grow at

over 9% by yearend. The industry order book remains high at around 30% of the existing

fleet.

CMA’s average freight rates declined by 2.1% yoy to $1,407/TEU including bunker

surcharges. Three trade lines representing 60% of the volumes saw rates decline, and in

particular rates on the Asia-Europe & Med routes fell by 6%. Trade lines representing 40% of

the volumes saw rate increases. CMA’s average 2.1% decline compares with a drop of

around 20% for the SCFI index. The relative resilience of CMA reflects its geographic

diversification, long-term contracts and backhaul trades. The SCFI index was at 1,064 on 26

August, unchanged from the previous week but 5.5% higher than a month ago.

Total operating costs rose by 30% yoy to $3.72bn, reflecting sharp increases in all items

including bunker fuel and charter costs but also logistic and employee expenses. Bunker

consumption increased by 3% yoy to 1,501 tons despite significantly higher volume growth

so that bunker fuel unit consumption improved to 593 Tons/TEU from 630 Tons/TEU in the

year ago period.

The company has almost completed its capex programme for 2011, spending $920m in



December 2011 59

Estimated cash balance before changes in operating cash flows

the first half of the year. Management has reversed previous cancelled orders for an

additional seven ships. At the end of June, the company had $1.2bn in total capex

commitments for 11 ships, three of which to be delivered in 2012 and already funded via

bank debt. Of the eight remaining ships, seven will be delivered in 2014.

CMA sold a 50% stake in Malta Free port to Yilderim for €200m ($289m) in cash proceeds

reporting a gain of $308m by writing up the value of the entire stake. It also sold 51% of its

90% stake in Compagnie du Ponent also to Yilderim for a nominal 1 euro, reporting a loss of

$25m whilst reducing its capex commitments by $131m. Apart from its remaining stake in

CdP, CMA has $215m in loans outstanding to CdP, the amount and potential repayment of

which is subject to discussion with banks, currently at a preliminary stage.

Cash on balance sheet at the end of June was $1.67bn and $1.54bn net of bank

overdrafts. Gross debt was $7.3bn including $555m in senior notes due in 2012 and 2013

which were redeemed after closing, thus reducing the cash balance to $941m at the end of

July, including restricted cash and overdrafts of $226m. Management estimates cash on

balance sheet at $750m at year-end including net debt repayments, interest costs, capex and

proceeds from disposals but before any potential cash generated from operations and before

margin calls on its loan-to-value funding arrangements.

At the end of June, LTV payments amounted to $153m, down from $273m in December.

Management indicated that although the market value of the ships is not increasing in current

market conditions, they are receiving net payments from the banks reflecting the gradual

amortisation of the debt in LTV loans.

Cash from operations was $120m to the end of July and management expects cash from

operations to remain significantly positive for the whole of 2011. Overall, we estimate that the

company’s cash balance should remain above $650m at the end of the year net of overdrafts.

Minimum operating cash requirements are less than $100m according to management,

although the current financing arrangements require CMA to maintain a $400m minimum

cash balance.

$m

Cash end July 2011* 941

Debt maturing -351

Cash interest expenses -164

Capex -70

Cash from financing activities 114

Proceeds from asset disposals 280

Est. cash Dec 2011 before cash from operations* 750

Source: Company Data * Including overdrafts of approx. $130m at end July

In 2012, the company’s foreseeable cash outflows relate to interest costs of around $400m

and unfunded capex of $120m towards the end of the year. CMA had $1.24bn of debt

maturing in the 12 months to June 2012 excluding overdrafts. According to the information

shown in the Q2 report, CMA had approximately $1.24bn of debt due between June 2011

and June 2012 excluding the recently redeemed bonds and overdrafts. Management

indicated that it will repay $351m of debt between July and December this year, included in

the table above, leaving around $850m of debt due in H112. We understand that

approximately $180m of this debt is represented by securitised receivables and that an

additional $250-300m also rolls over, leaving actual debt maturities of around $380m. The

refinancing of certain tax leases coming to maturity should translate into cash inflows of

slightly less than $100m, leaving net debt maturities of approximately $280m in H112.



December 2011 60

The company has additional sources of liquidity available. It confirmed during the call that

through Merit Corp. it has the option to require Yilderim to subscribe to an additional $250m

of convertible bonds on the same terms as the previous $500m subordinated notes.

Management estimates the market value of debt-free assets at $0.5-1bn, including vessels.

CMA retains a 50% stake in Malta Freeport, worth $289m based on the recent sale to

Yilderim. However CMA has committed to the Malta authorities to maintain its current stake

in MF. The company has $1.5bn of trade receivables on its balance sheet, already partly

securitised.

According to the company’s own calculation and based on an LTM EBITDA of $1.78bn,

net leverage was 2.9x at the end of June. In order to comply with the covenants under its

financing arrangements, CMA would need to generate $800-900m of EBITDA in H2. Given

management’s guidance for Q3, a covenant breach looks very likely, in our view.

Management is in constant dialogue with its lenders and highlighted the company’s strong

liquidity position as key in their relationship with the banks.



December 2011 61


Continental AG manufactures tires, automotive parts and industrial products. The company

produces passenger car, truck, commercial vehicle, and bicycle tires, braking systems, shock

absorbers, hoses, drive belts, conveyor belting, transmission products, and sealing systems.

Continental markets its products under such brands as Continental, Uniroyal, Gislaved, Viking

and Barum.

Strengths A diversified auto parts group from historical tyre business to electronic products for the

automotive industry.

A solid recovery since 2007/2008 collapse, which was partly supported by higher

production from German carmakers.

Continental’s new debt structure and maturity profile, with four bond issues up to 2018 and

a €6.0bn credit facility granted in the first quarter, have improved the group’s debt maturity

profile.

Weaknesses Higher capex and raw material burden is likely to reduce free cash flow in the foreseeable

future. As result, deleveraging has stalled over the past few quarters.

Uncertainties remain on a possible combination with Continental’s largest shareholder, the

Schaeffler Group. Since the March 2011 restructuring, Schaeffler Group (49.9%) and two

trustee banks (5.2% each) own 60.3% of Continental voting rights, down from 75%.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Ba3 - Stable

S&P B+ B Positive

Fitch BB- B Stable

8.5% 2015 spread evolution

From

German

carmaker

s


Share price



Bloomberg Ticker CONGR

Analyst

Pierre Bergeron

+331 4213 8915

[email protected]






Continental AG

Schaeffler Group (49.9%)

Sal. Oppenheim (5.2%)

Metzler Bank (5.2%)

€750m 8.5% July 2015

€625m 6.5% Jan. 2016

€1.0bn 7.5% Sept. 2017

€625m 7.125% Oct. 2018

€ 6.0bn VDO Loan:

-Tranche €625m loan , maturity Aug 2012

- Tranche €2.5bn revolving credit facility, maturity

April 2014.

Covenant: Net debt to EBITDA < 3.0x

Conti-Gummi Finance

BV Netherlands

100%

0

100

200

300

400

500

600

700

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

0

100

200

300

400

500

600

700

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

0

10

20

30

40

50

60

70

80

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Auto & Auto parts

Continental AG



December 2011 62

Continental AG - Financial data

2010 revenue split

2010 operating profit split

Bond debt maturity chart

Debt structure end-June 2011

Bonds

Bank borrowings

Financial leases

Customers deposits

Main shareholder

Schaeffler Group 49.9%


Conti - INCOME STATEMENT (€m) 2007 2008 2009 2010 2011e 2012e 2013e

Total revenues 16,619 24,239 20,096 26,047 29,520 31,000 32,800

Cost of revenues (12,596) (19,485) (16,082) (20,268) (23,270) (24,410) (25,780)

Gross income 4,024 4,754 4,014 5,779 6,250 6,590 7,020

Other operating income/ (expense) (147) (1,602) (1,968) (437) (100) (100) (100)

EBITDA (ex. associates) 2,491 2,771 1,591 3,588 4,120 4,220 4,470

Depreciation and amortisation (815) (3,068) (2,632) (1,652) (1,650) (1,600) (1,550)

Operating income pre-impairment pre-associate income (EBIT) 1,676 (296) (1,040) 1,935 2,470 2,620 2,920

Total net interest income/ (expense) (154) (707) (721) (697) (660) (580) (500)

Pre-tax income 1,522 (1,003) (1,761) 1,238 1,810 2,040 2,420

Taxation (472) (75) 154 (592) (540) (680) (810)

Tax rate % 31% -7% 9% 48% 30% 33% 33%

Associate income/ (loss) after taxation 48 57 73 204 260 370 500

Net income before minorities 1,098 (1,021) (1,534) 850 1,530 1,730 2,110

Minority interests (29) (46) (42) (70) (80) (90) (110)

Reported net income/ (loss) 1,069 (1,067) (1,576) 780 1,450 1,640 2,000

2007 2008 2009 2010 2011e 2012e 2013e

EBITDA margin 15.0% 11.4% 7.9% 13.8% 14.0% 13.6% 13.6%

Operating margin 10.1% -1.2% -5.2% 7.4% 8.4% 8.5% 8.9%

BALANCE SHEET 2007 2008 2009 2010 2011e 2012e 2013e

Intangible assets and goodw ill 10,269 8,907 7,605 7,367 7,367 7,367 7,367

Of which goodwill 7,289 6,384 5,537 5,644 5,644 5,644 5,644

Tangible assets (incl. leased assets) 5,998 6,122 5,784 6,099 6,149 6,249 6,399

Total long-term assets 17,384 16,348 14,725 14,888 14,908 14,973 15,088

Inventory 2,536 2,571 2,076 2,638 3,034 3,186 3,371

Receivables 3,944 3,288 3,648 4,454 5,166 5,425 5,740

Pre-paid expenses & other current assets 1,077 866 677 682 773 812 859

Cash, cash equivalents & short-term investments 2,797 1,616 1,924 1,729 3,380 4,326 5,226

Total current assets 10,354 8,340 8,325 9,503 12,353 13,748 15,196

Total assets 27,738 24,688 23,049 24,391 27,261 28,721 30,283

Long-term debt (other than employee benefits obligations) 9,946 9,768 5,968 7,752 7,752 7,752 7,752

Provisions 689 670 1,345 1,405 1,425 1,475 1,525

Other long-term liabilities 1,177 872 584 553 1,290 995 718

Total long-term liabilities 11,812 11,310 7,897 9,710 10,467 10,222 9,994

Short-term debt & current portion of long-term debt 4,157 3,238 5,625 2,442 2,442 2,442 2,442

Payables 2,759 2,470 2,820 3,511 4,018 4,219 4,464

Other current liabilities & accrued expenses 2,297 2,140 2,646 2,525 2,862 3,006 3,180

Total current liabilities 9,213 7,848 11,090 8,477 9,322 9,667 10,086

Total liabilities 21,025 19,158 18,988 18,188 19,788 19,888 20,081

Shareholders' equity 6,583 5,265 3,773 5,860 7,050 8,320 9,580

Minority interests 273 265 289 343 423 513 623

Shareholders' equity + Minority interests 6,856 5,530 4,062 6,203 7,473 8,833 10,203

Total liabilities and shareholders' equity 27,881 24,688 23,049 24,391 27,261 28,721 30,283

Total Financial debt 14,103 13,007 11,593 10,194 10,194 10,194 10,194

Total Industrial Financial debt 14,103 13,007 10,819 9,046 10,194 10,194 10,194

Net Industrial debt 11,306 11,391 8,896 7,317 6,814 5,868 4,968

Industrial Leverage 2007 2008 2009 2010 2011e 2012e 2013e

FFO / Total debt (%) 14% 15% 10% 26% 28% 29% 31%

Total debt / EBITDA (x) 5.7 4.7 6.8 2.5 2.5 2.4 2.3

CASH FLOW 2007 2008 2009 2010 2011e 2012e 2013e


Share based payment (in deduction) 0 0 0 0 0 0 0

Dividends from associates 0 0 0 0 0 0 0

Net interest income received/ (expense paid) (154) (707) (721) (697) (660) (580) (500)

Taxation paid (472) (75) 154 (592) (540) (680) (810)

Other operating cash movements 95 (26) 93 10 (100) 0 0

Funds From Operations 1,960 1,964 1,117 2,308 2,820 2,960 3,160

Change in w orking capital (74) (79) 595 (497) (601) (210) (255)

Cash flow from operating activities 1,886 1,884 1,712 1,811 2,219 2,750 2,905

Net capital expenditure (863) (1,504) (782) (1,196) (1,700) (1,700) (1,700)

Free operating cash flow 1,023 380 930 615 519 1,050 1,205

Acquisitions of subsidiaries, securities & other investments (11,677) 248 (4) 86 30 35 35

Disposals of subsidiaries, securities & other investments 0 0 0 0 0 0 0

Cash flow from investing activities (12,539) (1,256) (787) (1,110) (1,670) (1,665) (1,665)

Share issue proceeds 8 0 24 1,056 0 0 0

Dividends paid (293) (323) (33) (35) (36) (40) (240)

Cash flow from financing activities (285) (323) (9) 1,021 (36) (40) (240)

Free cash flow after financing and investing activities (Total CF) (10,939) 305 916 1,722 513 1,045 1,000

Net increase/ (decrease) in cash resulting from cash flows (10,939) 305 916 1,722 513 1,045 1,000

Auto62%

Rubber38%

Auto29%

Rubber71%

0

200

400

600

800

1000

1200

2015 2016 2017 2018



December 2011 63

Bond Covenants

Bond covenants

Continental 8.5% July 2015 Continental 6.5% Jan. 2016 Continental 7.5% Sept 2017 Continental 7.125% Oct. 2018

Issuer Conti-Gummi Finance BV Conti-Gummi Finance BV Conti-Gummi Finance BV Conti-Gummi Finance BV

Coupon Semi annual (15 Jan 15 July) Semi annual (15 Jan 15 July) Semi annual (15 Mar 15 Sept) Semi annual (15 Apr 15 Oct)

Ranking within issuer Unsecured. Ranking pari

passu

Unsecured. Ranking pari

passu


passu


passu

Ranking vs. other debt Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Guarantees Continental AG and certain

subsidiaries of Continental

AG

Continental AG and certain


AG



AG



AG

Negative Pledge Yes Yes Yes Yes

Change of Control Yes Yes Yes Yes

Fundamental Change No No No No

Limit of Indebtedness Yes Yes Yes Yes

Cross Default Yes Yes Yes Yes

Negative Covenant Yes Yes Yes Yes

Certain Sales of Assets Yes Yes Yes Yes

Restriction on Activities Yes Yes Yes Yes

Debt Service Coverage Ratio No No No No

Free Cash Flow To Debt

Service Ratio

No No No No

Restrictive Covenant Yes Yes Yes Yes

Merger Restrictions Yes Yes Yes Yes

Limitation on Sale-and-

Leaseback

No No No No

Limitation on Subsidiary Debt Yes Yes Yes Yes

Restricted Payments Yes Yes Yes Yes

Ratings Trigger No No No No

Collective Action Clause No No No No

Material Adverse Change

Clause

No No No No

Force Majeure No No No No




December 2011 64


Continental AG: solid quarterly results to support spread tightening

Despite the recent rally, we reiterate our recommendation to sell protection on Continental vs.

Michelin at the current 2.4x spread ratio with 1.5x target ratio and 3.0x stop-loss. On the cash

side, we favour the 2017 and 2015 issues that offer higher yield to maturity than the 2016 and

2018s.

Continental posted third quarter EBIT of €635.7m, slightly lower than the €687.8m expected by

analysts but higher than the €365.1m reported one year ago. The quarterly EBIT margin improved

to 8.2% from 5.6% mainly due to an 18.9% yoy rise in sales. Tyres for the light vehicles division

delivered the group’s highest quarterly EBIT margin of 14.1%, slightly down from 14.7% in

Q3 2010. Reported free cash flow was negative €-90.9m in the third quarter due to

unfavourable changes in working capital and higher capex. Gross debt at €9.1bn at end-

September 2011 and net debt of €7.3bn are stable compared to end-2010.

The group maintained its guidance of more than €500m free cash flow for 2011 due to a

13.4% rise in sales and an adjusted 10% EBIT margin. Higher capex, up to €1.8bn from

€1.3bn in 2010, and raw material impact revised up to €900m compare to a €483m burden in

2010. Like Moody’s and S&P, we believe that Continental deserves mid-BB ratings on a

standalone basis, as highlighted in the table below.

Since the March 2011 restructuring, Schaeffler Group (49.9%) and two trustee banks

(5.2% each) own 60.3% of Continental voting rights, down from 75%. We believe that

Continental’s new debt structure and maturity profile, with four bond issues up to 2018 and a

€6.0bn credit facility granted in the first quarter, have reduced possible funding support from

Schaeffler Group and, as a result, the need to combine the two groups in the short to medium

term. This credit facility limits dividends paid by Continental and prohibits loans and

guarantees to major shareholders. It also limits the group’s acquisitions, thus its debt

leverage, providing protections to Continental bondholders.



December 2011 65


Dixons Retail plc is Europe’s largest specialist electrical retail and service group. It operates

in 26 countries, with over 1,200 stores in 13 countries across Europe, with over 38,000

employees. It is the number one market leader in the UK & Ireland, Nordics, Greece and the

Czech Republic.

Dixons financial performance in the coming years will remain in a state of flux: strained by

likely continued disappointments in the UK, yet boosted by probable continued growth in its

Nordic business. In the UK, we believe Dixons will struggle to turn its business around as it

lacks significant competitive advantage in an environment of tough competition and, more

importantly, a likely prolonged period of slow demand from the UK consumer, who is

increasingly bargain-focused. While Dixons has managed to cut its UK store portfolio by 19%

to 612 over three years and shed £60m in annual costs, it is looking to cut capacity and costs

further. We see this as a business in a state of managed decline rather than turnaround. The UK

and Ireland are particularly important to Dixons’ credit quality as they are the only operating

companies directly servicing the bonds. The Nordic business, on the other hand, is akin to a

lifeline for Dixons Group as it contributed £106m (68%) to the group’s underlying operating

profit for the year to April 2011. The relatively reliable performance from this region provides

management with an extended timeframe to carry out its turnaround efforts in the UK. We note,

however, that the Nordic business is not part of the group obligated to support Dixons bonds,

which would rapidly cause greater concern should circumstances worsen beyond our current

assumptions. In our view, the Dixons credit story has become one of delicate timeline cash

management, but one management seems increasingly able to steer.

Group structure

Negative

Corporate Ratings

LT Outlook MDY B1 Stable

S&P NR NR

Fitch B Negative

Bond price evolution

CDS price evolution

Share price


Market cap.(£m) 391.7

Bloomberg Ticker DXNS LN

Analyst

Torstein Jorstad

[email protected]






Dixons Retail plc (UK)(formerly DSG International plc UK)

HoldCo

DSG Retail Limited (UK)(Currys and PC World)

OpCo

£150m 8.75% 3 August 2015 bonds

£360m RCF unti l Aug 2013 unless...

£160m 6.125% 15 Nov 2012 bonds

DSG Ireland Limited (UK)

HoldCo

DSG International Holdings Limited

(UK)

HoldCo

DSG Retail Ireland Limited

(Ireland)

OpCo

Coverplan Insurance Services

Limited (UK)

HoldCo

DSG Card

Handling Services

Limited (UK)HoldCo

DSG International Treasury Management

Limited (UK)

DSG Overseas Investments

Limited (UK)

HoldCo

DSG European

Investments Limited (UK)

HoldCo

PIXmania businesses

Other international businesses: Greece ,

Central Europe

Nordic businesses

Other international bus inesses: Italy,

Spain, Turkey

Not guarantors of Dixons Retail plc bonds

Guarantors of Dixons Retail plc UK bonds

80

85

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105

Jul10 Sep10 Nov10 Jan11 Mar11 May11 Jul11 Sep11 Nov11

Last Price Last Price

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Retail

Dixons Retail plc



December 2011 66

Dixons - Bonds


Dixons Retail PLC B1 / Stable NR / NR B+ / Negative 160 6.125% 15 Nov 2012 - Buy

Dixons Retail PLC B1 / Stable NR / NR B+ / Negative 150 8.75% 03 Aug 2015 30 July 2010 Buy


Dixons - Financial extract

Revenue split

EBIT split


Debt structure, fiscal 2011 (£m)

2012 bonds 160

2015 bonds 150

Operating leases,

estimated

3,000

RCF 360

Pension liabilities 247

Unencumbered

cash

225

Main shareholders

Schroders PLC 12.03%

Schroders Investment 11.08%

UBS GAM 10.20%

UBS GAM 9.94%

Standard Life 8.00%

Standard Life 7.56%


FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F

Income statement

UK & Ireland 4,659.7 4,745.7 4,228.6 4,013.5 3,816.1 3,434.5 3,262.8

Nordics 1,394.3 1,618.7 1,762.8 2,094.6 2,268.9 2,337.0 2,407.1

Other international 1,424.3 1,529.2 1,519.0 1,503.2 1,226.7 1,079.5 993.1

e-commerce 451.4 652.3 807.4 921.2 842.7 792.1 760.5

Total revenues 6,984.4 7,929.7 8,545.9 8,317.8 8,532.5 8,154.4 7,643.1 7,423.4

UK & Ireland 227.9 156.7 58.7 71.1 71.3 57.0 52.5

Nordics 91.0 77.2 72.5 95.8 105.6 108.8 112.0

Other international -29.5 -21.6 -23.7 -8.3 -21.6 -20.0 -15.0

e-commerce 1.2 7.5 15.0 11.3 0.9 0.9 0.9

Underlying operating profit/loss 290.6 219.8 122.5 169.9 156.2 146.7 150.4

Central costs -25.7 -34.8 -25.0 -19.5 -15.8 -16.0 -17.0

Underlying operational EBIT 256.6 264.9 185.0 97.5 150.4 140.4 130.7 133.4

Property profit (loss) 2.9 8.7 -7.3 -18.1 -18.8 -12.8 -13.0 -13.0

EBIT before exceptionals 259.5 273.6 177.7 79.4 131.6 127.6 117.7 120.4

Share of post-tax results for associates 3.6 1.6 1.6 1.6 1.6

Underlying EBIT 299.3 291.0 217.5 83.0 133.2 129.2 119.3 122.0

Underlying net finance continuing ops. 26.5 21.6 13.0 -26.9 -42.7 -42.3 -42.3 -42.3

Financial income 106.4 51.7 45.7 21.8 20.6 14.6 14.6 5.0

Financial costs -70.0 -34.7 -42.8 -51.2 -55.3 -51.7 -51.7 -51.7

Net financials 36.4 17.0 2.9 -29.4 -34.7 -37.1 -37.1 -46.7

Other financials -6.0 3.6 -6.8 -8.8 -8.4 -8.4 -8.4

Net Interest actual 36.4 11.0 6.5 -36.2 -43.5 -45.5 -45.5 -55.1

Underlying pre-tax profit 325.8 312.6 230.5 56.1 90.5 86.9 77.0 79.7

Exceptionals -20.9 -186.5 -409.7 -179.7 21.8 -309.4 -100.0 -100.0

Tax -88.2 -77.3 -66.0 -56.8 -46.7 -19.1 -20.0 -20.0

Discontinued -5.0 -46.4 -14.5 -38.9 -8.7 -2.1 -10.0 -10.0

Net profits / losses reported 211.7 2.4 -259.7 -219.3 56.9 -243.7 -53.0 -50.3

Minority interest -4.2 2.6 -1.1 0.1 -2.5 -6.3 -5.3 -4.3

Net profits to shareholders 215.9 -0.2 -258.6 -219.4 59.4 -237.4 -47.7 -46.0

Summary cash flows

Underlying EBIT 299.3 291.0 217.5 83.0 133.2 129.2 119.3 122.0

Depreciation & Amortisation 131.0 136.8 136.2 134.7 128.6 139.4 139.4 139.4

EBITDA 430.3 427.8 353.7 217.7 261.8 268.6 258.7 261.4

Tax paid -85.0 -100.8 -53.1 -35.7 -31.9 -26.2 -26.2 -26.2

Financial expenses -70.0 -34.7 -42.8 -51.2 -55.3 -51.7 -51.7 -51.7

Operating cash flows (FFO) 275.3 292.3 257.8 130.8 174.6 190.7 180.8 183.5

Pension fund contributions 0.0 0.0 0.0 -12.0 -12.0 -12.0 -12.0 -12.0

WC movements 15.4 -15.1 8.1 -285.4 39.7 40.4 10.0 0.0

Net restructuring & other one-off items 33.9 -63.6 -37.6 -64.2 -45.7 -28.9 -20.0 -10.0

Capex -78.4 -108.0 -123.6 -129.9 -165.3 -223.2 -100.0 -100.0

Free cash flows 246.2 105.6 104.7 -360.7 -8.7 -33.0 58.8 61.5

Dividends paid -149.9 -157.5 -160.8 -60.3 0.0 0.0 0.0 0.0

Retained cash flows 96.3 -51.9 -56.1 -421.0 -8.7 -33.0 58.8 61.5

Less acquisitions (net of disposals) -51.7 -184.3 -11.2 -27.6 -7.0 0.0 0.0 0.0

Change in equity -107.4 20.8 -90.7 5.7 296.3 0.2 0.0 0.0

Cash flow before borrowing -62.8 -215.4 -158.0 -442.9 280.6 -32.8 58.8 61.5

Summary balance sheets

Gross financial debt 410.5 401.5 397.6 679.1 524.8 552.0 552.0 392.0

Cash 617.5 440.5 365.8 201.6 304.2 345.2 345.2 185.2

Restricted funds 67.6 78.9 120.3 120.3 120.3

Unencumbered cash 134.0 225.3 224.9 224.9 64.9

Net financial debt -207.0 -39.0 31.8 545.1 299.5 327.1 327.1 327.1

Operating leases (8x rent) 2,484.0 2,753.6 2,904.8 2,900.0 3,033.6 3,000.0 3,000.0 2,960.0

Pension liability 141.7 38.4 51.1 153.0 266.8 247.3 247.3 247.3

Off balance sheet debt, estimate for 2011 80.0 105.1 138.0 89.2 62.6 50.0 50.0 50.0

Adjusted total debt 3,116.2 3,298.6 3,491.5 3,821.3 3,887.8 3,849.3 3,849.3 3,649.3

Adjusted net debt 2,498.7 2,858.1 3,125.7 3,687.3 3,662.5 3,624.4 3,624.4 3,584.4

Operating leases as % of total debt 80% 83% 83% 76% 78% 78% 78% 81%

Op. leases & pensions as % of total debt 105% 98% 95% 83% 90% 90% 90% 89%

Shareholder's Equity 1,423.7 1,304.3 853.5 584.9 875.1 676.5 676.5 676.5

Rental costs, est. for 2011 310.5 344.2 363.1 362.5 379.2 375.0 375.0 370.0

EBITDAR 741 772 717 580 641 644 634 631

Adj. RCF + Rent 407 292 307 -59 371 342 434 432

Credit statitistics (LTM)

Net Debt / EBITDA -0.5x -0.1x 0.1x 2.5x 1.1x 1.2x 1.3x 1.3x

TD/EBITDA 1.0x 0.9x 1.1x 3.1x 2.0x 2.1x 2.1x 1.5x

Adj. ND/EBITDA 5.8x 6.7x 8.8x 16.9x 14.0x 13.5x 14.0x 13.7x

Adj ND / EBITDAR 3.4x 3.7x 4.4x 6.4x 5.7x 5.6x 5.7x 5.7x

Adj TD / EBITDA 7.2x 7.7x 9.9x 17.6x 14.9x 14.3x 14.9x 14.0x

Adj. TD / EBITDAR 4.2x 4.3x 4.9x 6.6x 6.1x 6.0x 6.1x 5.8x

Adj. RCF+rent / adj. ND 16.3% 10.2% 9.8% -1.6% 10.1% 9.4% 12.0% 12.0%

EBITDAR / interest costs & rent 1.9x 2.0x 1.8x 1.4x 1.5x 1.5x 1.5x 1.5x

EBITDA / Interest costs 6.1x 12.3x 8.3x 4.3x 4.7x 5.2x 5.0x 5.1x

EBITDA / Net Interest -11.8x -38.9x -54.4x 6.0x 6.0x 5.9x 5.7x 4.7x

RCF + rent/ net debt 16.3% 10.2% 9.8% -1.6% 10.1% 9.4% 12.0% 12.0%

FFO + rent/ adj. net debt 27.3% 20.5% 18.1% 2.0% 14.9% 14.7% 17.0% 17.2%

UK & Ireland47%

Nordics28%

Other international

15%

e-commerce10%

UK & Ireland47%

Nordics28%

Other international

15%

e-commerce10%

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RCF Bonds



December 2011 67

Bond Covenants

Bond DXNSLN 6 ⅛ 11/15/12 DXNSLN 8 ¾ 08/03/15 Corp

Issuer DIXONS RETAIL PLC DIXONS RETAIL PLC

Currency £ £

Coupon 6. 125%, Annual 8.75%, S/A

Coupon step-up N N

Ranking Senior unsecured Senior unsecured

Guarantees DSG Retail Limited Subsidiaries senior unsecured

Negative pledge Y Y

Anti-layering N N

Cross-default Y Y

Redemption before call Y N

Call schedule

30/07/2010 and anytime after

Tax redemption N Y

Change of control N Y, 101.00

Make-whole call N N

Equity clawback N N

Equity cure N N

Limitation on debt N Y, Fixed charge cover >2.5x

Asset sales / Conveyance N N

Limit on Sale & Leasebacks N N

Restricted payments N Y

Transactions with affiliates N N

Merger/Sale restrictions N Y

Restriction on bus. activities N N

Limitation on sub debt N Y

Financial reporting N Y

MAC clause N N




December 2011 68


Dixons – Comfortingly uneventful H1 2011/12

SG Bond Recommendation: Dixons’ 5-year CDS has again decompressed against the

volatile cross-over index. Comforted by today’s result, we reiterate our view that Dixons

remains an attractive albeit speculative relative risk proposition. We recommend a Sell on

Dixons’ 5-year CDS protection at 338 over the iTraxx Xover-index at 839 mid-prices with a

view to 150 tightening potential over the coming six months. We also reiterate our Buy on

the 2015 bond currently yielding 15.7%. We close our coverage (was a ‘Buy’) on the

November 2012 given the short maturity.

Opinion: Dixons delivered an H1 2011/12 result which helpfully excluded any significant

negative surprises. Management appears well focused on cash management, which has

strengthened our belief that the path to an uneventful bond-repayment in November 2012 is

reasonably clear. Beyond the coming 12 months, we see the Dixons credit story as one of

deleveraging, as we previously discussed in our report, "In a state of managed decline". We

thus retain our ‘negative’ credit opinion. H1’s bottom line of £-28m was bang in line with

expectations after weak sales everywhere, except in the Nordic countries, leading to a

blended -5% drop in group revenues. However, our key take-away from today’s conference

call was the comforting sense of management’s attention to the upcoming bond redemption

hurdle in November 2012. By our calculation, the cash required next November amounts to

£225m, consisting of the £160m bond repayment and its associated £65m net hedging

cost. We also add an estimated £12m in cash which we assume Dixons will need to

contribute to its pension fund. While the latter is not sensitive to November 2012, it makes

the total cash outflow £237m for the year. Dixons had a good cash position of £270.5m on

15 October 2011, roughly the same as last October. However, excluding restricted cash, the

cash position was £159m. Dixons’ net debt was reported as £254.7m, excluding restricted

cash (£143.2m including restricted cash), down 24% at the same time last year. Free cash

flow for the period was £72.6m boosted by the much-talked-about property sale in Sweden,

representing £58m. Without this sale, free cash flow generation was almost exactly the

same as last year, largely due to cost-efficiencies and lower capital spending. Dixons’

£360m revolving credit facility (RCF) was unutilised as of 15 October, which was a positive

surprise. As we know from previous years, the calendar Q4 period can be very cash usage-

heavy as stock-building towards Christmas can mean nearly £100m tied up in working

capital. After Christmas, the company typically swings back into a healthy cash-rich position

until the end of February. In October 2010, in contrast, Dixons had already drawn around

£80-90m on its RCF. The key point made by management today, in our interpretation, is

that Dixons should be well capable of replicating current year’s financial status at the same

time next year, just as the bond is due. The RCF will be used to repay the bond and to settle

the swap, a procedure management has cleared with its bankers.

Next calendar events: Trading Statement and interim results in January 2012 (date to be

announced).


https://www.sgresearch.com/p/en/3/0/164518/E8D1457D76DEE346C12578C40052C541.html?sid=985e1c3d4a881fc83368535162478978


December 2011 69


Europcar is the largest car rental company in Europe ahead of Avis Europe, Hertz and Sixt.

Globally, it operates in 150 countries from 3,464 locations around the world, employs 6,600

staff and owned 193,000 vehicles in 2010. Europcar has been wholly-owned by the

investment company Eurazeo since its March 2006 acquisition from the Volkswagen Group.

Strengths An oligopolistic car rental industry in Europe, with Europcar, Avis Europe and Hertz

representing a combined 67% market share, remains under combined pressure from the

stuttering economic outlook and still possible air traffic disruption, as c.40% of Europcar

revenues are generated at airports.

A conservative fleet management to support group profitability. Around 95% of fleet is under

buyback programme that leaves marginal residual value risk.

Despite stable demand in October, the group has already set up cost-saving initiatives to

protect Europcar’s profitability going forward. We believe that expected challenging

economic environment should lead Europcar to reduce the fleet and group expenses in the

coming quarters.

Weaknesses Europcar is highly leveraged due to the March 2006 buyout by Eurazeo in addition to

persistent weak cash flow generation. As a result, group net debt of €3.7bn at end-

September 2011 remains Europcar’s major burden.

This limits the group’s financial flexibility to make acquisitions in the current wave of M&A

under way in the rental industry.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY B2 - Stable

S&P B+ - Stable

Fitch - - -



N/A

Share price

N/A


Market cap.(€m) N/A

Bloomberg Ticker EUROCA

Analyst

Pierre Bergeron

+331 4213 8915

[email protected]

Source: Company Data / SG Cross Asset Reearch





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December 2011 70

Europcar - Financial data

2010 Revenue split

2007 2008 2009 2010

Revenues 2,046.8 2,091.3 1,851.4 1,973.0

Fleet holding costs -491.9 -575.8 -509.2 -530.0

Fleet, rental and revenue related costs -704.4 -735.4 -646.1 -706.0

Personnel costs -311.8 -329.4 -297.7 -305.0

Overheads -243.9 -219.8 -202.7 -206.0

D&A -32.0 -33.6 -34.3 -35.0

Others 15.2 12.8 6.7 13.0

Operating profit 278.0 210.1 168.1 204.0

Other non-recurring items -41.1 -24.8 -147.2 -88.0

Operating profit after special items 236.9 185.3 20.9 116.0

Net financing costs -196.8 -222.9 -189.1 -242.0

EBT 40.1 -37.6 -168.2 -126.0

Income tax -24.7 2.5 20.3 -2.7

Net income 15.0 -35.0 -148.0 -129.0

2007 2008 2009 2010

Adj. Corporate EBITDA 180.0 119.0 105.0 128.0

Change in non-fleet working capital 19.7 44.0 45.0 -13.0

Change in fleet net capex, net of fleet wc 163.4 373.0 579.0 45.0

Free cash flow 265.0 401.2 603.2 27.0

Net change in bonds 260.8 0.0 0.0 272.0

Change in fleet financing -227.7 -339.0 -622.0 -122.0

Net change in cash 51.9 29.0 -20.0 81.0

Assets 2007 2008 2009 2010

Intangible assets 1,422.0 1,407.0 1,315.0 1,265.0

Property, plant and eq. 95.0 122.0 115.0 102.0

Inventories 13.0 17.0 15.0 16.0

Rental fleet receivables 2,526.0 1,982.0 2,155.0 2,125.0

Non restricted cash 327.0 319.0 231.0 263.0

Others 1,124.0 1,089.0 490.0 592.0

Total assets 5,507.0 4,936.0 4,321.0 4,363.0

Borrowings 3,179.0 2,827.0 2,245.0 2,411.0

Rental fleet payables

669.0 646.0

Other payables 999.0 947.0 355.0 355.0

Provisions 133.0 129.0 173.3 174.0

Others 384.0 379.0 381.7 364.0

Total Equity 812.0 654.0 497.0 413.0

Total Equity & Liabilities 5,507.0 4,936.0 4,321.0 4,363.0

2007 2008 2009 2010

Adj. Operating margin 13.6% 10.0% 9.1% 10.3%

Adj. Consolidated EBITDA 671.3 686.2 622.0 663.0

Corporate debt 800.0 800.0 794.0 815.0

Fleet debt 2,433.4 2,009.9 2,408.0 2,588.0

Total debt 3,233.4 2,809.9 3,202.0 3,403.0

Adj. Net debt 2,906.4 2,490.9 2,971.0 3,140.0

Total debt / EBITDA 4.3 3.6 4.8 4.7

2010 Operating profit split

Not disclosed

Europcar debt maturity chart -

2010

Debt structure end-2010

Bonds 53%

Bank borrowings 47%

Main shareholders

Eurazeo 100%


Germany27%

UK19%France

18%

Italy12%

Spain10%

14%

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2011 2012 2013 2014 2015 2016 2017 2018UK fleet fin, loan 2014 Secured FRN

RCF (drawn) RCF (undrawn)

New Revolving facility (drawn) New Revolving facility (undrawn)

2017Secured Notes 2018 Sub Notes



December 2011 71

Bond Covenants

Bond

FRN due 2013

€375m E3M+3.5% Senior Subordinated Secured

Notes due 15 May 2013

9.75% Notes due 2017

€350m 9.75% Senior Secured Notes due 1 August

2017

9.375% Notes due 2018

€400m 9.375% Senior Subordinated Unsecured

Notes due 15 April 2018

Issuer Europcar Groupe SA EC Finance PLC Europcar Groupe SA

Coupon Quarterly (15Feb, 15May, 15Aug, 15Nov) Semi-annual (1Feb, 1Aug) Semi-annual (15 Apr, 15 Oct)

Ranking

within issuer

Subordinated to all senior indebtedness Senior obligations of the Issuer Senior subordinated

Ranking vs

other debt

Subordinated to all indebtedness of non-guarantor

subsidiaries

Subordinated in right of payment to all existing and

future Senior Debt Facility

Effectively subordinated to all secured

indebtedness of the issuer including the

outstanding FRN

Guarantees Guaranteed on an unsecured senior subordinated

basis by Europcar International Sa & Co and

Europcar Autovermietung GmbH (Germany),

Europcar UK Ltd

Guaranteed on a senior unsecured basis by ECI No guarantee

Securities Second priority security interest in the shares of

ECI

Secured by the English bank accounts of the Issuer

and the Issuer’s rights under the ECI Subordinated

Loan, the Securitifleet proceeds Loan and an

unsecured guarantee from ECI.

Unsecured

Limitation of

liens

No liens unless it is a Permitted Lien or unless

Notes are secured on an equal basis with the

obligations that are being secured (or prior to in the

case of Liens with respect to junior obligations)

Applicable to Issuer and Restricted Subsidiaries

and restricts the incurrence of Liens other than

permitted liens unless the Notes are equally and

rateably secured

Limitation on Liens covenant is applicable to ECI

and its Restricted Subsidiaries, and restricts the

incurrence of any lien except for permitted liens

(unless the notes are equably and rateably secured)

Cross default Yes for any debt repayment >€30m Yes Yes

Redemption

before call

No - Make-Whole

- Equity clawback prior to 1Aug2013 at 109.75%,

limited to 35% of the notes

- Make-Whole

- Equity clawback prior to 15Nov2013 at 109.375,

limited to 40% of the notes

Call schedule >15 May 2007: 102%

>15 May 2008: 101%

>15 May 2009: 100%

>1 Aug 2014: 104.875%

>1 Aug 2015: 102.438%

>1 Aug 2016: 100%

>15 Nov 2013: 107.031%

>15 Nov 2014: 104.688%

>15 Nov 2015: 102.344%

>15 Nov 2016: 100%

Tax

redemption

In whole at 100% In whole at 100% In whole at 100%

Change of

control

Put at 101% Put at 101% Put at 101%

Limitation on

Debt

- Corporate Consolidated Fixed Charge Coverage

Ratio is at least 2.0 to 1.0

- Debt under Senior Credit Facilities up to €350m

- Purchase money up to €35m

- Consolidated Fixed Charge Coverage Ratio

greater than 2.0 to 1.0 (permitted to be incurred by

ECI only)

- Any indebtedness incurred by Securitifleet

Holding or Securitifleet Companies must be in

compliance with the Loan to Value covenant (Loan

to Value percentage shall not exceed 95%)

- Debt under Senior Credit Facilities up to €350m

- Purchase money up to €35m

- Issuer and Restricted Subsidiaries may incur debt

if Consolidated Fixed Charge Coverage Ratio is not

greater than 2.0 to 1.0

- Credit Facilities Basket (can be incurred by Issuer

and the Guarantors) not to exceed €350m, plus

€20m for each €100m by which consolidated

revenue of the Issuer and its Restricted

Subsidiaries

- CLO/PMO not to exceed €35m

Limitation on

Asset

disposals

Limitations with the following carve-out (cumulative

conditions):

- Disposal at fair market value (determined in good

faith by the Board of Directors if >€20m)

- At least 75% of the consideration received is in

the form of cash or equivalents if >€20m

- The proceeds must serve to repay debt, acquire

permitted assets or finance capex (authorized

excess proceeds of €25m)


conditions):





- The proceeds must serve to prepay or repay

Senior Indebtedness, or to invest in Replacement

Assets


conditions):





- The proceeds must serve to prepay or repay

Senior Indebtedness, or to invest in Replacement

Assets

Restricted

payments

- Max 50% of the consolidated net income of the

Parent plus 100% of the proceeds received from

the Issuance/ sale of capital stock plus the amount

by which Issuer or Restricted subsidiaries' debt

reduced plus the amount equal to the net reduction

of restricted investments.

- Possibility to

purchase/repurchase/cancel/redeem capital stock

held by employees or management in the limit of

€10m plus €5m multiplied by the number of years

since the Issue date plus net cash proceeds from

the sale of capital stock to Management Investors

(directors or employees of the Issuer and relatives).

- General basket of €25m or 1% of consolidated

total assets

- Basket of €35m for transactions purposes only

- Max 50% of the consolidated net income plus

100% of the proceeds received from the Issuance/

sale of capital stock plus the amount by which

Issuer or Restricted subsidiaries' debt reduced plus

the amount equal to the net reduction of restricted

investments.

- General basket of the greater of €45m or 1% of

consolidated total assets

- Max 50% of the consolidated net income plus

100% of the proceeds received from the Issuance/

sale of capital stock plus the amount by which

Issuer or Restricted subsidiaries' debt reduced plus

the amount equal to the net reduction of restricted

investments.

- General basket of the greater of €45m or 1% of

consolidated total assets

Transaction

with affiliates

Transaction must be at market conditions, and

certified by Disinterested Directors if >€20m








December 2011 72

Latest research published on 22 March 2011

Europcar: Highly leveraged

SG Bond Recommendation: the group has recently refinanced a €1.8bn Senior Asset

Financing Loan (SARF) by issuing €250m in senior secured notes (maturity Aug-2017) and a

new €1.3bn SARF (maturity Aug-2014). Also, following the early redemption of a €375m

senior subordinated unsecured note due in May 2014, Europcar has issued a €400m senior

subordinated note (maturity 2018). Moody’s has assigned Caa1 ratings to this subordinated

deal due to its junior positioning within the group’s capital structure combined with the

absence of any guarantees from the group’s operating companies. In a recovery analysis,

S&P assigned a 6 rating, or 0-10% recovery rate, to the subordinated 2013 and the

subordinated 2018, as well as a 4 to the 2017, or 30-50% recovery rate. As result, taking into

account our view of weak cash flow generation and continued high leverage, we recommend

investors sell Europcar bonds.

SG Credit Opinion: SG’s stable credit opinion on Europcar reflects our anticipation of a

more favourable economic environment to support group revenues. However, the

oligopolistic car rental industry in Europe, with Europcar, Avis Europe and Hertz representing

a combined 67% market share, remains under combined pressure from the stuttering

economic outlook and still possible air traffic disruption, as c.40% of Europcar revenues are

generated at airports. Looking ahead, there are significant question marks over whether the

rental companies could benefit from a higher number of rental days/fleet utilization rates as

they are both close to what we believe to be the ceiling for such measures. Similarly, we

believe that extending fleet life beyond the current 5 to 7 months average age is likely to

prove difficult due to tough competition within the sector. Moreover, the recent sharp

recovery of carmakers and their strategy to improve product-mix and margins should make

incentives talks with rentals tougher than in the past, in our view. We believe that PSA’s

guidance for 2011, i.e. recurring operating income higher than 2010 and free cash flow close to

neutral, could be revised down on 26 October, the Q3 revenues publication date. PSA posted

sales down 13.3% in September in Europe (60% of PSA’s sales) impacted by the disruption of

some component supplies. In the coming weeks, we estimate that a combination of announced

production cuts and higher incentives to keep inventories under control are likely to pressure 2011

group operating profit and consequently operating cash flow.

That said, cost-cutting during the recent ‚crisis‛ in addition to revenue recovery should

deliver an operating margin close to the double-digits in 2010 and 2011. However, cash flow

generation will be negatively impacted by the return of fleet-related capex following its sharp

reduction in 2009. Negative free cash flow posted in the first nine months of 2010, however,

was followed by a debt restructuring which has provided the group with additional cash. For

the full year, we forecast free cash flow as close to breakeven, which will provide weak

support for the group’s deleveraging. As such, we expect Europcar to remain highly

leveraged due to its weak cash flow generation leaving little scope for further debt

redemption and ratings upgrades for some time. The expected IPO of Europcar, that would

likely see Eurazeo cease to be a shareholder, could open the door to stronger support from a

new majority shareholder. Given the recent expansion of carmakers into services like Mu by

Peugeot (Peugeot’s pay-as-you-drive scheme), we cannot exclude the potential return of a

major carmaker to the Europcar shareholder structure. This scenario would support an

upgrade of Europcar ratings, in our view.



December 2011 73


Fiat Industrial manufactures a wide range of branded trucks and tractors. The company also

makes powertrains for industrial and marine applications, as well as manufactures and supplies

truck, bus and diesel engines, and engineers, manufactures, markets and distributes

agricultural and construction equipment.

Strengths Successful group strategy to focus on high-margin business, namely agricultural and

construction equipment, trucks and powertrains.

Good diversification by region, with only 12% of 2010 revenues contributed from Italy, 24%

from North America, 32% from Europe ex-Italy and 17% from Latin America.

High profitability and low financial leverage support high-grade category financial ratios.

Weaknesses Fiat Industrial is liable for any Fiat SpA debts remaining unsatisfied at end-2010, the

effective date of the demerger, up to the limit of the net assets value received, or €3.75bn.

The group is not immune to the significant slowdown in capital goods markets that is now

widely expected for 2012.

Group structure

Stable

Corporate ratings

LT ST Outlook MDY Ba1 - Stable

S&P BB+ B Negative

Fitch - - -



Share price



Bloomberg Ticker FIIM

Pierre Bergeron

+331 4213 8915

[email protected]






IVECO

Exor SpA

CNH89.3%

Fiat Industrial

Ba1 / BB+

$1.0bn 7.75% Sep-13

$0.5bn 6.25% Nov-16

100%

30.5%

Fiat Powertrain

Technologies

Industrials

100%

€1.0bn 5.25% March-15

€1.2bn 6.25% March-18

0

100

200

300

400

500

600

700

800

Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

0

200

400

600

800

1000

1200

Mar Apr Jun Aug Sep Nov

4

5

6

7

8

9

10

11

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Auto & Auto parts

Fiat Industrial



December 2011 74

Fiat Industrial - Financial data

2010 Revenue split

2010 trading profit split

Fiat bond debt maturity chart


Bonds 55%

Bank borrowings 43%

Others 3%

Main shareholder

EXOR 35.0%


Income StatementIn €m FY 2009A FY 2010A FY 2011E % chg. FY 2012E % chg. FY 2013E % chg.

Revenue 17,968 21,342 24,300 14% 25,100 3% 26,300 5%

Check - - - - -

Cost of sales (15,549) (17,979) (19,930) (20,550) (21,430)

Gross profit 2,419 3,363 4,370 30% 4,550 4% 4,870 7%

Gross margin, % 13.5% 15.8% 18.0% 18.1% 18.5%

SG&A (1,636) (1,793) (2,090) (2,210) (2,300)

Research & Development costs (388) (418) (510) (540) (560)

Other income / (expense) (73) (60) (40) (20) (20)

Trading Profit 322 1,092 1,730 58% 1,780 3% 1,990 12%

Trading margin, % 1.8% 5.1% 7.1% 7.1% 7.6%

Check - - - - -

Operating Profit (19) 1,017 1,670 64% 1,730 4% 1,950 13%

Trading margin, % -0.1% 4.8% 6.9% 6.9% 7.4%

PBT (470) 576 1,280 122% 1,380 8% 1,650 20%

PBT margin, % -2.6% 2.7% 5.3% 5.5% 6.3%

Income taxes (33) (198) (500) (490) (550)

Effective tax rate, % 7% -34% -39% -36% -33%

Net profit (loss) (503) 378 780 890 1,100

Minority interest 39 (37) (80) (90) (100)

Group net profit (loss) (464) 341 700 105% 800 14% 1,000 25%

Group net margin, % -2.6% 1.6% 2.9% 3.2% 3.8%

Cash Flow StatementIn €m FY 2009A FY 2010A FY 2011E % chg. FY 2012E % chg. FY 2013E % chg.

Net profit (loss) (503) 378 780 106% 890 14% 1,100 24%

Depreciation & amortization (net of vehicles sold

under buyback commitments or leased)637 665 680 740 810

(Gains) / losses on disposals 2 (5) - - -

Other non-cash items 252 197 200 50 50

Dividends received 18 32 80 50 50

Change in provisions 46 122 200 - -

Change in deferred taxes (123) 30 80 - -

Changes relating to buy-back commitments (35) 40 20 - -

Changes relating to operating leases (41) 26 5 - -

Change in w orking capital 869 1,070 (515) (134) (163)

Cash Flow from operating activities 1,122 2,555 1,530 -40% 1,596 4% 1,847 16%

Trading Profit conversion, % 348% 234% 88% 90% 93%

PPE and intangible assets (net of vehicles sold

under buy-back commitments or leased)(708) (872) (900) (1,000) (1,100)

Investments (5) (27) (150) - -

Proceeds from disposals of non-current assets 12 42 15 15 -

Net change in receivables from financing activities 1,120 335 (1,000) - -

Net change in f inancial amounts receivable from Fiat SpA - - - - -

Change in other current securities 17 18 (20) - -

Other changes (32) 76 (70) (150) (150)

Cash Flow from investing activities 404 (428) (2,125) 396% (1,135) -47% (1,250) 10%

Free Cash Flow 421 1,698 495 -71% 611 23% 747 22%

Trading Profit conversion, % 131% 155% 29% 34% 38%

Cash Flow from financing activities (1,116) (120) 1,029 (183) (215)

Effect of FX changes on cash & cash equivalents 61 118 (100) - -

Net increase (decrease) in Cash & Cash equivalents 471 2,125 334 277 382

Net debt calculation

Net (debt) / cash (13,645) (12,179) (11,743) (11,465) (11,083)

Balance SheetIn €m FY 2009A FY 2010A FY 2011E % chg. FY 2012E % chg. FY 2013E % chg.

Intangible assets 3,200 3,567 3,510 3,510 3,510

Property, Plant & Equipment 3,846 3,856 4,062 4,322 4,612

Investments and other f inancial assets 671 737 865 970 1,100

Leased assets 457 492 482 482 482

Defined benefit plan assets 126 166 150 150 150

Deferred tax assets 917 1,211 1,250 1,300 1,400

Non-current assets 9,217 10,029 10,319 10,734 11,254

Inventories 4,144 3,898 4,982 5,171 5,365

Trade receivables 1,729 1,839 1,993 2,083 2,157

Receivables from financing activities 10,605 10,908 10,982 10,982 10,982

Financial amounts receivable from Fiat SpA 2,201 2,865 - - -

Current tax receivables 315 618 643 643 643

Other current assets 946 955 1,150 1,200 1,200

Current f inancial assets 190 112 204 204 204

Current securities 37 24 69 69 69

Other f inancial assets 153 88 135 135 135

Cash and cash equivalents 1,561 3,686 4,020 4,298 4,680

Current assets 21,691 24,881 23,973 24,580 25,231

Asset held for sale 11 11 15 15 15

Adjustment (211) (220) (353)

Total assets 30,919 34,921 34,096 35,109 36,147

Total assets adjusted for asset-backed f inancing transactions 24,401 26,600

Shareholders' equity 5,073 3,987 4,409 4,814 5,280

Minority interest 718 757 830 893 959

Total Equity 5,791 4,744 5,239 5,707 6,239

Provisions for employee benefits 1,905 2,017 2,000 2,100 2,200

Other provisions 2,053 2,258 2,365 2,365 2,365

Financial payables 15,008 18,695 15,928 15,928 15,928

Asset-backed f inancing 6,518 8,321 8,189 8,189 8,189

Debt payable to Fiat SpA 4,948 5,626 - - -

Other debt 3,542 4,748 7,739 7,739 7,739

Other f inancial liabilities 227 147 137 137 137

Non-current liabilities 19,193 23,117 20,430 20,530 20,630

Trade payables 3,220 4,077 4,799 4,945 5,050

Current taxes payables 262 508 655 655 655

Deferred tax liabilities 62 52 73 73 73

Other current liabilities 2,391 2,423 2,900 3,200 3,500

Current liabilities 5,935 7,060 8,427 8,873 9,278

Liabilities held for sale - - - - -

Total Equity & liabilities 30,919 34,921 34,096 35,109 36,147

NEW - SG scenario

NEW - SG scenario

NEW - SG scenario

CNH52%

Iveco37%

FPT11%

CNH69%

Iveco25%

FPT6%

0

200

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1000

1200

1400

2013 2015 2016 2017 2018



December 2011 75

Bond Covenants

FIIM 5.25% March 2015 FIIM 6.25% March 2018

Bond 11 March 2015 €1.0bn 5.25% 9 March 2018 €1.2bn 6.25%

Issuer FIAT INDUSTRIAL FINANCE EUROPE FIAT INDUSTRIAL FINANCE EUROPE

Coupon Annually (11 March) Annually (9 March)

Negative Pledge No No

Change of Control No No

Fundamental Change No No

Limit of Indebtedness No No

Cross Default No No

Negative Covenant No No

Certain Sales of Assets No No

Restriction on Activities No No

Debt Service Coverage Ratio No No

Free Cash Flow To Debt Service Ratio No No

Restrictive Covenant No No

Merger Restrictions No No

Limitation on Sale-and-Leaseback No No

Limitation on Subsidiary Debt No No

Restricted Payments No No

Ratings Trigger No No

Collective Action Clause No No

Material Adverse Change Clause No No

Force Majeure No No




December 2011 76

Latest research published on 04 October 2011

Fiat Industrial: Sono l'Americano!

Spreads of both Fiat Industrial and Fiat SpA have widened considerably over the past few

months as fears over the Italian sovereign have intensified. CDS spreads of Fiat Industrial and

Fiat SpA have been impacted by the widening of Italy’s CDS since July 2011. The spread of

Italian 5-year CDS over US increased to 418bp on 4 October, from 129bp on 1 July.

Although their CDS trade at similar levels, in our view Fiat Industrial’s fundamentals are stronger

than Fiat SpA’s, and the former merits an IG rating. We therefore recommend Selling protection

on Fiat Industrial and Buying protection on Fiat SpA at the current spread ratio of 0.97x. The

target ratio on a 3-month horizon is 0.8x with a stop loss at 1.2x.

In 2010, Fiat Industrial generated 55.2% of its revenues from US-managed unit Case New

Holland. Having taken control of Chrysler on 11 June, Fiat SpA anticipates 47% of its 2011

revenues will come from North America.

Fiat Industrial’s key financial ratios for 2011-2013 are stronger than those of Fiat SpA in our

view; we estimate the former’s EBIT margin will improve faster, to 7.2% in 2013, as will its

leverage ratio, to 1.8x, than will Fiat SpA’s, to 3.9% and 1.9x, respectively.

Fiat Industrial is rated BB+, or 1 notch higher than Fiat SpA at BB. Moody’s cut Fiat SpA’s

ratings by 1 notch to Ba2 on 21 September, equivalent to a BB from S&P, due to the greater

competition in Fiat SpA’s key market, Brazil, and higher capex to support its product offensive.

Moody’s negative outlook mainly reflects execution risks from the Chrysler integration. In our

view, on its performance in 2011, Fiat Industrial merits an investment grade rating, in contrast to

Fiat SpA, which is fairly rated.



December 2011 77


Fiat S.p.A. manufactures and markets automobiles, commercial vehicles, and agricultural

and construction equipment. The company also produces metallurgical products and

production systems for the automobile industry, and owns publishing and insurance

companies.

Strengths Successful group strategy to combine with Chrysler Group; the latter’s recovery in US

markets in addition to growing synergies will support Fiat’s profitability and cash flow

generation.

Impressive management that has taken control of Chrysler at a very low price.

Fiat / Chrysler credit profile is supported by a high cash pile of €19.0bn at end-June 2011,

while only €2.5bn of bonds are due to mature before end-2012.

Weaknesses Fiat is a mass market carmaker, whose profitability is more impacted than that of pure

premium players by cyclical markets and pricing pressure in competitive auto markets.

Fiat is one of the top players in the Brazilian market, but increasing competition is likely to

pressure Fiat do Brasil’s high margin.

Fiat failed to make Alfa Romeo a successful premium brand to compete with the Germans

and to return high operating margin to the group.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Ba2 - Negative

S&P BB B Negative

Fitch BB B Negative



Share price



Bloomberg Ticker FIAT

Pierre Bergeron

+331 4213 8915

[email protected]






Fiat Powertrain

Technologies

Autos

Magneti

Marelli

Fiat SpABa2 on / BB on

Exor SpA

Ferrari,

Maserati

€1.25bn 9.0% July-12

€1.0bn 6.625% Feb-13

€900m 6.125% July-14

€1.25bn 7.625% Sept-14

€1.5bn 6.875% Feb-15

€1.0bn 6.375% April-16

€600m 7.375% July-18

Fiat Group

Automobiles

Fiat Finance

and TradeBa3 on

Fiat Finance

North AmericaBa3 on

Fiat Finance

€1.0bn 5.625% Jun-17

30.5%

100% 100% 100%

61%

39%

Chrysler LLC

53.5%

$1.5bn 8.0% Jun-19

$1.7bn 8.25% Jun-21

0

100

200

300

400

500

600

700

800

900


0

200

400

600

800

1000

1200

Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11

0

1

2

3

4

5

6

7

8

9

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Auto & Auto parts

Fiat Spa



December 2011 78

Fiat SpA - Financial data

2010 revenue split


Not disclosed

Fiat bond debt maturity chart


Bonds 53%

Bank borrowings 33%

Others 13%

Main shareholder

EXOR 35.0%


FIAT - INCOME STATEMENT (€m) 2009 2010 2011e 2012e 2013e

Total revenues (Ym) 32,684 35,880 57,470 73,000 77,060

Cost of revenues (28,252) (30,718) (48,391) (61,110) (64,080)

Gross income 4,432 5,162 9,079 11,890 12,980

Research & development (1,010) (1,013) (1,621) (2,100) (2,280)

Other operating income/ (expense) (371) (201) 1,006 (170) (160)

EBITDA (ex. associates) 2,414 3,178 6,666 7,920 8,820

Depreciation and amortisation (2,036) (2,186) (3,413) (4,900) (5,200)

Operating income pre-impairment pre-associate income (EBIT) 378 992 3,254 3,020 3,620

Associate income/ (loss) before taxation 65 120 85 90 100

Interest expenses on f inancial debt (352) (400) (1,015) (1,200) (1,100)

Total net interest income/ (expense) (340) (406) (995) (1,190) (1,090)

Pre-tax income 103 706 2,344 1,920 2,630

Taxation (448) (484) (358) (530) (800)

Tax rate % 435.0% 68.6% 15.3% 27.6% 30.4%

Net income before minorities (345) 222 1,986 1,390 1,830

Minority interests (29) (43) (160) (340) (410)

Reported net income/ (loss) (374) 179 1,825 1,050 1,420

EBITDA margin 7.4% 8.9% 11.6% 10.8% 11.4%

Operating margin 1.2% 2.8% 5.7% 4.1% 4.7%

BALANCE SHEET 2009 2010 2011e 2012e 2013e

Tangible assets (incl. leased assets) 13,402 9,601 21,686 23,286 24,986

Other long-term assets 4,883 3,351 9,973 10,313 10,613

Total long-term assets 25,484 17,302 39,470 41,410 43,410

Inventory 8,748 4,443 8,910 8,651 9,093

Receivables 3,649 2,259 4,117 5,037 5,240

Pre-paid expenses & other current assets 17,128 37,471 14,962 13,222 12,901

Cash, cash equivalents & short-term investments 12,226 11,967 13,761 15,799 16,492

Total current assets 41,751 56,140 41,750 42,708 43,727

Total assets 67,235 73,442 81,220 84,118 87,136

Employee benefits obligations 3,447 1,704 6,800 6,900 7,000

Long-term debt (other than employee benefits obligations) 28,991 21,059 28,374 28,374 28,374

Other long-term liabilities 0 0 0 0 0

Total long-term liabilities 37,423 25,983 40,627 40,727 40,827

Payables 12,295 9,345 15,580 16,206 17,030

Other current liabilities & accrued expenses 6,402 25,653 12,003 13,000 13,500

Total current liabilities 18,697 34,998 27,583 29,206 30,530

Total liabilities 56,120 60,981 68,211 69,933 71,358

Shareholders' equity 10,301 11,544 9,519 10,354 11,538

Minority interests 814 917 3,490 3,830 4,240

Shareholders' equity + Minority interests 11,115 12,461 13,009 14,185 15,779

Total liabilities and shareholders' equity 67,235 73,442 81,220 84,118 87,136

Total Financial debt 28,991 21,059 28,374 28,374 28,374

Total Industrial Financial debt 28,991 12,509 19,244 21,009 21,009

Net Industrial Financial debt 16,765 542 5,483 5,210 4,517

Industrial Leverage

Total debt / EBITDA (x) 12.0 3.9 2.9 2.7 2.4

CASH FLOW 2009 2010 2011e 2012e 2013e

EBITDA (ex. associates) 2,414 3,178 6,666 7,920 8,820

Other operating cash movements 657 1,991 (2,590) (780) (1,090)

Funds From Operations 3,071 5,169 4,076 7,140 7,730

Change in w orking capital 1,530 941 (1,384) (34) 179

Cash flow from operating activities 4,601 6,110 2,692 7,106 7,909

Net capital expenditure (2,688) (3,090) (4,856) (6,400) (6,800)

Free operating cash flow 1,913 3,020 (2,164) 706 1,109

Acquisitions of subsidiaries, securities & other investments 0 (863) 0 (250) (200)

Disposals of subsidiaries, securities & other investments 129 0 1,519 0 0

Cash flow from investing activities 129 (863) 1,519 (250) (200)

Share buy-back 0 0 0 0 0

Dividends paid (27) (239) (152) (183) (215)

Other movements in cash f low statement 215 (1,078) (4,079) 0 0

Cash flow from financing activities 6,281 (2,317) (4,231) (183) (215)

Free cash flow after financing and investing activities (Total CF) 8,323 (160) (4,875) 273 694

Adjustment due to foreign exchange valuation 220 359 (66) 0 0

Net increase/ (decrease) in cash resulting from cash flows 8,543 199 (4,941) 273 694

Europe54%Brazil

26%

Rest of the

World15%

North America

3%China

2%

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021



December 2011 79

Bond Covenants

Fiat 9.0% July-

2012

Fiat 6.625% Feb-

2013

Fiat 6.125% July-

2014

Fiat 7.625% Sept-

2014

Fiat 6.875% Feb.-

2015

Fiat 6.375% April-

2016

Fiat 5.625% June-

2017

Fiat 7.375% July-

2018

Bond 30 July 2012

€1.25bn 9.0%

15 Feb 2013

1.0bn 6.625%

8 July 2014

900m 6.125%

15 Sept 2014

1.25bn 7.625%

13 Feb 2015

1.25bn 6.875%

1 April 2016

1.0bn 6.375%

12 June 2017

€1.0bn 5.625%

9 July 2018

600m 7.375%

Issuer Fiat Finance &

Trade

Fiat Finance &

Trade

Fiat Finance &

Trade

Fiat Finance &

Trade

Fiat Finance &

Trade

Fiat Finance &

Trade

Fiat Finance &

Trade North

America

Fiat Finance &

Trade

Coupon Annually (30

July)

Annually (15

August)

Annually (8

July)

Annually (15

Sept)

Annually (13

Feb)

Annually (1

April)

Annually (12

June)

Annually (9

July)

Ranking within issuer

The Notes and any relative Receipts and Coupons are direct, unconditional, unsubordinated and (subject to the provisions of

Condition 4) unsecured obligations of the relevant Issuer and (subject as aforesaid) rank and will rank pari passu without any

preference among themselves, with all other present and future outstanding unsubordinated and unsecured obligations of the

relevant Issuer (subject to mandatorily preferred obligations under applicable laws).

Ranking vs. other debt The Notes rank pari passu with all other present and future outstanding unsecured and unsubordinated obligations of the Guarantor.

Guarantees The payment of principal and interest in respect of the Notes and any relative Receipts and Coupons has been irrevocably and

unconditionally guaranteed by the Guarantor (Fiat SpA) pursuant to the Guarantee.

Negative pledge Yes Yes Yes Yes Yes Yes Yes Yes

Anti-layering No No No No No No No No

Cross default Yes Yes Yes Yes Yes Yes No Yes

Redemption before call

Change of Control: Within thirty (30) days following any Change of Control, the Issuer will give notice to each holder describing the

transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the Change of Control

Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice

is given to Noteholders. Issuer Call: If Issuer Call is specified in the applicable Final Terms, the Issuer may, having given: (i) not

less than 15 nor more than 30 days’ notice to the Noteholders in accordance with Condition 14; and (ii) not less than 15 days before

the giving of the notice referred to in (i). the Optional Redemption Amount in relation to any Notes denominated in euro and

redeemed pursuant to this Condition 7(c) shall be an amount equal to 100 per cent. of the principal amount of such Notes together (if

appropriate) with interest accrued to (but excluding) the date of redemption, plus the Applicable Premium (the greater of: (i) 1.0 per

cent. of the principal amount of such Note(s), or (ii) the excess of: (A) the present value at such redemption date of (i) the principal

amount of such Note(s) at maturity plus (ii) all required interest payments due on such Note(s) through the Maturity Date indicated in

the relevant Final Terms, (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to

the Bund Rate as of such redemption date plus 0.50 per cent.; over (B) the principal amount of such Note(s), if greater.

Call schedule None None None None None None None None

Tax redemption Yes Yes Yes Yes Yes Yes Yes Yes

Change of control

‚Change of Control‛ means the occurrence of both (i) an event

described in clauses (1) or (2) below and (ii) a Rating Decline: (1)

the consummation of any transaction (including, without

limitation, any merger or consolidation), the result of which is that

any ‚person‛ (as that term is used in Section 13(d) of the

Exchange Act), other than one or more Related Parties, becomes

the beneficial owner, directly or indirectly, of more than 50 per

cent. of the Voting Stock of the Guarantor measured by voting

power rather than number of shares; or (2) the stockholders of the

Guarantor or the Issuer approve any plan of liquidation or

dissolution of the Guarantor or the Issuer, as the case may be. If a

Change of Control occurs, except in certain circumstances, the

relevant Issuer will be required to offer to repurchase the Notes at

a purchase price equal to 101 per cent. of their aggregate

principal amount, plus accrued and unpaid interest, if any, to the

date of purchase.

No

Limitation on Debt No No No No No No No No

Asset disposals No No No No No No No No

Restricted payments No No No No No No No No

Transaction with

affiliates No No No No No No No No

Change in covenant No No No No No No No No




December 2011 80

SG Equity/Credit report on Fiat SpA published on 21 July 2011

Although we believe that the two groups will not merge in the foreseeable future, we are of

the opinion that it will happen in the medium term. As a result, a credit opinion on Fiat-

Chrysler would be useful for Fiat 2016 or 2017 bondholders. We initiate a stable credit

opinion on the combined Fiat-Chrysler entity. While we do not rule out execution risks from

combining a weak Italian mass market carmaker with a post chapter 11 Big 3, we believe in

the Fiat-Chrysler story for the following reasons:

Like most auto analysts, we were more than sceptical about Fiat SpA’s recovery plan in the

mid-2000s. However, Fiat CEO Sergio Marchionne achieved the targets set for product

offensive, sales, profitability and deleveraging…until the 2008 crisis. A few years later, it is

hard to believe that the same strategy executed by the same, but now more experienced,

manager and supported by synergies between Fiat and Chrysler will not strengthen this new

auto group.

When compared with Ford (45% of sales) and GM (31%), Chrysler is the most dependent on

North America (73%). Its YTD market share in May 2011 was 9.8%, ranking it fourth behind

GM (19.8%), Ford (16.6%) and Toyota (13.3%). We anticipate another year of recovery for the

US market in 2011, expecting an 11.3% increase to 12.9m, which will support Chrysler’s

recovery. However, 74.6% of Chrysler vehicles sold in the US YTD May 2011 were light

trucks, vs 25.4% of passenger cars. This compares with the overall quantities sold in the US,

48.8% vs 51.2%, due mainly to high gasoline prices.

Neither Fiat nor Chrysler is present in China, which will be the most promising auto market

in the coming years according to most industry experts.

Neither Fiat nor Chrysler is present in the premium vehicles segments. Unlike Cadillac at GM

and Lincoln at Ford, Chrysler has no premium brand despite growing appetite from clients for

premium vehicles. In the stable European auto market in 2011 to date, or -0.4% YTD May

2011, premium carmakers BMW and Audi posted increases in sales of +12.8% and +8.6%,

while quasi-premium Lancia posted a 16.6% decline. Fiat’s strategy of selling Chrysler

models, namely the 300C, 200 and Voyager, with the Lancia badge, raises concerns as to

European clients’ appetite for such a mix. Unlike Fiat SpA, Ford or GM, Chrysler’s marketing

strategy is not supported by a captive unit. Chrysler’s former parent company sold Chrysler

Financial to Canadian bank Toronto Dominion Bank.

On a pro forma basis, comparing the first 12-month consolidation in 2012 vs just seven

months in 2011, we estimate the new group will deliver a decent 4.3% operating margin,

mainly due to the recovery of the US markets, but also weak free cash flow due to high

capex. Excluding an IPO scenario for Chrysler and debt acquisition of the VEBA fund’s stake

in Chrysler, we estimate that pro forma industrial debt and EBITDA will deliver a financial

leverage ratio of 2.2x in 2013, close to the 2.2x required by S&P for the BBB category. As a

result, we believe investor and rating agency sentiment will be less negative on Fiat/Chrysler

in the foreseeable future, making the Fiat SpA CDS current spread level attractive to build a

long position.



December 2011 81

Credit research report published on 01 June 2011

Fiat SpA – Chrysler Group: E la nave va

We recommend selling protection on Fiat SpA and buying protection on the Main index at

the current spread ratio of 3.5x and a target of 3.0x over a 3-month horizon; stop-loss at 3.8x.

We raise our recommendation to Buy from Hold on the Fiat 2014, 2015 and 2016 and

maintain a Hold on the Fiat 2012, 2013 and 2017. We reiterate our long-held Buy

recommendation on the Fiat Industrial 2015 and 2018.

Following the 24 May repayment of $7.6bn of loans to the US and Canadian governments

by Chrysler Group, Fiat has increased its stake in the third-largest US carmaker to 46% from

30% at a price of $1.3bn. As early as this week, we expect Fiat to exercise its option to

acquire the US Treasury’s 6% stake in Chrysler, raising its global stake to 52%. This would

open the door to the full consolidation of Chrysler by Fiat before mid-2011, and later to a full

merger, in our opinion. Fiat also has an option to buy the 45.7% stake from US trade-union

United Auto Workers. This would accelerate the groups’ integration and increase synergies.

On a pro forma basis, the first time over twelve months in 2012 vs. only seven months in

2011, we estimate that the new group will deliver a decent 4.5% operating margin, mainly

due to the recovery of the US markets, but also weak free cash flow due to high capex.

Excluding an IPO scenario for Chrysler, we estimate that pro forma industrial debt and

EBITDA will deliver a financial leverage ratio of 2.1x in 2012 close to the 2.2x required by S&P

for the BBB category. As a result, we believe investor and rating agency sentiment will be less

negative on Fiat/Chrysler in the foreseeable future, making the Fiat SpA CDS current spread

level attractive to build a long position.



December 2011 82


Fresenius SE & Co. KGaA is a diversified health care group providing products and services

to, or at hospitals. Consolidated revenues were €16bn in 2010 and the group contains four

business segments, including the dominant US-based FMC, in which Fresenius SE has a

30% economic interest. Fresenius Medical Care (FMC) is a listed company and the world

leader in dialysis, selling products and providing services in more than 2,553 clinics

worldwide. Kabi is a well-performing and rapidly growing company specialising in infusion

therapy, clinical nutrition solutions and injection devices and pumps. Fresenius Helios is a

private hospital operator in Germany. Fresenius Vamed provides health care facilities services

and maintenance.

Ownership in FMC cut to 30.3%: FMC is fully consolidated in the group’s financial

accounts, which we see as unhelpful to the assessment of Fresenius SE bonds’ credit risk.

Fresenius SE’s shareholding of FMC was cut 5% in August 2011 to 30.3% of its ordinary

share capital (69.7% are free floating). We prefer to look at the Fresenius group excluding the

consolidated FMC figures. The lowered economic interest in FMC in the Fresenius Group

capital structure has only strengthened our belief in this approach. Instead we view FMC as

an undeniably impressive, cash-generative, valuable and also liquid stock-investment on the

balance sheet of Fresenius SE. To revisit this view, please see our report "Fresenius - Event

risk on the rise".

Group structure

Stable

Corporate Ratings


S&P BB Positive

Fitch BB+ Stable

CDS price evolution

CDS price evolution

Share price



Bloomberg Ticker FRE GY

Analyst

Torstein Jorstad

[email protected]






Fresenius SE & Co. KGaAExcluding FMC:

Revenues: € 6.9bnEBITDA: €1.2bn

OCF: €0.9bn

Debt: € 4.4bn

49% 51%

Fresenius Medical Care AG & Co. KGaA, GermanyRevenues: € 9.1bn

EBITDA: € 1.8bnDebt: € 4.4bn

Fresenius Kabi AGHolding

Revenues: € 3.7bnEBITDA: € 0.9bn

Debt: € 4.3bn

Free float66%

Fresenius Finance BV€ 5% Jan '13 BB/Ba1

€ 5.5% Jan '16 BB/Ba1

Proserve GmbHHolding

100%

Else Kröner-Fresenius-Stiftung 28.85% economic interest and

voting rights since January 2011

Alliance4.26%

Vamed AGand other op. subs

Revenues: € 0.7bnEBITDA: € 49m

Debt: € 16m

"FRE GR" bondsBloomberg label

Fresenius US Finance II, Inc$ 9% Jan '15 BB/Ba1

€ 8.75% July '15 BB/Ba1

FMC Finance III S.A.$ 6.875% July '17 BB/Ba2

Fresenius Medical Care Deutschland GmbH

FMC Finance VI S.A.€ 5.5% July '16 BB/Ba2

FMC Finance VII S.A.€ 5.25% Feb '21 BB/Ba2

Fresenius Kabi operating

subsidiaries

Helios GmbHand other Helios op. subs.

Revenues: € 2.5bnEBITDA: € 318mDebt: € 1.1bn

30.3% to be boosted to 31.5%

Fresenius Medical Care Holdings North America Limited

Partnership

Fresenius Medical Care Holdings, Inc. New York

National Medical Care, Inc. Delaware, USA

Renal Care Group, Inc.Delaware, USA

FMC Free float 69.7%

to be cut to 68.5%

100%

100%

APP Pharmaceuticals Inc.

Fresenius Medical Care Capital Trust IV$ 7.875% June '11 BB/Ba3

Fresenius Medical Care US Finance, Inc.$ 5.75% Feb '21 BB/Ba2

99% 77% 100%

100%

"FME GR" bondsBloomberg label

Fresenius Medical Care Capital Trust V€ 7.375% June '11 BB/Ba3

Fresenius Medical Care US Finance, Inc.$ 6.5% Sept. '18 BB/Ba2

FMC Finance VIII S.A.€ 6.5% Sept '18 BB/Ba2

0

100

200

300

400

500

600

700

800

900

1000

Xover index

Fresenius 5-year CDS

0

50

100

150

200

250

300

350

400

0

10

20

30

40

50

60

70

80

Pharmaceuticals

Fresenius SE & Co. KGaA


https://www.sgresearch.com/p/en/3/0/164518/057B79683A41F335C12578990028962A.html?sid=31d44411bc96e6f51c0f83660a61ebad



December 2011 83

Fresenius SE & Co. KGaA - Bonds


FRESENIUS Finance BV Ba1 / Stable BB / Stable BB+ / Stable 500 5.0% 31/01/13 - Hold

FRESENIUS Finance BV Ba1 / Stable BB/ Stable BB+ / Stable 650 5.5% 31/01/16 31/01/11 Sell

FRESENIUS US Finance II Ba1 / Stable BB/ Stable BB+ / Stable $500 9.0% 15/07/15 - Buy

FRESENIUS US Finance II Ba1 / Stable BB/ Stable BB+ / Stable 275 8.75% 15/07/15 - Buy


Fresenius SE - Financial extract

Revenue split

EBITDA split


Debt by subsidiary

FMC 4,970

Kabi 4,205

Other -1,099

Helios 1,069

Vamed 36

Main shareholders

Else Kröner-Fresenius-

Stiftung 28.85%

Alliance 4.26%

Free float 66.89%


2010 Group Group

FMC Kabi&APP Helios Vamed Other with FMC without

Revenues 9,091 3,672 2,520 713 -24 15,972 6,881

EBITDA 1,830 893 318 49 -33 3,057 1,227

Depreciation & amortisation 379 156 83 8 13 639 260

EBIT 1,451 737 235 41 -46 2,418 967

Net interest 211 279 55 -2 23 566 355

Net income 738 294 131 30 -571 622 -116

Operating cash flow (OCF) 1,032 567 311 47 -46 1,911 879

OCF before acquisitions and dividends 649 401 150 38 -60 1,178 529

Total Debt 4,400 4,298 1,096 16 -1,026 8,784 4,384

Total assets 12,793 6,860 3,270 549 105 23,577 10,784

Capex 395 174 166 9 14 758 363

Acquisitions 596 31 13 5 -1 644 48

R&D 73 143 0 0 28 244 171

FCF (OCF after capex, before divi) 637 393 145 38 -60 1,153 516

EBITDA margin 20.1% 24.3% 12.6% 6.9% 137.5% 19.1% 17.8%

EBIT margin 16.0% 20.1% 9.3% 5.8% 191.7% 15.1% 14.1%

Interest coverage (times x) 6.9 2.6 4.3 -20.5 -2.0 4.3 2.7

TD/EBITDA x 2.4 4.8 3.4 0.3 31.1 2.9 3.6

TD/OCF 4.3 7.6 3.5 0.3 22.3 4.6 5.0

TD/FCF 6.9 10.9 7.6 0.4 17.1 7.6 8.5

FMC

57%

Kabi

23%

Helios

16%

Vamed

4%

FMC

59%

Kabi

29%

Helios

10%

Vamed

2%

0

200

400

600

800

1,000

1,200

1,400

2013 2014 2015 2016

RCF Loans Bonds



December 2011 84

Bond Covenants

Bond FREGR 5 01/31/13 FREGR 8 ¾ 07/15/15 FREGR 8 ¾ 07/15/15 FREGR 5 ½ 01/31/16

Issuer FRESENIUS Finance

BV

FRESENIUS US

Finance II

FRESENIUS US

Finance II

FRESENIUS

Finance BV

Currency € € $ €

Coupon 5.0% 8.75% 9.0% 5.5%

Coupon step-up N N N N

Ranking Senior unsecured Senior unsecured Senior unsecured Senior unsecured

Guarantees Y Y Y Y

Negative pledge Y Y Y Y

Anti-layering N N N N

Cross-default Y Y Y Y

Redemption before call N Y Y N

Call schedule

31/01/2011 and

anytime after at

102.75%;

31/01/2012 and

anytime after at

101.833; etc

Deferral language

Tax redemption Y N N Y

Change of control Y, 101.00 Y, 101.00 Y, 101.00 Y, 101.00

Make-whole call N Y Y N

Equity clawback N N N N

Equity cure N N N N

Limitation on debt Y Y Y Y

Asset sales / Conveyance N N N Y

Limit on Sale & Leasebacks N N N N

Restricted payments Y Y Y N

Transactions with affiliates N N N N

Merger/Sale restrictions Y Y Y Y

Restriction on bus. activities Y Y Y Y

Limitation on sub debt Y Y Y N

Financial reporting N N N N

MAC clause N N N N




December 2011 85


Fresenius SE - Playing with fire

SG Bond Recommendation: We have maintained a Sell CDS recommendation on the name

since the acquisitions of Liberty Dialysis and American Access Care (for $1.7bn) were

announced in July. Despite our implied criticism in the commentary below, we are

comfortable in reiterating this recommendation (relative value chart overleaf). We also

maintain our Buy recommendations on the € and $ Fresenius US Finance issues for their

yield. We prefer to Sell Fresenius Finance BV 16s because of the exposure to the call of the

bonds at 102.75 currently, or at 101.833 after 31 January 2012.

Event: Fresenius is to spend €180m in cash to buy FMC stock in the market to take its

holding up to 31.5%. The reason is that certain FMC stock options could dilute Fresenius’s

holding by 1 percentage point, from 30.3% currently to 29.3%. Should this happen, and

Fresenius wanted to bring its holding back up above 30% again, German law would require

Fresenius to bid for the whole of FMC. That would not be realistic as we estimate FMC’s

enterprise value (EV) is $26bn versus Fresenius’s consolidated EV (including 30% of FMC) of

€25bn.

SG Credit Opinion: There is something slightly disturbing to us about this share purchase

announcement, as, in addition to the risks of owning such a small stake while still claiming

consolidation rights over FMC, it looks as if Fresenius has only just discovered the dilutive

effect of FMC stock options. Readers of our reports on Fresenius, e.g. "Fresenius - Event risk

on the rise" will know that the biggest objection we have with this group is its complex

ownership structure, as illustrated overleaf. That said the amount to be spent is something we

believe Fresenius can easily cope with, as the purchases will be funded from cash. On 30

September 2011 the Fresenius group had €654m in cash, of which €293m ($396m) belongs

to FMC. The group has a dollar-denominated RCF of over €400m, which is untapped. Thus,

ceteris paribus, Fresenius will be left with ‘only’ c. €181m in cash on its balance sheet once

the €180m is spent on buying FMC shares. Fresenius management expects to maintain the

leverage target of not exceeding 3x ND/EBITDA in 2012. In our view, today’s announcement

does not appear to be within the mould of the impressive HoldCo portfolio management we

expect from Fresenius, but at least the bigger issue of not losing strategic options in its FMC

ownership has been averted through the upcoming share purchases.

Next calendar event: Full-year 2011 results are scheduled for 21 February 2012.





December 2011 86


HC is based in Germany and is the fourth largest cement producer in the world. The

company generated €11.8bn in sales and €2.1bn in EBITDA in 2010. In 2007, HC acquired

Hanson, the UK-based aggregate company, which improved its vertical integration and

footprint in the UK and US, but significantly increased its leverage. 43% of sales are generated

in cement, 29% in concrete and 18% in aggregates. Post the Hanson takeover, HC also runs a

building products division (concrete pipes, precast concrete parts, concrete paving blocks, roof

tiles and bricks) which accounted for 9% of sales and is considered ‘non-core’. The main

shareholder is Ludwig Merckle with a 25% stake; the remainder is free float.

Strengths #3 cement maker and #1 aggregate maker worldwide

Good discipline on cost-cutting measures

Investment-grade business profile with potential for medium-term rise to investment grade

rating

Adequate liquidity

Weaknesses Inherent cyclicality of its end-markets

High level of debt

Ongoing investigation of the European cement cartel

Group structure

Stable

Corporate ratings

LT ST Outlook MDY Ba1* NP Stable

S&P BB B Stable Fitch BB+ B Stable

*long-term rating; Ba2 for senior

unsecured debt (i.e. all outstanding

bonds)


CDS 5Y spread

Share price (€)


Bloomberg, Markit


Equity Ticker HEI GY

Analysts

Barbora Matouskova


Roberto Pozzi







HeidelbergCement AG guarantees

Hanson Guarantees

HEIDELBERGCEMENT AGReference Entity

HoldCo

Ludw ig Merckle Free float

Hanson LimitedReference Entity

HoldCo

HeidelbergCement Finance BV

HoldCo

Hanson Australia Funding Ltd

OpCo

€3bn syndicated line (€394m drawn) due 2013 (secured*)

€1,000m 6.375% due Jan 2012

€1,000m 7.500% due Oct 2014

€650m 6.500% due Aug 2015

€650m 6.750% due Dec 2015

€1,000m 8.000% due Jan-2017

CHF150m 7.250% due Nov 2017

€480m 5.625% due Jan 2018

€300m 9.500% due Dec 2018 €500m 8.500% due Oct 2019

€750m 7.500% due Apr 2020

$750m 6.125% due Aug 2016

$750m 5.250% due Mar 2013

24.4% 75.6%

100% directly100% indirectly

100% indirectly

*Security package:

(i) upstream guarantees of group companies which together represent about 70% of the group turnover and the group assets

(ii) share pledges over all shares in 100% subsidiaries held directly by HeidelbergCement AG

0

200

400

600

800

1000

Z-s

pre

ad

(b

ps

)

HEIGR 6.375 12 EURHEIGR 5.25 13 USDHEIGR 7.5 14 EURHEIGR 6.75 15 EURHEIGR 8 17 EURHEIGR 5.625 18 EUR

0.0

0.2

0.4

0.6

0.8

1.0

(400)

(200)

0

200

400

600

800

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

HEI CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CorpHEI - XOHEI / XO (RHS)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

(€)

Construction Materials

HeidelbergCement



December 2011 87

HeidelbergCement bonds summary

Bond Issuer Rank

S&P Corp Rtg /

Outlook

Moody’s Corp

Rtg / Outlook

Fitch Corp Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%)

Next

call Rec

HEIGR 6.375 12

€

HEIDELBERG CEMENT

FIN BV

Senior

Unsec. BB STABLE Ba2 STABLE BB+ STABLE 4.2x 1,000 1,000 101.36 -98 0.4 n.a.

Hold

HEIGR 5.25 13

US$

HANSON AUSTRALIA

FUNDING

Senior

Unsec. BB STABLE Ba2 STABLE BB+ STABLE 4.2x 750 750 102.99 229 2.9 n.a.

Hold

HEIGR 7.5 14 € HEIDELBERG CEMENT

FINANCE

Senior

Unsec. BB STABLE Ba2 STABLE BB+ STABLE 4.2x 1,000 1,000 107.67 319 4.7 n.a.

Hold


FINANCE

Senior


Hold


FINANCE

Senior


Hold

HEIGR 6.125 16

US$ HANSON LTD

Senior


Hold

HEIGR 8 17 € HEIDELBERG CEMENT

FINANCE

Senior

Unsec. BB STABLE Ba2 STABLE BB+ STABLE 4.2x 1,000 1,000 n/a n/a n/a n.a.

Hold

HEIGR 5.625 18

€

HEIDELBERG CEMENT

FIN BV

Senior

Unsecured BB STABLE Ba2 STABLE BB+ STABLE 4.2x 480 480 98.12 399 6.0 n.a.

Hold


FINANCE

Senior


Hold


FINANCE

Senior


Hold


FINANCE

Senior


Hold


HeidelbergCement - Financial data Revenue split (Dec 2010)

2007 2008 2009 2010 2011e 2012e

Sales 10,862 14,187 11,117 11,762 12,500 12,999

EBITDA 2,378 2,946 2,412 2,239 2,300 2,392

Interests -466 -740 -637 -583 -570 -600

Taxes -369 -327 190 -184 -280 -280

FFO 1,680 2,044 914 1,516 1,450 1,512

Change in WC 71 -170 557 -55 -100 0

Capex -992 -1,031 -771 -714 -1,050 -1,200

Dividends -177 -193 -50 -154 -141 -141

Free cash flow 582 650 650 593 159 171

Acquisitions/Disposals -10,131 2,288 450 103 68 0

Rights issue/Share buyback 527 513 2,263 0 0 0

Other -12

Net debt 14,734 11,789 8,508 8,182 7,967 7,795

Adjustments 1,147 1,217 1,393 1,362 1,362 1,362

Adj. net debt 15,881 13,006 9,901 9,544 9,329 9,157

EBITDA margin 21.9% 20.8% 21.7% 19.0% 18.4% 18.4%

EBITDA yoy n/a 24% -18% -7% 3% 4%

Net debt/EBITDA 6.2x 4.0x 3.5x 3.7x 3.5x 3.3x

Adj. net debt/EBITDA 6.7x 4.4x 4.1x 4.3x 4.1x 3.8x

FFO/Net debt 11% 17% 11% 19% 18% 19%

FFO/Adj. net debt 11% 16% 9% 16% 16% 17%

EBITDA /Net interest 5.1x 4.0x 3.8x 3.8x 4.0x 4.0x

Capex as % of sales 9% 7% 7% 6% 8% 9%

EBITDA split (Dec 2010)


Debt structure (in €m) %

Banks – RCF secured 354 4%

Bonds 7,450 78%

Other 1,700 18%

Total 9,504 100%

Main shareholders L. Merckle 25.1%

First Eagle 4.9%

BlackRock 4.8%

Norges Bank 3.1%

Gartmore 2.4%


Cement,

€4,831m,

41%

Concrete

Service-

Other,

€4,079m,

35%

Aggregate

s and

Concrete,

€1,683m,

14%

Building

Products,

€1,169m,

10%

Cement,

€1,639m,

71%

Aggregate

s and

Concrete,

€539m,

23%

Building

Products,

€102m,

4%

Concrete

Service-

Other,

€46m, 2%

3,218

365

1,843

1,142 1,175 1,334

569 1,019

487 509 752

9

622

122

500

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500 New bonds



December 2011 88

Bond Covenants

HeidelbergCement covenants summary

Bond HEIGR 6 3/8 12 HEIGR 5 1/4 13 HEIGR 7 1/2 14 HEIGR 6 1/2 15 HEIGR 6 3/4 15 HEIGR 6 1/8 16

Issuer HEIDELBERG

CEMENT FIN BV

HANSON

AUSTRALIA

FUNDING

HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FINANCE HANSON LTD

Currency € US$ € € € US$

Coupon 7.625%, 25-Jan 5.25%, 15-Sep &

15-Mar

7.5%, 30-Apr & 31-

Oct

6.5%, 03-Aug & 03-

Feb

6.75%, 15-Dec &

15-Jun

6.125%, 15-Feb &

15-Aug

Coupon step-up

Y

1st: +50

2nd: +125

N N N N N

Ranking Unsec., Sr. Unsec. Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec. Unsec., Sr. Unsec.

Sr Unsec., Sr.

Unsec.

Guarantees N N N N N N

Negative pledge Y Y Y N Y Y

Anti-layering N Y Y Y Y Y

Cross-default Y Y Y N Y Y

Redemption before call N N N N N N

Call schedule N N N N N N

Tax redemption Y Y N N N Y

Change of control Y, 100.000 N Y, 101.000 Y, 101.000 Y, 101.000 Y, 101.000

Make-whole call N +25 +50 +50 N +25

Equity clawback N N N N N N

Equity cure N N N N N N

Limitation on debt N N Y,EBITDA/int.>2.0 N Y N

Asset sales / Conveyance N Y N N N Y

Limit on sale & leasebacks N Y N N N Y

Restricted payments N N N N N N

Transactions with affiliates Y Y N N Y Y

Merger/Sale restrictions N N N N N N

Restriction on bus. activities Y Y N N Y Y

Limitation on sub debt N Y N N N N

Financial reporting N N N N N N

MAC clause N N N N N N




December 2011 89

Bond Covenants

HeidelbergCement covenants summary

Bond HEIGR 8 17 HEIGR 7 1/4 17 HEIGR 5 5/8 18 HEIGR 9 1/2 18 HEIGR 8 1/2 19 HEIGR 7 1/2 20

Issuer HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FIN BV

HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FINANCE

HEIDELBERG

CEMENT FINANCE

Currency € CHF € € € €

Coupon 8%, 31-Jan & 31-Jul 7.25%, 14-May &

14-Nov 5.625%, 04-Jan

9.5%, 15-Jun & 15-

Dec

8.5%, 30-Apr & 31-

Oct

7.5%, 03-Oct & 03-

Apr

Coupon step-up N N N N N N

Ranking Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Sr Unsec., Sr.

Unsec.

Guarantees N N N N N N

Negative pledge Y

Y N Y

Anti-layering Y Y N Y Y Y

Cross-default Y N Y N Y N



Tax redemption N N N Y N N

Change of control Y, 101.000 N N Y Y Y

Make-whole call N N N N N +50



Limitation on debt Y,EBITDA/int.>2.0 N N Y Y,EBITDA/int.>2.0 N

Asset sales / Conveyance N N N N N N

Limit on sale & leasebacks N N N N N N


Transactions with affiliates Y N Y Y Y N


Restriction on bus. activities Y N Y Y Y N

Limitation on sub debt N N N N N N






December 2011 90


HeidelbergCement – We move to Hold from Buy on the bonds

Extract from Building Materials, When the going gets tough, the tough get going

After a good run in spreads since our last recommendation, we now move to Hold from Buy

on HeidelbergCement 14s and 17s. We think the company is still likely to visit the bond

market on an opportunistic basis next year, just as it did recently given its slightly front-

loaded debt maturity schedule. We now see better value in Lafarge 14s, trading at B+655bp

vs B+467bp for the lower-rated HeidelbergCement. We expect the credit metrics of the two

companies to be in line by the end of 2012. In addition, Lafarge benefits from stronger

liquidity situation and is more likely than HeidelbergCement to please credit investors with

additional asset sales in 2012.

Full-year guidance maintained, but “mid-cycle targets” withdrawn: HC maintained its full-

year guidance saying ‚it expects increasing turnover and operating income compared to

2010‛ but management withdrew its mid-cycle targets. The financial targets were set up at

the end of 2009 and were as follows:

- operating EBITDA at €3bn (vs €2.3bn LTM); and

- ND/EBITDA < 2.8x (vs 3.7x in September).

While this was not completely unexpected, it also means that it will take longer to achieve the

investment-grade ratings, possibly not before 2013. Indeed, S&P has already revised its

outlook to Stable from Positive following the Q3 results.

Liquidity improves, but we expect another bond issue in 2012

HeidelbergCement’s liquidity is adequate although its debt maturity profile is a bit front-

loaded. At the end of September, the company had €2.4bn of available committed credit lines

as well as €0.9bn of cash and cash equivalents. The company issued recently two bonds (in €

and CHF) for a total amount of around €0.6bn, which comes in addition to the available

resources. This compares with around €2.2bn of debt to be refinanced in the next 15 months

(of which €1bn of bonds in January) and around €1.2bn to be refinanced in each of the

following two years. Also, the €2.4bn available under the credit line matures in December

2013, hence we expect some refinancing to take place as soon as next year.

This credit line is currently secured and to our best knowledge does not contain any fall-away

covenants. The credit line however contains two financial covenants – ND/EBITDA and ICR –

though the levels are not publicly disclosed.


https://www.sgresearch.com/p/en/3/0/32334/B74872AE325E4DBCC125795600643496.html?sid=cf4604fbb16e70a58949611708793e8d


December 2011 91


Ineos is the world’s third-largest chemical company by sales. After selling a 50% stake of its

refinery business, the company's core businesses are olefins and polymers, chemical

derivatives and specialty chemicals. The olefins and polymers business is based in both North

America and Europe. Ineos’ major products include ethylene, propylene, polypropylene and

HDPE. In a 50/50 joint venture recently set up with Petrochina, the group operates two

refineries, one in Grangemouth, Scotland, and the other in Lavéra, France. The derivatives and

specialty chemicals businesses include acrylonitrile and other nitriles, alpha olefins, and

polyisobutane and the former businesses of Ineos Group Limited (Ineos Phenol, Ineos Oxide,

Ineos Fluor and others).

Strengths Large scale and leading market position in most businesses

Focus on renewable resources

Management team has strong operating track record

Good asset coverage

Weaknesses High cyclicality of operations

High financial leverage

Short-term oriented debt maturity profile

Heavy debt maturity schedule

Group structure


Stable

Corporate Ratings


S&P B- Positive

Fitch NR NR



Uses of petrochemicals

Source: company data

Market cap.(m)

Bloomberg Ticker BB706922

Analysts

Roberto Pozzi






0

20

40

60

80

100

120

Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11

Ineos 9.25% 15 Ineos 7.875% 16 Kerling 10.625% 17

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

01/11/08 01/05/09 01/11/09 01/05/10 01/11/10 01/05/11 01/11/11

Packaging and food26%

Construction18%

Fuel/Lubricants11%

Auto/Transport9%

Textiles9%

White goods/Durables

8%

Pharma/Agro3%

Other16%

Chemicals

Ineos



December 2011 92

Ineos - Bonds


INEOS FINANCE PLC 300 9.25 15/05/15 Ba3 B 98.7 9.3 761 104.625 15/05/13 Hold

INEOS GROUP HOLDINGS LTD 1532 7.875 15/02/16 Caa1 CCC 72.4 17.1 1520 103.938 04/01/12 Buy vs.

Buy 5yr

CDS


Ineos - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

Jim Ratcliffe, CEO 49.70%

Other management &

employees 29.20%

Ineos Directors 21.10%


O&P North America

18%

O&P Europe36%

Chemical intermediates

46%

O&P North America

34%

O&P Europe22%

Chemical intermediates

44%

0

500

1000

1500

2000

2500

Liq 2011 2012 2013 2014 2015 2016

Available lines (RCF+Securitisation)CashDrawn RCF and Securitisation Term loans

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Ineos Vinyls Senior Notes Senior Notes

Senior Secured Notes Senior loans and other debt



December 2011 93

Bond Covenants

€7.875% Sr unsec 15 Feb 16


Call schedule 15 Feb 11 @ 103.938, 15 Feb 12 @ 102.625, 15 Feb 13 @ 101.313, 15 Feb 14 @ 100

CoC 101%





€9.25% Sr sec 15 May 15

Ranking/Security/Guarantee Senior secured debt of the issuer

Call schedule 15 May 13 @ 104.625, 15 May 14 @ 100

CoC 101%







December 2011 94


Ineos - Visibility remains low

Recommendation: On 10 November, we attended Ineos' investor day and site visit in

Antwerp, Belgium. Management believes that the petrochemical supply/demand balance

remains tight and that chemical demand remains broadly strong despite some softer areas.

Inventories are generally light; but with slowing GDP growth in Europe and elsewhere, it is too

early to call meaningful restocking activity in Q1. With low visibility on 2012 trading

conditions, Ineos’ unsecured bonds will likely remain under pressure despite potential upside

in the case of successful refinancing. We maintain our negative basis trade with a Buy on the

7.875% notes and a Buy in 5-year CDS. We change our opinion to Stable from Positive.

Highlights: Ineos remains confident that the petrochemical markets will remain tight

despite risk of a slowdown in China. The much-touted threat coming from capacity additions

in the Middle East has so far not materialised thanks to strong growth in Asia and more

limited additions than previously expected by CMAI. Petrochemical prices are holding up

thanks to the moderate decline in oil prices, which is keeping cash costs high for high-cost

producers. Risks remain with regard to sentiment on 2012 commodity margins.

Chemical demand remains low but has improved in recent weeks with restocking

expected to restart in Q1, the magnitude of which is unclear. Also, recent price declines seem

to be starting to stimulate spot market activity. Inventories remain low across the chemical

supply chain, according to company. Oxides are holding up well but glycol pricing is

softening. Nitriles are seeing falling demand and margins could be weak through Q1 despite

low inventories. Oligomers demand remains strong with the exception of PIB due to

destocking (construction). Phenol volumes were down 15% vs. Q1-Q3 levels, though from

peak levels. Overall, the order book shows seasonal softness but remains stronger than in the

2008/09 downturn.

With Europe and the world economy slowing down, leverage at 3.4x (pro forma for the sale

of refining) should start rising again next year, creating the need to amend the covenants.

Amend and extend would clearly look the most logical option for the 2013 loan maturities;

however, with current yields around 10% for the loans and the secured notes, management is

clearly in a wait-and-see mood, hoping debt market conditions improve. It helps that the

company is currently generating positive free cash flow, at least before working capital, and

its capex, interest and tax cash outflows should fall next year by approximately €250-300m.

Capex should be around €200-250m next year and cash interest should fall to €500-550m,

leaving room to generate free cash flow even based on conservative scenarios. However, we

expect management to wait as long as possible before adding debt with a 10% coupon. The

better shape of the US high yield market could provide opportunities here.

Management guided towards an EBITDA somewhat below last year's €224m. After interest

and capex, free cash flow should remain positive also thanks to a partial reversal of the

€800m working capital outflows seen so far this year. For the full year, EBITDA should be

around €1.8bn and net debt €6.3bn.



December 2011 95


ITV, formed by the merger of Granada and Carlton in 2003, is the largest private free-to-air

(FTA) operator in the UK. The company derives more than 90% of its revenues from the UK. Its

pure-player broadcasting business model combines the high cyclicality of advertising revenues

with limited cost flexibility – so any revenue variations are usually magnified in EBITDA and cash

flows. ITV’s new management, which took over in early 2010, has decided to reduce the

company’s reliance on the volatile and structurally declining FTA TV market by increasing its

presence in digital distribution, content and selected pay-TV opportunities. However, the

change will be gradual, and ITV will remain heavily reliant on FTA for the time being. ITV intends

to pursue small and midsized deals to support its transformation strategy. The presence of the

taxpayer-funded BBC, and the relative strength of alternative media sources such as online,

makes the UK one of the most difficult FTA TV markets in Europe.

After a very steep 31% EBITDA decline in 2008-2009, the company enjoyed a cyclical

recovery in 2010 and early 2011. However, as the UK economic recovery lost steam, the

company slipped back into revenue contraction in Q2 11 (-2% yoy). New management has

prudently resisted calls to increase dividends during the recovery, instead building reserves to

finance its multi-year transformation plan. The upcoming slowdown, combined with the likely

deterioration of the deficit of ITV’s relatively large pension fund, is likely to test this buffer in the

coming quarters, but we believe the company’s liquidity position is comfortable on a 2-year

horizon – hence our Buy on the EUR2014 bonds and Sell on the GBP2015 bonds.

In order to minimise outright cash contributions to its pension fund, ITV has set up a special

partnership structure that effectively leaves bondholders subordinated to pensioners for key

assets. ITV’s bonds once enjoyed upstream guarantees from Carlton, but that was recently

removed after the buyback of the 2013 bonds, and the ITV bonds are once again at risk of

subordination.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Ba2 NP Positive

S&P BB B Stable

Fitch BB NR Positive



Share price


Market cap.(£m) 2,314

Bloomberg Ticker ITV LN.

Analysts








0

50

100

150

200

250

300

350

400

450

500

ITV GBP2015 ASW

0

50

100

150

200

250

300

350

400

450

500

ITV 5yr CDS

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

ITV

Media

ITV PLC



December 2011 96

ITV PLC - Bonds

Issuer Rating MDY Rating S&P Rating Fitch Amount (m) Coupon Maturity Call date Reco

ITV Plc Ba2 / Positive BB / Stable BB / Positive EUR189 10% 30 Jun 2014 - Buy

ITV Plc Ba2 / Positive BB / Stable BB / Positive GBP255 5.375% 19 Oct 2015 - Sell


ITV PLC - Financial data


EBITA split - 2010


Debt structure

Jun 2011 GBPm %

Bonds 734 78.6

Loans and other 200 21.4

Main shareholders

BSkyB 7.50%

Axa 4.39%


(in £ millions) 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013eGroup revenues 2,083 2,177 2,181 2,082 2,029 1,879 2,064 2,090 2,100 2,033Change % n/a 4.5% 0.2% -4.5% -2.5% -7.4% 9.8% 1.3% 0.5% -3.2%EBITDA 359 494 407 346 247 240 438 474 454 433Margins % 17.2% 22.7% 18.7% 16.6% 12.2% 12.8% 21.2% 22.7% 21.6% 21.3%Cash interest -47 -46 -69 -62 -63 -76 -64 -64 -53 -44Cash taxes -12 -120 -50 18 43 41 -23 -64 -57 -57+/(-) other cash items -30 -121 -211 -48 -69 -83 -48 -55 -45 -45FFO 270 207 77 254 158 122 303 291 298 287Changes in WC 22 -10 -36 -44 -67 121 99 -45 -45 -45CF from operating activities 292 197 41 210 91 243 402 246 253 242CapEx -36 -46 -88 -59 -53 -27 -28 -75 -55 -53As % sales -1.7% -2.1% -4.0% -2.8% -2.6% -1.4% -1.4% -3.6% -2.6% -2.6%RCF (CFO - CapEx) 256 151 -47 151 38 216 374 171 199 189As % sales 12.3% 6.9% -2.2% 7.3% 1.9% 11.5% 18.1% 8.2% 9.5% 9.3%Disposals/(acquisitions) 703 -233 193 68 26 -69 69 0 0 0FCF (before div + buybacks) 959 -82 146 219 64 147 443 171 199 189Dividends -48 -98 -128 -122 -123 -25 0 -16 -36 -36Buybacks -354 -50 -251 0 0 -3 -6 -6 0 0Shareholder remuneration -402 -148 -379 -122 -123 -28 -6 -22 -36 -36As % of FCF's 41.9% -180.5% 259.6% 55.7% 192.2% 19.0% 1.4% 12.6% 18.2% 19.1%New debt YTD/(redemptions) -192 234 568 -441 79 1 -162 -239 -10 0Net cashflows 397 81 298 -463 118 -30 274 -91 153 153Cash and equivalents 582 663 961 498 616 586 860 769 921 1,074Gross debt reported 909 1,144 1,695 1,266 1,346 1,347 1,196 964 954 954Net debt (unadjusted) 327 481 734 768 730 761 336 196 33 -120EBITDA/interest coverage 7.6 10.7 5.9 5.6 3.9 3.2 6.8 7.4 8.5 9.9FFO/net debt 82.6% 43.0% 10.5% 33.1% 21.6% 16.0% 90.2% 148.6% 899.2% -239.6%Net debt-to-EBITDA x 0.9x 1.0x 1.8x 2.2x 3.0x 3.2x 0.8x 0.4x 0.1x -0.3xOperating leases (NPV) 137 137 152 150 143 131 124 124 124 124PBO tax adjusted 470 372 200 79 178 436 313 313 313 313Other off B/S 0 0 0 0 0 0 0 0 0 0Adjusted gross debt 1,516 1,653 2,047 1,495 1,667 1,914 1,633 1,402 1,392 1,392RCF/adj. gross debt 16.9% 9.1% -2.3% 10.1% 2.3% 11.3% 22.9% 12.2% 14.3% 13.6%FFO/adj. gross debt 17.8% 19.7% 13.9% 17.0% 9.5% 6.4% 18.6% 20.8% 21.4% 20.6%Adj. gross debt-to-EBITDA x 4.2x 3.3x 5.0x 4.3x 6.7x 8.0x 3.7x 3.0x 3.1x 3.2xAdjusted net debt 934 990 1,086 997 1,051 1,328 773 633 470 317RCF/adj. net debt 27.4% 15.3% -4.3% 15.1% 3.6% 16.3% 48.4% 27.0% 42.3% 59.7%FFO/adj. net debt 28.9% 20.9% 7.1% 25.5% 15.0% 9.2% 39.2% 46.0% 63.4% 90.5%Adj. net debt-to-EBITDA x 2.6x 2.0x 2.7x 2.9x 4.3x 5.5x 1.8x 1.3x 1.0x 0.7x

84%

16%Broadcasting+Online

Content

80%

20% Broadcasting+Online

Content

0

100

200

300

400

500

600

700

800

2011 2012 2013 2014 2015>

bonds loans



December 2011 97

Bond Covenants

ITV- bond covenants

ITV - 10% due 2014 ITV - 5.375% due 2015 ITV - 7.375% due 2017

Bond €188m 10% senior unsecured notes

due 30/06/2014

GBP255m 5.375% senior unsecured

notes due 19/10/2015

GBP250m 7.375% senior unsecured

notes due 05/01/2017

Issuer ITV Plc ITV Plc ITV Plc

Coupon Annually Annually Annually, step up/down at

Baa3/BBB-

Mandatory deferral No No No


Pari passu vs other unsecured

unsubordinated debt - subordinated

to secured debt


unsubordinated debt -



unsubordinated debt -


Ranking vs. other debt Unsubordinated and unsecured Unsubordinated and unsecured Unsubordinated and unsecured

Guarantees None None None

Negative pledge Yes, excludes non-tradeable

instruments

Yes, excludes non-tradeable

instruments

Yes, excludes non-tradeable

instruments

Cross default

Yes for any indebtedness if > than the

greater of £25m or 5% of adjusted

share capital and reserves

Yes for any indebtedness if > than

the greater of £25m or 5% of

adjusted share capital and reserves

Yes for any indebtedness if > than

the greater of £25m or 5% of

adjusted share capital and reserves

Redemption before call No No No

Call schedule None None None

Tax redemption Yes Yes Yes

Change of control

Acquisition of more than 50% of

capital or voting rights, if bonds are

rated or downgraded to Ba1/BB+ or

worse by either Moody's/S&P/Fitch









Limitation on debt No No No

Asset disposals No No No

Restricted payments No No No

Transaction with affiliates No No No

Change in covenant No No No




December 2011 98

Latest research published on 27 July 2011

ITV PLC - Back to revenue contraction and further subordination after changes to

capital structure – Sell

We move to a Sell on the GBP2015 bonds and maintain our Buy on the EUR2014s.

SG Bond Recommendation: Despite the significant deterioration of ITV’s revenue trends

in the past quarter, and the significant risks of the underlying business, we remain confident

that it will have more than enough cash to meet the maturity of the EUR2014s. These bonds

have widened significantly since ITV’s revenues began to contract, and are now very

attractive for three-year risk at an ASW of 315bp. The GBP2015s, in comparison, are too

expensive vs the EUR2014s at 331bp considering these risks and the recent negative

changes to ITV’s capital structure.

SG Credit Opinion: We maintain our Stable credit opinion. While ITV is guiding for another

quarter of revenue contraction in Q3 11, we believe it will still be able to generate cash flow in

H2 11 (see financial tables attached). The company has previously stated that acquisitions of

companies involved in the production of media content could be part of its transformation

strategy, and we believe only a shortage of potential targets has kept the company from

pursuing deals in H1 11. While we do not expect these targets to be large, we believe they

will be the preferred destination for ITV’s excess cash, especially after today’s announcement

of a relatively conservative dividend policy. While dividends are being restarted at a low level,

we believe this is the right policy considering the significant challenges ITV faces in

transitioning to a sustainable business model and the vulnerability of the business to adverse

economic conditions, highlighted by its lack of short-term cost flexibility. Following ITV’s

recent rating upgrade cycle, we believe the company is unlikely to see another upgrade

anytime soon, and should remain in high yield territory for the foreseeable future.

While core advertising revenues contracted 2% in Q2 11, the company claims it is making

progress on its turnaround strategy, following an increase in content revenues. However, we note

that the H1 11 EBITA of ITV Studios declined to GBP38m from GBP43m a year earlier, suggesting

that the recovery of the unit remains fragile and in doubt. The company itself admits that return on

the investments made in the content unit will be uncertain. We generally agree with the company’s

strategic orientation and see progress being made. However, we believe content revenues,

especially the ones ITV relies on, remain indirectly linked to the health of the TV advertising market

with a one-year lag.

The position of the existing bonds in ITV’s capital structure has deteriorated materially in H1 11

(see capital structure chart attached). The full redemption of the March 2013 bonds essentially

means that the ITV bondholders no longer enjoy an upstream guarantee from Carlton

Communications. In addition, ITV has effectively increased the claims of the pension fund on its

SDN assets by GBP50m in H1 11. As a result, the pension fund, which would ordinarily rank at the

same level as unsecured creditors in a bankruptcy, now has GBP200m of specific claims on one

of ITV’s most future-proof assets.



December 2011 99


Kabel Deutschland is the largest cable operator in Germany and one of Europe’s largest

cable companies. It provides analogue and digital TV, broadband internet and telephony

services to 8.7m of 15.3m marketable households in 13 of 16 German federal states,

representing a 58% penetration rate within its footprint. KDG was formed in 2003 through the

consolidation of six of the nine regional cable systems previously developed and owned by

Deutsche Telekom. KD’s network covers all but three – Hesse, North-Rhine Westphalia and

Baden-Wuerttemberg - of Germany’s 16 federal states. It is a Level-3 cable network operator

distributing analogue and digital cable signals directly to end-customer households and,

indirectly, to housing association residences via Level-4 operator networks.

Strengths

Good earnings and cash flow growth capacity

Network technological advantage, particularly as DOCSIS 3.0 roll-out progresses

Strong cash flow generating ability and a moderate leverage target

Weaknesses Need to balance share buyback and dividend levels in order to maintain moderate leverage

Potential for moderately sized domestic M&A

Group structure

Positive

Corporate Ratings

LT ST Outlook

MDY Ba2 NR Stable

S&P BB- NR Positive

Fitch BB NR Stable

Bond z-spreads

CDS 5Y spread

Share price (€)

Source: Bloomberg, Markit, SG Cross

Asset Research


Equity Ticker KD8 GY

Analyst

Alejandro Núñez

[email protected]

Source: Company Data, SG Cross Asset Research





100.0%

€2,380m TLs A-D

Free Float

Kabel Deutschland Holding AG

Kabel Deutschland GmbH

OpCo / KDVS

€500m 6.5% 2018 Sr. Sec. Nts

300

400

500

600

700

800

900

1000

Z-s

pre

ad

(b

ps

)

KABEGR 6.5 18 EUR

iBoxx HY Global

iBoxx € HY TMT

0.0

0.2

0.4

0.6

0.8

1.0

1.2

(400)

(200)

0

200

400

600

800

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

KABEGR CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyKABEGR - XOKABEGR / XO (RHS)

0

5

10

15

20

25

30

35

40

45

50

(€)

Diversified Telecom Services

Kabel Deutschland



December 2011 100

Kabel Deutschland – bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask) (%) Next call Rec

KABEGR

6.5 18 €

KABEL DEUTSCHLAND

GMBH

Senior

Secured BB- POS

Ba2

Stable BB Stable 3.7 500 500 102.96 385 5.8 6.4

30-Jun-

14 Hold


Kabel Deutschland - Financial data

Revenue split (Mar-11)

EBITDA split (Mar-11)

Debt maturity profile (Sep-11)

Debt structure (Sep-11 LTM)

Equity shareholders

BlackRock 11.0%

Norges Bank 5.2%

Threadneedle 5.0%

Fidelity 4.9%

Scout Capital 3.0%

Source: Company data, Bloomberg

Source: SG Cross Asset Research, Company Data

(€m) 2008A 2009A 2010A 2011E 2012E 2013E

Total revenues 1,197 1,370 1,502 1,599 1,701 1,807

Normalised EBITDA 457 571 659 729 791 854

Revenue growth 9.4% 14.5% 9.6% 6.5% 6.4% 6.2%

EBITDA growth -19.8% 24.8% 15.5% 10.6% 8.5% 8.0%

EBITDA margin 38.2% 41.7% 43.9% 45.6% 46.5% 47.3%

Normalised EBITDA 457 571 659 729 791 854

Cash interest, net -175 -203 -219 -268 -240 -220

Cash taxes -2 -4 -25 12 10 6

Other -22 26 -5 -25 0 0

Change in provisions 0 0 0 0 0 0

Working capital 11 77 -13 35 -5 -5

Restructuring cash costs, other 0 0 0 0 0 0

Cash Flow from Operations 269 467 398 482 556 635

Capital expenditures -316 -373 -327 -337 -380 -385

Acquisitions / Divestitures 9 -514 55 -30 0 0

Other Investing 0 0 0 0 0 0

Cash Flow from Investing -308 -887 -272 -367 -380 -385

Dividends / Shareholder returns -14 -8 28 0 -193 -196

Debt issuance 391 785 199 640 1,000 0

Debt redemption -331 -310 -199 -1,056 -747 0

Other Financing -7 -8 -9 0 0 0

Cash Flow from Financing 38 458 19 -416 60 -196

Change in Cash -1 38 145 -301 236 54

Cash 15 52 271 28 265 319

Revolver (drawn) 0 0 0 0 80 80

Senior Bank debt 1,210 1,685 1,685 2,060 2,310 2,310

Senior Secured notes 0 0 0 0 500 500

Senior Unsecured notes 756 756 756 0 0 0

Sr. Subordinated debt 0 0 0 0 0 0

PIK Loan 587 656 696 715 0 0

Total debt (w/o PIK) 1,966 2,441 2,441 2,060 2,890 2,890

Total debt (w/PIK) 2,553 3,097 3,137 2,775 2,890 2,890

Net debt (w/o PIK) 1,950 2,389 2,169 2,032 2,625 2,571

Net debt (w/PIK) 2,537 3,045 2,865 2,747 2,625 2,571

Financial summary (€m) 2008A 2009A 2010A 2011E 2012E 2013E

Revenues 1,197 1,370 1,502 1,599 1,701 1,807

Adj. EBITDA 457 571 659 729 791 854

EBITDA margin 38.2% 41.7% 43.9% 45.6% 46.5% 47.3%

Funds From Operations (FFO) 258 390 410 448 561 640

FFO - Capex -w/c chg (OpFCF) -48 94 70 145 176 250

Free Cash Flow (FCF) -62 85 99 145 -17 54

0.0 0.0 0.0 0.0 0.0 0.0

EBITDA / net interest 2.6x 2.8x 3.0x 2.7x 3.3x 3.9x

FFO / Net debt 13.2% 16.3% 18.9% 22.0% 21.4% 24.9%

FFO - Capex / Net debt -2.3% 0.5% 2.9% 4.0% 6.9% 9.9%

FCF / Net Debt -2.4% 2.8% 3.4% 5.3% -0.6% 2.1%

Capex / Sales 26.4% 27.2% 21.8% 21.1% 22.3% 21.3%

Net Senior Debt / EBITDA 2.6x 2.9x 2.1x 2.8x 2.7x 2.4x

Net Sr. Sec. Notes / EBITDA 2.6x 2.9x 2.1x 2.8x 3.3x 3.0x

Net Sr. Unsec. Notes / EBITDA 4.3x 4.2x 3.3x 2.8x 3.3x 3.0x

Net debt / EBITDA 5.5x 5.3x 4.3x 3.8x 3.3x 3.0x

Cash 15 52 271 28 265 319

Revolver Availability 325 325 325 325 245 245

TV and Radio, €1,133m, 71%

Internet &

Phone, €466m,

29%

TV and Radio,

€243m, 71%

Internet &

Phone, €102m,

29%

283

10639

1,336

0

400

0

1,000

0 0 0

0

200

400

600

800

1,000

1,200

1,400

1,600

(€m

)

2,381 3.1

500 0.7

0 0.00 0.02,881 3.8

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal D

eb

t (€

m)

% o

f T

ota

l D

eb

t

Debt (€m) Debt/EBITDA (x)

Senior bank Sr. Secured Sr. Unsec. Sr. Sub. TOTAL



December 2011 101

Bond covenants

Kabel Deutschland – covenants summary

Bond KABEGR 6.5 18

Issuer KABEL DEUTSCHLAND GMBH

Currency €

Coupon 6.5%, 31-Jan & 31-Jul

Coupon step-up N

Ranking 1st lien, Senior Secured

Guarantees Parent & subsidiaries

Negative pledge Y

Anti-layering Y

Cross-default Y

Redemption before call N

Call schedule 30-Jun-14 103.250

30-Jun-15 101.625

30-Jun-16 101.000

Tax redemption N

Change of control Y, 101.000

Make-whole call +50 30-Jun-14

Equity clawback 40% @ 106.5 30-Jun-14

Equity cure N

Limitation on debt Y, 4.5x Consolidated Lev. at KDG

Asset sales / Conveyance Y

Limit on Sale & Leasebacks N

Restricted payments Y

Transactions with affiliates Y

Merger/Sale restrictions N

Restriction on bus. activities Y

Limitation on sub debt Y

Financial reporting N

MAC clause N




December 2011 102


Kabel Deutschland – TMTing Bytes: Good show

SG Bond Recommendation: Following redemption of the Kabel Deutschland (KD) 2014

PIK loan, we close our Hold recommendation on KD’s 2014 PIKs. We also take this

opportunity to initiate a Hold on KD’s €500m 6.5% 2018 Senior Secured Notes.

Event: KD reported solid Q2 11/12 results in line with our expectations, maintaining

positive revenue and earnings growth, driven by strong yoy 16% growth in New Services

(Premium TV, Internet, Phone) and, in particular, stronger than expected growth in Premium

TV. Meanwhile, KD maintained control of its costs; adjusted costs rose 2.8% yoy but fell 2%

yoy on the basis of monthly cost/RGU to €5.8.

SG Credit Opinion: We maintain a Positive opinion on KD supported by several metrics: 1)

increased penetration of New Services into KD’s direct Basic Cable customer base, which

should continue to drive revenue and ARPU and earnings growth of at least 6%e over the

next six months; 2) continued cost control ensuring EBITDA growth matches or exceeds

revenue growth; 3) we expect KD to balance its shareholder returns to achieve and maintain

its stated leverage objective of 3.5x Net debt/EBITDA by FYE 11/12.

In addition to cost control and top-line growth, scale economies also helped boost KD’s

EBITDA margin from 45.2% in Q2 10/11 to 47.0% in Q2 11/12.

We note the pressure on KD’s variable phone revenues and ARPU due principally to lower

variable phone usage and fixed-line telephony promotions. The 4% sequential (9% yoy) Q2

11/12 decline in blended monthly Internet & Phone ARPU continues a gradual trend observed

over the last five quarters, due in part to promotional activity begun in Q2-Q3 10/11.

However, the rate of ARPU decline is tapering off and the lapse of promotions begun last

autumn could help stabilise ARPU into KD’s fiscal year-end in March 2012.

We also note the yoy rise in capex levels to €178m for H1 11/12, albeit from an abnormally

low Q2 10/11 level of €142m, due primarily to higher success-based capex related to

Premium TV (HD, DVR) and Internet & Phone take-up. As KD enters the seasonally stronger

H2 and Internet & Phone growth continues, we expect H2 capex levels to rise slightly to

€192-195m relative to H1, yet still remain within a moderate capex/revenue range of 21.5-

22.0%.

Next calendar events: We expect KD to report its Q3 2011/12 results in late Feb-12.



December 2011 103


Based in France, Lafarge is the leading producer in the cement market. While it enjoys an

above-average exposure to the emerging markets, it is highly dependent on the MENA region

following the acquisition of Orascom, which accounts for about 35% of its operating profit. In

2010, the company generated €16.2bn in sales and €3.3bn in EBITDA. Apart from cement and

aggregates, Lafarge also operates in gypsum, a division with €1.4bn of sales, and currently

considered non-core. The company’s main shareholder is Groupe Bruxelles Lambert, the

Belgian private equity firm with a 21% share, followed by NNS, Mr. Sawiris’ holding, with

14.1%.

Strengths #1 cement maker worldwide and market leader in many of its markets

Higher profitability vs its competitors

Investment-grade business profile with potential for medium-term rise to investment grade

rating

Adequate liquidity

Weaknesses Inherent cyclicality of underlying markets

High level of debt

More-shareholder friendly strategy

Ongoing cartel investigations

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Ba1 WR Stable

S&P BB+ B Stable

Fitch BB+ B Stable


CDS 5Y spread

Share price (€)


Bloomberg, Markit


Equity ticker LG FP

Analysts

Barbora Matouskova


Roberto Pozzi







0

200

400

600

800

1000

Z-s

pre

ad

(b

ps

)

LGFP 7.625 14 EURLGFP 6.125 15 EURLGFP 4.25 16 EURLGFP 7.625 16 EURLGFP 5.375 18 EURLGFP 4.75 20 EUR

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(400)

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ea

r C

DS

/ 5

-ye

ar

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CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

LAFARGE CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CorpLAFARGE - XOLAFARGE / XO (RHS)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

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Lafarge



December 2011 104

Lafarge bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m) Out (m)

Price

(Ask)

Z-

spread

(Ask)

(bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%)

Next

call Rec

LGFP 6.875 12 £ LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 350 350 102.70 256 4.0 n.a.

Sell

LGFP 5.448 13 € LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 500 500 103.05 244 3.9 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 1,000 1,000 108.05 389 5.4 n.a.

Buy

LGFP 5 14 € LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 612 612 103.98 192 3.4 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 750 750 102.43 375 5.3 n.a.

Sell

LGFP 5.5 15 US$ LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 550 550 103.32 423 5.2 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 500 500 98.89 280 4.5 n.a.

Sell

LGFP 6.5 16 US$ LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 800 800 106.18 379 5.0 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 750 750 107.43 523 7.1 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 350 350 111.01 561 7.5 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 200 200 99.14 483 6.8 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 500 500 94.36 466 6.6 n.a.

Sell

LGFP 5 18 € LAFARGE SA Unsecured BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 500 500 93.62 549 7.5 n.a.

Hold


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 1,000 1,000 92.67 590 8.0 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 750 750 91.52 598 8.2 n.a.

Sell


STABLE

Ba1

STABLE

BB+

STABLE 4.8x 500 500 86.80 460 6.9 n.a.

Sell

LGFP 7.125 36

US$ LAFARGE SA Unsecured

BB+

STABLE

Ba1

STABLE

BB+

STABLE 4.8x 600 600 91.50 535 7.9 n.a.

NR




December 2011 105

Lafarge - Financial data Revenue split (Dec 2010)

2007 2008 2009 2010 2011e 2012e

Sales 17,614 19,033 15,884 16,169 15,484 15,639

EBITDA 4,183 4,438 3,373 3,342 3,181 3,425

Interests -526 -531 -926 -723 -990 -986

Taxes -725 -479 -260 -316 -320 -320

FFO 2,781 4,799 2,177 2,156 1,871 2,119

Change in WC -79 -154 1,029 354 -100 0

Capex -2,113 -2,886 -1,645 -1,331 -1,200 -1,000

Dividends -652 -1,051 -536 -849 -471 -471

Free cash flow -63 708 1,025 330 100 648

Acquisitions/Disposals 1,435 -5,738 686 299 2,099 0

Rights issue/Share buyback -452 0 1,500 0 0 0

Other

Net debt 8,680 17,765 13,757 13,986 11,790 11,142

Adjustments 1,716 2,023 2,187 2,258 2,258 2,258

Adj. net debt 10,396 19,788 15,944 16,244 14,048 13,400

EBITDA margin 23.7% 23.3% 21.2% 20.7% 20.5% 21.9%

EBITDA yoy n/a 6% -24% -1% -5% 8%

Net debt/EBITDA 2.1x 4.0x 4.1x 4.2x 3.7x 3.3x

Adj. net debt/EBITDA 2.5x 4.5x 4.7x 4.9x 4.4x 3.9x

FFO/Net debt 32% 27% 16% 15% 16% 19%

FFO/Adj. net debt 27% 24% 14% 13% 13% 16%

EBITDA/Net interest 8.0x 8.4x 3.6x 4.6x 3.2x 3.5x

Capex as % of sales 12% 15% 10% 8% 8% 6%

EBIT split (Dec 2010)


Debt structure

(€m) %

CPs & securitisation 550 3%

Banks 1,800 11%

Bonds 11,350 71%

Other 2,380 15%

Total 16,080 100%

Main shareholders

GBL 21.0%

Dodge & Cox 5.8%

Natixis AM 1.1%

Vanguard 0.7%


Cement,

€10,280m

, 61%

Aggregate

s,

€5,093m,

30%

Gypsum,

€1,441m,

9%

Cement,

€2,031m,

91%

Aggregate

s, €183m,

8%

Gypsum,

€9m, 1%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000



December 2011 106

Bond covenants

Bond covenants summary

Bond LGFP 6.875 12 LGFP 5.448 13 LGFP 7.625 14 LGFP 5 14 LGFP 6.125 15 LGFP 5.5 15

Issuer LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA

Currency £ € € € € US$

Coupon 6.875%, 06-Nov 5.448%, 04-Dec 8.875%, 27-May 5%, 16-Jul 6.125%, 28-May 6.2%, 09-Jan & 09-

Jul

Coupon step-up N N Y N N N

Ranking Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured

Guarantees

Negative pledge Y Y Y Y Y N

Anti-layering Y Y Y Y Y Y

Cross-default Y Y Y Y Y N



Tax redemption Y Y Y Y Y N

Change of control N N Y N Y Y

Make-whole call N N N N N N



Limitation on debt N N N N N N




Transactions with affiliates Y Y Y Y Y N


Restriction on bus. activities Y Y Y Y Y N




Lafarge covenants summary (continued)

Bond LGFP 4.25 16 LGFP 6.5 16 LGFP 7.625 16 LGFP 8.75 17 LGFP 6.625 17 LGFP 5.375 17

Issuer LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA

Currency € US$ € £ £ €

Coupon 4.25%, 23-Mar 6.5%, 15-Jan & 15-Jul 8.875%, 24-Nov 10%, 30-May 6.625%, 29-Nov 5.375%, 26-Jun

Coupon step-up N N Y Y N N

Ranking Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured

Guarantees

Negative pledge Y Y Y Y Y Y

Anti-layering Y Y Y Y Y Y

Cross-default Y Y Y Y Y Y



Tax redemption Y Y Y N N Y

Change of control N N Y Y N Y, 100.000

Make-whole call N +25 N N N N



Limitation on debt N N N N N N




Transactions with affiliates Y Y Y Y Y Y


Restriction on bus. activities Y Y Y Y Y Y







December 2011 107

Lafarge covenants summary (continued)

Bond LGFP 5 18 LGFP 5.375 18 LGFP 5.5 19 LGFP 4.75 20 LGFP 7.125 36

Issuer LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA LAFARGE SA

Currency € € € € US$

Coupon 6.25%, 13-Apr 5.375%, 29-Nov & 29-Nov 5.5%, 16-Dec & 16-Dec 4.75%, 23-Mar & 23-Mar 7.125%, 15-Jan & 15-Jul

Coupon step-up Y Y Y N N

Ranking Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured Sr Unsecured

Guarantees

Negative pledge Y N Y Y Y

Anti-layering Y Y Y Y Y

Cross-default N N Y Y Y

Redemption before call N N N N N

Call schedule N N N N N

Tax redemption N N N Y Y

Change of control Y Y Y N N

Make-whole call N N N N +30

Equity clawback N N N N N

Equity cure N N N N N

Limitation on debt N N N N N

Asset sales / Conveyance N N N N N

Limit on Sale & Leasebacks N N N N N

Restricted payments N N N N N

Transactions with affiliates Y N Y Y Y

Merger/Sale restrictions N N N N N

Restriction on bus. activities Y N Y Y Y

Limitation on sub debt N N N N N

Financial reporting N N N N N

MAC clause N N N N N




December 2011 108


Lafarge – Buy the 7.625% 2014 bonds

Extract from Building Materials, When the going gets tough, the tough get going

Recommendation

Lafarge’s Q3 11 results were not impressive, but the company made three important

announcements. Firstly, it confirmed the divestment programme is well on track, with the

largest deal (€850m) now successfully closed. Secondly, the company said it expects to

dispose of some more assets in 2012 without however quantifying it. Lastly, management

announced a new €500m cost-cutting programme to be implemented as soon as in 2012,

largely catching up with the more disciplined HeidelbergCement. This should improve

Lafarge’s liquidity and bring the credit metrics in line with the former, and we therefore

recommend switching from HEIGR14 to LGFP 14 for a pick-up of approximately 200bp. We

think the two bonds should trade in line.

Liquidity

Lafarge’s liquidity position is adequate and supported by its ongoing disposal programme.

The company expects to receive €2.1bn of cash proceeds by the end of the year which

comes in addition to an estimated €1.8bn of available cash and €3bn of unused committed

credit lines. This compares to around €3.3bn of debt maturing between now and the end of

2012, of which we estimate around €1.8bn should be rolled over in the normal course of

business.


https://www.sgresearch.com/p/en/3/0/32334/B74872AE325E4DBCC125795600643496.html?sid=cf4604fbb16e70a58949611708793e8d


December 2011 109


Lecta is the largest manufacturer of coated fine paper in Southern Europe and the second

largest in Europe after Sappi with a market share of around 15%. The group was formed

through a rollup led by CVC of Cartiere del Garda in Italy in 1997, Condat in France in 1998 and

Torrespapel in Spain in 1999. In 2007, CVC refinanced its investment via the bond market

issuing €598m of senior secured (guaranteed) 7-year notes and €150m of floating rate

unsecured notes, both still outstanding. In late September 2011, management announced that

the ‚advanced discussions‛ regarding the sale of the company by CVC to a third party had

been terminated. CVC still owns 61.7% of Lecta’s shares.

After 14 years of ownership and having recently attempted but failed to find a buyer, CVC

does not have many options to exit what must be one of its longest investments. Trade as

well as finance buyers seem to have limited appetite and the current state of the financial

markets suggests that refinancing of the note due in 2014 might increasingly become a

further concern for potential buyers. The notes’ covenants limit the ability of the company to

pay a large dividend and would trigger a change in control, which could potentially be

triggered also by a business combination. The most likely option is therefore ‚do nothing‛, in

our view. With over half its revenue from Spain, Italy and France, Lecta will probably face a

difficult year and need to start considering how to refinance its large 2014 debt maturities and

preserve its large cash pile.

Strengths Leading market position in coated fine paper in Europe

Lower distribution cost thanks to proximity to customers

Stable operating performance despite input price volatility

Relatively low net leverage, strong free cash flows and large cash balance

Weaknesses Structural overcapacity in fine paper

Limited geographic diversification and focus on Southern Europe

Power pulp integration versus peers

Limited strategic options

Group structure


Stable

Corporate Ratings


S&P B+ Stable

Fitch NR NR



Na

Share price


Market cap.(m)

Bloomberg Ticker LECTA

Analysts

Roberto Pozzi


Barbora Matouskova






0

20

40

60

80

100

120

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

Secured notes HY notes

Paper & Packaging

Lecta



December 2011 110

Lecta - Bonds

Issuer Issue Size Coupon Maturity Mdy S&P Price Yield Next call Next call Reco

LECTA SA 598 4.087 15/02/14 B1 B+ 92.5 7.3 100 22/12/11 Sell

LECTA SA 143 5.462 15/02/14 B3 B- 88.9 10.5 100 22/12/11 Sell


Lecta - Financial data

Revenue split

Revenue split


Debt structure

Main shareholders

CVC Investors 61.73%

Adavale Global Holdings

Limited 10.67%

MidOcean Capital

Investors Offshore LP 9.57%

Management 8.58%

Intermediate Capital

Investors 8.14%


Spain23%

France20%

Italy14%

UK8%

North America

7%

Germany3%

Other25%

Coated woodfree

70%

Specialites20%

Other activities

10%

0

100

200

300

400

500

600

700

800

Liquidity 2010 2011 2011-13 2014

Available RCF Cash Other debt Bonds

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 Jun-11

Unsecured notes Secured notes

Bank loans and other debt



December 2011 111

Bond Covenants

€598m Float 2014 secured

Ranking/Security/Guarantee Pari passu with all existing and future debt of the issuer that is not subordinated to the secured notes

Structurally subordinated to all liabilities of the issuer's subsidiaries that do not guarantee the secured notes

Sr unsubordinated guarantees from six subsidiaries. These guarantees are secured on some of the assets of the

guarantors including shares in certain subsidiaries, but not all assets and no real property

Secured notes and related guarantees are secured by security interests in certain of the issuers assets (i.e. of its

assets in Sub Lecta 1 S.A. and Sub Lecta 2 S.A., the Intercompany loans held by it) or the guarantors assets (of over

€135m of unconsolidated EBITDA)

The guarantee will be effectively subordinate to any debt that is secured on other assets of the guarantors (for

example trade receivables are pledged to DB under the securitisation bridge and provide no security to the notes).

Security interest will be first ranking except that the RCF and certain hedging debt will be repaid in priority

Call schedule At 100 since 2009

CoC 101%

Debt test Interest cover test at 2.5x




€150m Float 2014 unsecured

Ranking/Security/Guarantee Pari passu with all existing and future debt of the issuer that is not subordinated to the unsecured notes

Structurally subordinated to all liabilities, disqualified stock and preferred stock of the issuer's subsidiaries that do

not guarantee the unsecured notes

Subordinated to all existing and future secured debt of the issuer and any guarantor, incl. the secured notes and

indebtedness under the RCF.

Call schedule At 100 since 2009

CoC 101%

Debt test Interest cover test at 2.5x

Restricted payments Up to 50% of cumulated net income - General carve-out: €50m plus 100% of proceeds from disposals





December 2011 112


Lecta - Limited strategic options left and a more difficult market environment

Ahead of Lecta’s Q3 results to be published on 29 November, we take a fresh look at the

company’s secured and high yield notes. After moving close to par on the back of a potential

takeout at 101, the senior notes have moved back to the low 90s after CVC’s talks with potential

investors faltered. After 14 years of ownership and having failed once again to sell its investment,

we believe that CVC is now likely to consider other options. This could include paying a dividend

or seeking a merger. We think Burgo (net debt to EBITDA at 7.1x in June) could be a good match

in the Italian paper industry, which continues to consolidate. Despite Lecta’s low leverage based

on net debt at 2.8x, the company still keeps €351m of cash on balance sheet. We argue that this

could soon be put to use, and that investors should therefore start looking at gross debt to

EBITDA of 4.9x as Lecta’s appropriate leverage. The company’s high exposure to Italy and Spain

(combined, 37% of revenue) as well as to France (20%) is also a concern given the likely further

dose of austerity the new Spanish and Italian governments are forced to take. Despite the

resilience of Lecta’s operations, the ‚secured‛ notes plunged to the low 40s during the 2008/09

downturn. The security of the notes consists in senior unsubordinated guarantees from six

subsidiaries. These guarantees are secured on some of the assets of the guarantors including

shares in certain subsidiaries, but not all assets and no real property. We maintain our Sell

recommendation on both the secured and high yield notes. The main risks to our recommendation

are from the potential resumption of negotiations with interested parties and the use of the

company’s high cash balance for bond buybacks. The company has so far bought back only a

limited amount of the high yield notes, however.

We think Burgo (net debt to EBITDA at 7.1x in June) could be a good match in the Italian paper

industry, which continues to consolidate. Despite Lecta’s low leverage based on net debt at 2.8x,

the company still keeps €351m of cash on balance sheet. We argue that this could soon be put to

use, and that investors should therefore start looking at gross debt to EBITDA of 4.9x as Lecta’s

appropriate leverage. The company’s high exposure to Italy and Spain (combined, 37% of

revenue) as well as to France (20%) is also a concern given the likely further dose of austerity the

new Spanish and Italian governments are forced to take. Despite the resilience of Lecta’s

operations, the ‚secured‛ notes plunged to the low 40s during the 2008/09 downturn. The security

of the notes consists in senior unsubordinated guarantees from six subsidiaries. These guarantees

are secured on some of the assets of the guarantors including shares in certain subsidiaries, but

not all assets and no real property. We maintain our Sell recommendation on both the secured

and high yield notes. The main risks to our recommendation are from the potential resumption of

negotiations with interested parties and the use of the company’s high cash balance for bond

buybacks. The company has so far bought back only a limited amount of the high yield notes,

however.

Lecta's operating margins remained stable at 10.5% in June on a last twelve months (LTM)

basis. The company managed to offset stubbornly high input costs during the quarter through

higher selling prices and volumes. Lecta reported an EBITDA of €91m in the first half of 2011,

compared to €82m in the same period of 2010, which also reflects €11m higher sales of energy

this year. Despite the stable operating performance so far, we believe that downside risks remain,

however, primarily due to macroeconomic factors potentially affecting demand in Italy, Spain as

well as France, where the group has over half of its sales. This could exacerbate the industry

overcapacity, currently at around 8% including planned permanent shutdowns. European demand

for fine paper fell 7.9% in the first nine months of 2011 according to Cepifine, the industry

association. Total deliveries however declined by ‚only‛ 4.7% reflecting lower imports, probably

the effect of import duties, a slight change from the -4.2% reported for the first half of the year.

Lecta performed better than the market however, with volumes up 1% in the first half of 2011.

Burgo reported an EBITDA of €170m in June on an LTM basis, up from €163m in 2010. Gross

debt was €1.2bn and cash €33m excluding €170m of short-term finance receivables. On this

basis, Burgo’s net leverage was 7.1x in June, down from 7.6x at the end of 2010.



December 2011 113


M-Real is Europe’s largest supplier of consumer packaging products with a market share of

around 30%, followed by Stora Enso with around 25%. The group has significantly reduced its

presence in the paper industry via disposals and has implemented several cost reduction

programmes over the past few years. It is currently in the process of implementing another

round of restructuring which includes permanently closing two large loss-making mills with

expectations of a structurally improved profitability of the group’s remaining paper operations.

The remaining paper activities mainly consist of office and specialty paper and could potentially

be sold. The group is vertically integrated into pulp and energy and has a significant long net

position in pulp, which is expected to further increase after the ongoing shutdowns are

completed. M-real produces approximately 60% of its energy requirements.

Despite a stable core packaging business, the group's remaining paper operations continued

to drag earnings this year. Also, the company does not yet generate positive free cash flow, and

it is not clear yet if and when the ongoing restructuring measures will translate into meaningful

free cash flow generation without which M-Real remains dependent on refinancing to meet the

2013 maturities. The company has officially entered negotiations with banks over additional

funding but the timing and details of such negotiations is not clear at this stage. The negative

pledge of the notes is an obstacle to raising secured bank debt.

Strengths Focused on profitable, stable consumer packaging

Ongoing restructuring expected to eliminate remaining loss-making paper plants

Turnaround story, though not yet completed

Strong debt reduction thanks to disposals and relatively low leverage

Weaknesses

Execution risk on restructuring plan

Refinancing of €500m bond maturity in 2013 still not addressed

Still weak free cash flow generation

Accounting transparency could improve

Group structure


Stable

Corporate Ratings


S&P B- Stable Fitch NR NR



Share price



Bloomberg Ticker MESSA

Analysts

Roberto Pozzi


Barbora Matouskova






20

40

60

80

100

120

Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11

MESSA 8.75% 2013

0

1000

2000

3000

4000

5000

6000

7000

Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11

Price MA 100

1.3

2

2.7

3.4

2010 2011

Paper & Packaging

M-Real



December 2011 114

M-Real - Bonds


M-REAL OYJ 500 8.750 01/04/13 B3 B- 98.0 9.5 793 NC NC Hold


M-Real - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

Metsaliitto 34.60%

Varma Mutual Pension 4.12%

Alfred Berg Asset

Management 2.70%

Op Delta Fund 1.39%


Consumer packaging

41%

Office papers24%

Specialty papers9%

Market pulp and energy16%

Other operations

10%

Consumer packaging

64%

Office papers6%

Specialty papers-17%

Market pulp and energy

6%

Other operations

-7%

0

100

200

300

400

500

600

700

Liquid 2011 2012 2013 2014 2015 >2014

Cash ST debt LT debt

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 Sep-11Senior unsecured notes Private placements

Share of Metsa Botnia debt Other debt

Bilateral loans Pension loans



December 2011 115

Bond Covenants

M-Real - 7.250% 2013

Bond €500m 7.250% Senior Unsecured Notes due 1st April 2013

Issuer M-Real Oyj

Coupon Semi-annual (1 Apr, 1 Oct)

Ranking within issuer Senior unsecured

Ranking vs. other debt Pari-passu with other senior unsecured debt

Guarantees No

Negative pledge Yes

Anti-layering No

Cross default Yes for debt >€10m


Call schedule Not applicable

Tax redemption Yes , at the option of the borrower at par

Clawback No

Change of control Put at 101%, even under the condition that M-Real is downgraded within 90 days by Moody's or S&P by one or more

notches.

Limitation on Debt No

Asset disposals No



Rating Step Up/Down 0.25% p.a. for each rating notch decrease per rating agency below Ba3 (Moody's) and/or BB- (S&P) rating. 0.25%

p.a. for each rating notch increase per rating agency but limited to initial margin (7.250%).




December 2011 116


M-Real - Free cash flow still negative

M-real's update last week did little to reassure investors about its ability to refinance its

sizeable 2013 debt maturities. Despite a sound and reasonably stable core packaging

business, the group's remaining paper operations are dragging earnings down once more

and will continue to do so until the last round of restructuring measures start kicking in. Most

importantly, the company does not generate positive free cash flow, and it is not clear yet if

and when the ongoing restructuring measures will translate into a meaningful improvement.

Lacking significant positive free cash flow generation and any prospect of meaningful and

timely disposals, M-Real remains dependent on refinancing to meet the 2013 maturities.

Given the lack of news on the refinancing front, we expect spreads to remain range-bound in

the near future and thus change our recommendations to Hold/Neutral from Buy/Sell. The

8.75% 2013 notes currently yield over 10% with very limited liquidity. The 5-year CDS has

widened to 1,085bp since the summer and the 1-year is now quoted at approximately 733bp

despite the company's currently adequate short-term liquidity. Given uncertain debt market

conditions, we also recommend a neutral position along the CDS curve although the

company's liquidity positions would currently suggest a 1/5yr steepener.

In the three months to end-September, reported EBITDA dropped to €36m from €62m in

the previous three months. It is fair to say that the core packaging business continued to

perform well, generating €45m of EBITDA despite maintenance shutdowns and the loss of the

paper activities embedded in the packaging division. Currency volatility has so far had no

visible effect on the profitability of the division, but it remains on our minds given that over

half cardboard volumes are exported. However the resilient performance of the packaging

business was not enough to offset weaker paper operations. Office and specialty papers

made a combined loss of €8m after a modest profit of €2m in Q2. The recent results of the

paper operations partly reflect the loss of some customers in the specialty paper business

(deliveries fell 20% in Q3) as they switched supplier in anticipation of the announced plant

closures. Group results also suffered from the substantially weaker contribution of the energy

and pulp activities, whose EBITDA was a fraction of what they generated last year (€4m vs

€19m). Management guided towards flat Q4 versus Q3 overall with packaging strong, paper

still weak and pulp even lower. Consensus EBITDA is just above €200m for FY11 and over

€250m next year.

From reported EBITDA excluding one-offs, we subtract the share of results in associates

reported above the operating line and add back the dividends paid from the same associates.

We thus come to an adjusted EBITDA of just €22m for Q3 and €212m for the last 12 months.

On this basis, we calculate net leverage of 3.9x in September, up from 3.4x in June, but still

below the 4.1x posted at the end of last year.

M-real has indeed generated positive free cash flow in the first nine months of the year, but

only thanks to the dividends paid by Metsa Botnia. Operating free cash flow (i.e. before

assets disposals) was just €10m including the €45m dividends received from the 32%-owned

subsidiary. The operating results of this important associate remain satisfactory so far this

year, meaning that M-real should still be able to rely on these cash inflows again next year.

However, excluding dividends from associates, M-real's operations have consumed €35m of

cash so far this year.

The recently announced measures are supposed to eliminate the group’s two remaining

chronic loss-making mills, one in Germany and one in France. However, with three or more



December 2011 117

restructuring plans overlapping, it is difficult to keep up with costs and benefits. Broadly

speaking we understand that most of the expected savings will offset cost inflation and that

the net cash outflows related to the most recent measures will be sustained after Q1.

Admittedly, we struggle to have a view of the company's cash flows in 2012, but based on

consensus EBITDA of €250m, ‘cash’ EBITDA should be around €200m (reported EBITDA

minus associates plus dividends from associates translates into an actual EBITDA of probably

around €200m). From this subtract capex of €60/80m, cash interest of €65m, taxes of €10m

and net restructuring costs of €50m (management guidance) and we arrive at another modest

free cash flow figure next year.

Despite acceptable leverage, the debt markets remain concerned over refinancing risk due

to the company's modest free cash flow and its involvement in paper-making which is

perceived to be in structural decline whatever the grade. M-real's liquidity is currently

sufficient to repay all debt maturities up to 2013, but not the €600m of debt coming up in

2013. Management did say during the call that it has entered formal negotiations with banks

for a new revolver but it refrained from giving any further detail as regards the size and timing

of the facility it would like to have or if it is currently considering other options. Although we

would be surprised if M-real struggled to refinance its 2013 maturities, current uncertainty in

the financial markets suggests that investors will continue to err on the side of caution and

that execution risk will remain high. Also, we note that the rating agencies will behave

similarly and may take further rating actions if M-real does not sort out the refinancing soon

enough.



December 2011 118


Nexans is a leading supplier of cables. In particular, it holds a leading position in cables for

the T&D market as well as cables for more general use in industry and general construction. The

company has a smaller presence in the Telecom industry and is also downsizing its electrical

wires business. It is based in Paris, France.

Strengths Leading position in a highly competitive market

Good track record in generating positive free operating cash flow

Historically low leverage

Prudent financial policy

Weaknesses Cyclicality of the cable industry and exposure to volatile raw materials prices (mainly

copper)

Lower profitability compared to its competitors

Fragmented markets

Ongoing antitrust investigation

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY NR NR NR

S&P BB+ B Stable

Fitch NR NR NR


CDS 5Y spread

no traded CDS

Share price (€)


Bloomberg, Markit


Equity Ticker NEX FP

Analysts

Barbora Matouskova


Roberto Pozzi







0

200

400

600

800

1000

Z-s

pre

ad

(b

ps

)

NEXFP 5.75 17 EUR

iBoxx HY Global

iBoxx € HY Industrial

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

(€)

Capital Goods

Nexans


mailto:[email protected]


December 2011 119

Nexans bond summary

Bond Issuer Rank S&P Corp Rtg / Outlook

Moody’s

Corp Rtg

/ Outlook

Fitch

Corp Rtg

/ Outlook

Net debt/

EBITDA

(x) (Jun

A) Issue (m) Out (m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask) (%)

YTC

(Ask) (%)

Next

call Rec

NEXFP 5.75 17 € NEXANS SA Sr. Unsecured BB+ STABLE NR NR 1.0 350 350 95.60 482 6.7 n.a.

Buy


Nexans - Financial data

Revenue split (Dec-10)

EBIT split

Debt maturity profile*

Debt structure

%

Bank debt 799 37

Sr. Unsec. Bonds 350 39

Convertible 493 23

Main shareholders

Caisse des Depots 5.1%

AXA 5.0%

Deutsche Bank AG 4.9%

Dodge & Cox 4.8%

Manning Napier 3.7%

Source: SG Cross Asset Research * includes potential fine of €200m here paid in

2012

1H07 2H07 1H08 2H08* 1H09 2H09 1H10 2H10 1H11

Debt protection measures

Net debt / EBITDA (12 mo.s rolling avg) 1.3 0.5 0.8 1.0 0.7 0.4 0.7 0.6 1.0

FFO / Net debt 20.6% 123.1% 109.0% 62.9% 66.3% 141.8% 71.8% 74.3% 36.4%

FFO - capex / Net debt -3.9% 65.2% 74.2% 30.8% 3.2% 25.5% 23.8% 17.3% 4.0%

FCF / Net debt 14.2% 131.4% 50.8% 48.3% 152.9% 170.2% 27.8% 1.3% -27.1%

FCF before dividend (12 mo.s rolling avg) 76 381 232 259 477 240 77 3 -116

EBITDA / (Capex+Interest) 2.2 2.4 2.5 2.2 1.6 1.6 2.0 1.9 1.8

EBITDA / Net interest 8.0 9.3 8.8 8.1 6.5 5.9 6.1 5.1 4.7

EBITDA -capex / Net interest 5.5 6.4 6.3 5.5 3.6 3.2 4.0 3.5 3.1

P&L data

Sales 2,451 2,371 2,419 2,357 2,085 1,941 2,955 3,224 3,527

growth yoy (%) 7.8% #REF! -1.3% -0.6% -13.8% -17.6% 41.7% 66.1% 19.4%

Sales 12 mo.s rolling 4,620 4,822 4,790 4,776 4,442 4,026 4,896 6,179 6,751

EBITDA recurring 250 281 283 250 182 202 187 216 193

EBITDA margin 10.2% 11.9% 11.7% 10.6% 8.7% 10.4% 6.3% 6.7% 5.5%

EBITDA (12 mo.s rolling) 409 531 564 533 432 363 389 403 409

EBITDA margin (12 mo.s rolling avg) 8.9% 11.0% 11.8% 11.2% 9.7% 9.0% 7.9% 6.5% 6.1%

Int exp -26 -31 -33 -33 -33 -29 -35 -44 -43

Interest expense (12 mo.s rolling) -51 -57 -64 -66 -66 -62 -64 -79 -87

Tax -20 -6 -19

Tax (12 mo.s rolling) -45 -39 -26 -25

Cash flow data

FFO 50 307 191 146 61 139 60 108 48

Working capital 15 209 -264 410 113 148 -104 100 -201

Cash flow from operations 65 516 -73 556 174 287 -44 208 -153

Capex -69 -99 -60 -112 -85 -79 -54 -75 -64

Free cash flow before dividend -4 417 -133 444 89 208 -98 133 -217

Dividend -32 0 -52 0 -56 -1 -32 0 -32

Free cash flow after dividend -36 417 -185 444 33 207 -130 133 -249

FFO 50 307 191 146 61 139 60 108 48

FFO (12 mo.s rolling) 110 357 498 337 207 200 199 168 156

Capex (12 mo.s rolling) -131 -168 -159 -172 -197 -164 -133 -129 -139

Debt data

ST debt 285 301 277 274 145 140 228 255 261

LT debt 603 611 617 660 810 818 842 833 844

Gross debt 888 912 894 934 955 958 1,070 1,088 1,105

Cash on b/s 354 622 437 398 643 817 793 862 677

Net debt 534 290 457 536 312 141 277 226 428

Power

Network

Cabling,

€4,833m,

79%

Electrical

Wires,

€817m,

13%

Telecom

Network

Cabling,

€501m,

8%

8%

11%

14%

67%

1

Energy Infrastructure

Building

Industry

Private Networks

Telecom Infrastructure

Others

1,121

261

500

280

0 0

213

350

0

200

400

600

800

1,000

1,200

Liquidity 2011 2012 2013 2014 2015 2016 2017



December 2011 120

Bond Covenants

Nexans covenants summary

Bond NEXFP 5.75 17

Issuer NEXANS SA

Currency €

Coupon 5.75%, 02-May

Coupon step-up N

Ranking Sr. Unsecured

Guarantees N

Negative pledge Y

Anti-layering Y

Cross-default Y


Call schedule #N/A Field Not Applicable

Tax redemption N

Change of control Y, 101.000 (w/rating trigger > -1 notch)

Make-whole call N

Equity clawback N

Equity cure N

Limitation on debt N

Asset sales / Conveyance N


Restricted payments N




Limitation on sub debt N


MAC clause N




December 2011 121

Latest research published on 10 August 2011

Nexans – Stable credit – buy on weakness

SG Bond Recommendation: The Nexans 17s have been relatively stable during these volatile

times but have nevertheless dropped some 6 points since the beginning of August and are

trading at around 94 in cash price according to Bloomberg. We see this weakness as an

opportunity to buy these bonds as we expect the company to deliver or even slightly exceed its

full-year targets. Credit metrics and liquidity remain under control even after the recent

acquisition of Shandong Yanggu and the impact of a potential €200m fine payment.

Recent developments

H1 2011 results were in line: Nexans reported H1 results, which were in line with the

company’s guidance, and importantly reported an improvement in the pricing environment.

Sales at €2,287m (at constant metal prices) were up 8.2% organically vs guidance of 7-9%.

Energy Infrastructure (42% of sales) was flat in Q2 due to the difficult environment in the Middle

East while Building and Industry have seen a continuing upturn. EBITDA came in at €193m,

which was 8% higher yoy but only 1% sequentially. As part of a normal seasonal pattern, free

cash flow was a negative €249m, thus increasing net debt to €547m from €293m in December.

ND/EBITDA stood at 1x. Management said that price increases were sticking and the company

should be able to fully pass on raw material cost increases in H2. Therefore, the 2011 guidance

was reiterated for operating margins to be around 5.5% and sales organic growth in the range

of 5-7%. Furthermore, Nexans expects net debt to be around €300m in 2011 at constant scope

and metal prices.

Acquisition in China: On 21 June, Nexans announced the acquisition of 75% of the cable

business of Shandong Yanggu in China. This business mainly supplies underground high

voltage cables to State Grid Corporation of China, the grid network operator in China. The

company had revenues of approximately €150m in 2010 and an EBIT margin of around 7%. We

view this deal as positive as it doubles Nexans’ exposure to China and also increases the

group’s exposure to high-voltage cables, one of the highest value-added segments of the cable

industry. Nexans expects the high and medium voltage cable market to grow by 8-10% per

year in China, supporting its target to reach€200m in sales in 3-5 years. The transaction values

the whole business at €140m and is expected to close in 6-8 months. Pro forma for the deal, we

estimate the ND/EBITDA at around 1.3x. Nexans’ internal target is to remain below 2.5x and its

current covenant allows it to leverage up to 2.95x.

€200m provision constitutes a potential cash outflow: We note that the group booked a

€200m provision ahead of a potential EU fine for anticompetitive behaviour in the high-voltage

market. The company said the EU decision is likely to be known in 2012. Based on the current

liquidity situation, i.e. around €677m of unrestricted cash and cash equivalents and €580m of

unused committed credit lines and €261m in short-term debt, Nexans should be in a position to

meet this potential cash outflow.

S&P confirmed the ratings: Following the company's receipt of the European antitrust

authorities' statement of objections, S&P (the only agency rating Nexans) affirmed the

company’s rating at BB+, stable outlook. S&P said that the impact of any potential fine would

not distress Nexans’ credit metrics to a degree that would prompt a downgrade. While the S&P

note was released before the provision announcement, we understand that the agency was not

negatively surprised by the amount of €200m. We note that for the current ratings S&P expects

free operating cash flow to remain positive and FFO/adj. Net debt to remain in the 20-25%

range over the cycle. Based on our conservative expectations (flat EBITDA margin yoy), Nexans

should generate at least €90m of FCF in 2011 and its FFO/adj.net debt should stay above 25%.



December 2011 122


Norske Skog is the world’s second largest manufacturer of newsprint and the third largest in

Europe with a share of around 16% behind Stora Enso (25%) and UPM (20%). After disposals

and shutdowns in recent years, the group’s newsprint manufacturing capacity has shrunk to

approximately 3.4m tons with 1.6m in Europe. The profitability of Norske Skog’s newsprint

operations in Europe is very low and dependent on favourable energy contracts with state-

owned suppliers. The group has however profitable operations in Australasia and, though

smaller, in Latin America. The group also produces magazine paper in Europe.

Norske Skog has struggled to reduce leverage over the past several years despite having

reduced net debt by half since 2006 thanks to asset disposals. With newsprint demand in

structural decline in North America and Western Europe and an unfavourable cost base in

Europe, the company’s long term viability is questionable. The company’s liquidity has been a

concern for the past two years and has sharply deteriorated after its only partly successful

attempt to issue notes in early 2011. The wafer-thin room under the covenants of its new

‚guaranteed‛ revolving facility makes access to this ‚conditional‛ liquidity doubtful at the very

least. Negotiations over alternative sources of liquidity (trade receivable securitisation) have not

been completed at the time of writing.

Strengths Third largest newsprint producer in Europe

Profitable and stable Australia/New Zealand operations

Seeking to consolidate European newsprint industry

No major maturities after March 2012 and until 2014

Weaknesses Focused on newsprint, an industry in structural decline

High leverage and very tight liquidity

Wafer-thin buffer under covenants of revolving credit facility

Limited free cash flow generation

Group structure


Negative

Corporate Ratings

LT Outlook MDY Caa1 Negative

S&P B- Neg Watch

Bonds price: NSINO 7% 2017


Share price


Market cap.(m)

Bloomberg Ticker NSG NO.

Analysts

Roberto Pozzi


Barbora Matouskova






30

40

50

60

70

80

90

100

No

v-0

8

Ma

y-0

9

No

v-0

9

Ma

y-1

0

No

v-1

0

Ma

y-1

1

No

v-1

1

0

1000

2000

3000

4000

5000

No

v-0

9

Fe

b-1

0

Ma

y-1

0

Au

g-1

0

No

v-1

0

Fe

b-1

1

Ma

y-1

1

Au

g-1

1

No

v-1

1

Price MA 100

2

9

16

23

2010 2011

Paper & Packaging

Norske Skog



December 2011 123

Norske Skog – Eurobonds

Issuer Size Coupon Maturity Mdy S&P Price Yield Z-spread Nex call Nex call Reco

NORSKE SKOGINDUSTRIER 150 11.75 15/06/16 Caa1 nr 66.9 23.3 2150 NC NC Hold

NORSKE SKOGINDUSTRIER 493 7 26/06/17 Caa1 B- 55.7 20.8 1875 NC NC Neutral


Norske Skog - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

Viken Skog BA 5.74%

Government Pension

Fund 4.87%

Bank of N-Y 4.09%

AT Skog BA 3.51%


Newsprint Europe

28%

Newsprint RoW27%

Magazine Europe

29%

Energy6%

Other activities

10%

Newsprint Europe

31%

Newsprint RoW53%

Magazine Europe

16%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000LTM free cash flow New RCF May 14 Cash (incl. min cash of ~700/800m) Bank loans Bonds

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010

Senior unsercured notes Bank debt



December 2011 124

Bond Covenants

Norske Skog - €500m 7.000% due 2017

Bond €500m 7% Senior Unsecured Notes due 26/06/2017

Issuer Norske Skogindustrier ASA

Coupon Annual payment on 26 June

Ranking within issuer Pari passu Vs other senior debt

Ranking vs. other debt Structurally subordinated

Guarantees No

Negative pledge Yes - applies to any indebtedness

Carve-out: 15% of group net tangible assets

Anti-layering No

Cross default Yes for a debt repayment >€35m


Call schedule No

Tax redemption Yes at 100%

Clawback No

Change of control Put at 101% if more than 50% of the total voting rights of the Issuer are transferred and the Issuer is downgraded to

sub-IG due to the transfer within 90 days of the transaction.


Asset disposals Limitations on sale and lease back




Covenants under the revolving credit facility

Test Date Net Interest-Bearing Liabilities : Adjusted EBITDA EBITDA : Net Interest

30-Jun-11 6.50 1.50

30-Sep-11 5.75 1.75

31-Dec-11 5.50 1.75

31-Mar-12 5.25 2.00

30-Jun-12 5.00 2.00

30-Sep-12 4.75 2.25

31-Dec-12 4.50 2.25

31-Mar-13 4.27 2.50

30-Jun-13 4.00 2.50

30-Sep-13 3.75 2.75

31-Dec-13 3.50 2.75

31-Mar-14 3.50 2.75




December 2011 125


Norske Skog - Back to neutral after the rally

After the sharp tightening in NSINO spreads last week, we change our recommendation to

Neutral from Sell in 5-year CDS and from Buy to Hold on the 7% notes. The 17s are currently

trading around 55 (YTW 21.91%) and the 5-year CDS at 35/38pts whilst the March 12

contract is around 2/6pts. Although we feel that the short end could continue to tighten on

the back of potential price increases and/or the announcement of a second backup facility,

the risk/reward profile is not attractive given the risk of a sharp economic slowdown.

The company will likely avoid breaching the loan covenants in Q4, whilst the jury is still out

on the quarter after next. Having guided towards lower working capital needs in Q1 next year,

we expect Norske Skog to meet the 2012 debt maturities, potentially without the need to

draw the covenanted revolver. However, without showing a significant cash buffer on balance

sheet, the company risks a deterioration in the terms of payment asked its suppliers. It would

therefore still need either a covenant waiver or an alternative source of liquidity, such as the

long-awaited securitisation.

Management is waiting to see what price increases they can achieve in the negotiation

rounds currently ongoing both for newsprint and magazine. With the European economy

weakening, price increases may look difficult to achieve, however utilisation rates of over

90% in both grades suggest that the there might be some upside. The main risk remains

another sudden sharp drop in demand, as we have already witnesses back in 2009 (-30%). In

a much deteriorated macroeconomic environment with a looming recession in Europe,

The full-year EBITDA guidance given by management of slightly over last year’s

NOK1.41bn suggests NOK1.45bn of EBITDA this year, i.e. NOK400-450 in Q4. After outflows

of NOK100m in cash interest and NOK150m capex, inflows from working capital of around

NOK200m and asset disposals of NOK100-200m (possibly including the potential sale of the

Dutch assets announced this week) should result in approximately NOK500m in free cash

flow, thus bringing cash on balance sheet to an estimated NOK2.9bn. After subtracting the

debt maturities of Q4 of NOK1.7bn, we estimate cash on balance sheet at yearend at

approximately NOK1.2bn. This would cover the NOK655m maturities in March 2012 but

would bring the cash on balance sheet down to levels that could be considered too low to be

safe by the company’s suppliers.

Management has talked down the minimum cash requirements for operation needs to

NOK500- 750m but they concede that a minimum NOK1bn is probably safer to avoid having

suppliers ask to change the terms for payment. The company has so far not experienced any

deterioration in the terms of payments with suppliers, according to management, and none is

visible in their accounts. That said this remains another big risk the company faces with

around NOK2.7bn of trade payables on balance sheet.

Based on our estimates described above, the company would still be in compliance with

the covenants of the RCF in Q4, though this also depends on the levels of exchange rates at

the end of next quarter (among other things). Assuming that exchange rates do not move

unfavourably and based on NOK1.4bn of EBITDA and NOK7.6bn of net debt, net leverage

could improve to 5.3x from 5.5x in September compared to a covenant of 5.5 in December

(interest coverage would also improve slightly but the test remains at 1.75x and is therefore

less of a problem in December). The covenants get even stricter in the following quarters

starting with 5.25x in March (cover: 2.0x) a, 5.0x in June (cover: 2.0x) and so forth. Beyond

Q4 this year therefore, the company needs significant price increases in European newsprint

to keep access to the RCF, or a waiver.

With a recession looming and raw material prices falling, the prospects for price increases

in Europe are not bright. However, the current supply/demand balance is relatively favourable



December 2011 126

and all three main newsprint producers have been vocal about the need for price increases in

their recent updates. The pricing outlook for magazine paper is however better than for

newsprint given the shutdowns announced by UPM this year. Management admits however

that any price increase is not be anything near like the 80 EUR/ton (+20%) achieved last year.

Suggesting that their aim to get back to 550 EUR/ton, management implicitly hopes to get a

40 EUR/ton price increase, which would translate in an approximately NOK500m higher

EBITDA at constant volumes.

A 5% price increase in European newsprint (around 25 EUR/ton) translates into

approximately NOK300m higher EBITDA, everything else (volumes, exchange rates and input

costs) being equal. An increase in magazine prices of the same magnitude would have a

similar effect. Although the effect on earnings of any potential price increase would be partly

offset by declining volumes, three quarters of the operating costs are variable. Despite the

decline in deliveries and barring a massive acceleration of the current trends (see below for

further thoughts on this), it is clear that the sensitivity of the company’s results to price

changes is relatively high.

Currently, the Bloomberg EBITDA consensus for 2012 is NOK1.75bn, in a tellingly wide

NOK1.2-2.5bn range but up from the NOK1.45bn estimated this year. Assuming 3% lower

deliveries in both newsprint and magazine next year, the NOK250m higher earnings imply

price increases of barely above 5% in each of the two grades, or 25 EUR/ton in newsprint

and 35 EUR/ton in magazine. Subtracting from NOK1.75bn NOK650m in interest expenses

and NOK500m of capex, free cash flow could be around NOK600m next year (assuming no

restructuring outflows). Based on our EBITDA and free cash flow estimates above, net

leverage would be 4.1x at the end of 2012. However, execution risk remains clearly very high

in the current economic environment.

The uncertain macro-economic environment increases the risk of a sudden acceleration in

the decline of newsprint demand. In the first nine months of 2011, Cepiprint estimates that

European demand for this paper grade was 1.1% lower yoy. The working assumption of the

industry is for a 1-3% annual decline, although Stora Enso recently seemed to have become

gloomier. Putting things into historical perspective, deliveries fell 30% during the last

recession in 2009 with a very modest recovery thereafter. European newsprint deliveries were

510k in Q307 and still 472k in Q308. They fell to 331k by Q309 and are still not much higher

than that in Q311 at 374k tons. It may not come as a surprise to anyone but newsprint

demand does not tend to bounce back. Like many commodities, it also tends to fall abruptly,

as it happened in Q109 when it the yoy change suddenly went from -7/8% in the previous

quarters to -26% in Q109.

The long-awaited €120m securitization has not materialized yet. Management cited

‚administrative‛ and ‚commercial‛ reasons for the delay. We suspect that the delays are due

to the deterioration of debt market conditions and increased concerns over Norske Skog’s

financial position, regardless of the fact that a true securitization could be constructed in such

a way to avoid taking the company’s own credit risk. However likely, even on a smaller scale

(say, €80m, i.e. implying a much higher haircut) the securitization remains a potential positive

event risk with very significant implications for the liquidity of the company and therefore the

short end of the CDS curve in particular (the entire CDS curve would probably shift

downwards but the long dated bonds could widen reflecting increased subordination).

Lastly, the company still expects to receive cash from the insurance for the fire that

damaged one of its plants earlier this year. It is not clear how much they can get but the

amount could be several tens of millions kroner.



December 2011 127


Originally a construction and engineering company based in Spain, OHL has rapidly

expanded into international construction and into regulated concessions, mainly in Brazil and

Mexico. The group’s latest financial data shows that three quarters of group earnings now

come from concessions and less than a quarter from construction, with Spain contributing to a

fraction of this. The group has thus reduced its exposure to Spain’s construction market, where

its mainly non-residential activities have been affected by declining government and, in

particular, local government spending over the past three years. Whilst the group’s construction

activities are typically funded through customer advances, growth into concessions has been

achieved via non-recourse debt and, for the equity portion of its investments, by corporate

debt.

With gross corporate debt close of €1.9bn in September 2011, management is now focused

on reducing debt and leverage at the parent company through a mix of asset disposals and the

re-leveraging of concessions. After listing its Brazilian concession operations in 2005, OHL

listed its concession business in Mexico last year. The market capitalisation of OHL Brazil and

OHL Mexico is currently equivalent to €2.2bn. The OHL group is controlled by the Villar Mir

family and listed in Madrid.

Strengths

Strong international construction order book

Stable concession activities, although effectively ring-fenced

Focused on debt reduction (mainly at a parent company level)

Listed concessions could be used to raise liquidity if necessary

Weaknesses

Construction activities have volatile earnings and cash flow generation

Weak construction market in Spain, likely to continue to deteriorate

No direct access to the cash flows of the concessions

Reporting needs further improvements

Group structure


Positive

Corporate Ratings

LT Outlook MDY Ba2 Negative

S&P NR NR

Fitch BB- Stable



na

Share price



Bloomberg Ticker OHLSM

Analysts

Roberto Pozzi


Barbora Matouskova






40

50

60

70

80

90

100

110

Obras 15 OBRAS 18s OBRAS 12

Price MA 100

16

20

24

28

2010 2011


OHL



December 2011 128

OHL - Eurobonds

Issuer Issue Size Coupon Maturity Mdy Fitch Price Yield Z-spread Nex call Next call Reco

OBRASCON HUARTE LAIN SA 187 6.25 18/05/12 Ba2 BB- 100.7 3.3 161 NC NC Hold

OBRASCON HUARTE LAIN SA 700 7.375 28/04/15 Ba2 BB- 99.2 7.3 555 NC NC Buy

OBRASCON HUARTE LAIN SA 425 8.75 15/03/18 Ba2 BB- 98.4 8.9 677 104.375 15/03/15 Buy


OHL - Financial data Revenue split

EBITDA split


Debt structure

Main shareholders Grupo Villar Mir 60.03%


Construction55%

Concessions35%

Other10%

Construction21%

Concessions76%

Other3%

0

100

200

300

400

500

600

700

800

900

Est. liquidity

2011 2012 2013 2014 2015 2018

Estimated liquidity Loans Bonds

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009 2010 Sep-11

Non recourse debt Gross recourse debt



December 2011 129

Bond Covenants

€425m 8.75% senior unsecured 2018 notes

Ranking/Security Unsecured debt of the issuer, pari passu with syndicated loan

Call schedule 15 Mar 2015: 104.375%, 15 Mar 2016: 102.125%, 15 Mar 2017: 100%

Guarantees None

CoC 101%

Debt test Fixed charge cover ratio >2.5x (recourse subsidiaries)


Law English law


€700m 7.375% senior unsecured 2018 notes

Ranking/Security Unsecured debt of the issuer, pari passu with syndicated loan

Call schedule Not callable

Guarantees None

CoC 101%

Debt test Fixed charge cover ratio >2.5x (recourse subsidiaries)


Law English law




December 2011 130


OHL - Debt to go down sharply in Q4

OHL’s debt metrics are finally improving at both the consolidated and parent company

level with more substantial improvement expected before year-end. Management reduced

debt and leverage at the parent company level in Q3 by borrowing at its concession

subsidiaries level, where the group has more leverage capacity. At the same time, strong

organic growth at the concessions allowed OHL to improve its consolidated leverage. We

expect debt to sharply decrease in Q4 thanks to: 1) the planned sale of assets – around

€200m, expected in a matter of weeks; 2) working capital inflows from seasonal swings (we

factor in over €100m); and 3) a one-off from the repayment of unpaid bills from the Algerian

government worth €120m. We expect net recourse leverage to improve from just above 5x in

September to below 3x in Q4. The 8.75% 2018 notes were up one point to 99/101 YTW 8.9%

with the 7.375% 15s gaining half a point to around 99½/101½. The 6.25% 12 are quoted at

101/101¾. We expect Q4 results in February to push the 18s three to four points higher; our

target is around 106 YTW 7.5%.

In Q3, consolidated EBITDA rose 30% yoy while construction EBITDA declined 18% due

to the completion of major international works and the fact that new contract wins are not

expected to start generating earnings until next year. This is not the first time this has

happened as the construction business is inherently bumpy. Construction earnings also

continue to reflect weakness in Spain, where sales were down 14.4% in the nine months to

end-September, although they improved from the -21% reported in June. The order book in

the construction business remains solid overall with a book-to-bill ratio of 2.3x, unchanged

from June, suggesting strong sales and earnings growth in 2012.

Recourse gross debt was reduced to €1.91bn from €2.10bn in June, and recourse gross

leverage improved to 5.1x from 5.6x. Recourse net debt was reduced to €1.40bn from

€1.67bn in June, and recourse net leverage improved to 3.6x from 4.4x. At the group level,

gross and net debt remained unchanged at €6.5bn and €5.0bn respectively. However, both

gross and net group leverage improved to 5.5x from 5.9x and to 4.2x from 4.6x.

The company confirmed that the reduction of debt and leverage should continue with the

disposal of the environmental unit (approx. €200m) with sale negotiations potentially

completed in a matter of weeks. The target remains to reduce recourse leverage below 3x by

year-end. We believe that this is achievable and that execution risk is limited at this stage.

Consequently, we are changing our credit opinion to Positive from Stable.

Unlike Fitch, Moody’s maintains a negative outlook on OHL’s Ba2 and will stabilise it once

net recourse leverage is in a 2-3x range. Moody also requires group leverage to remain in a

5.0-5.5x range for the current rating, adjusted for factoring. We expect Moody’s to stabilise

after the company reports Q4 results in February, providing another catalyst for

outperformance.



December 2011 131


ONO is the second largest provider of broadband internet, pay television and fixed

telephony services and is a leading triple play operator in Spain. Through its proprietary state-

of-the-art network, ONO offers its services to over 7m homes across Spain, including the

nine largest cities. ONO is the only fibre operator in Spain with national coverage. As of 3-

Sep-11, ONO provided over 4.4m services to more than 1.9m residential (fibre and ADSL)

customers and around 82,000 SMEs. ONO also offer products and services to large

corporations and public sector entities as well as to the wholesale market. ONO is the

principal competitor to Telefónica, the incumbent telecommunications and pay television

operators in Spain. For the quarter ended 30-Sep-11, ONO generated revenues of €371m

and EBITDA of €191m with an EBITDA margin of 51.4%.

Strengths

Only national cable operator, operating an extensive and well-invested network

Technological advantages in DOCSIS 3.0 network

Prioritising deleveraging and cash flow generation; nearly €500m of available liquidity

Weaknesses Need to refinance c.€2.0 billion of credit facilities maturing in 2013

Increasing competition particularly at the low end of the market

Challenging macroeconomic environment

Group structure

Positive

Corporate Ratings

LT ST Outlook MDY B1 NP Stable

S&P B B Stable

Fitch NR NR NR


CDS 5Y spread

Share price (€m)

(Not listed)

Source: Source: Bloomberg, Markit,

SG Cross Asset Research

Market cap.(€m) N/A

Equity Ticker ONO SM

Analysts

Alejandro Núñez

[email protected]






0

200

400

600

800

1000

1200

1400

1600

1800

2000

Z-s

pre

ad

(b

ps

)

ONOSM 8.875 18 EUR

ONOSM 11.125 19 EUR

ONOSM 10.875 19 USD

iBoxx HY Global

iBoxx € HY TMT

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

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Au

g-1

1

Se

p-1

1

Oc

t-1

1

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

ONOFII CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyONOFII - XOONOFII / XO (RHS)


ONO



December 2011 132

ONO bonds summary

Bond Issuer Rank

S&P

Corp Rtg

/ Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total

debt/

EBITDA

(x) (Sep-

11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-

spread

(Ask)

(bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%) Next call Rec

ONOSM 8.875

18 €

NARA CABLE

FUNDING

Senior

Secured

B

STABLE

B

STABLE

B

STABLE

4.2 1,000 1,000 91.56 857 10.6 17.9 01-Dec-13

ONOSM 11.125

19 €

ONO FINANCE II

PLC

Senior

Subordinated

CCC+

STABLE

CCC+

STABLE

CCC+

STABLE

4.9 295 295 86.52 1,200 14.1 23.8 15-Jan-14 Buy

ONOSM 10.875

19 US$

ONO FINANCE II

PLC

Senior

Subordinated

CCC+

STABLE

CCC+

STABLE

CCC+

STABLE

4.9 225 225 89.75 1,116 12.9 20.7 15-Jan-14

Source: Bloomberg, SG Cross Asset Research

ONO financial summary


Geographic revenues (Dec-10)


Debt structure (Sep-11)

Main shareholders

CCMP Capital 15.0%

Providence Equity 15.0%

T.H. Lee Partners 15.0%

Quadrangle Capital 9.0%

Global Telecom 8.8%

Source: SG Cross Asset Research, Company data

(€m) 2008A 2009A 2010A 2011E 2012E

Total revenues 1,602 1,512 1,472 1,457 1,479

Normalised EBITDA 703 730 725 735 744

Revenue growth 0.0% -5.6% -2.7% -1.0% 1.5%

EBITDA growth 0.0% 3.8% -0.6% 1.3% 1.3%

EBITDA margin 43.9% 48.3% 49.3% 50.4% 50.3%


Cash interest, net -262 -264 -292 -222 -215

Cash taxes 0 0 0 0 0

Other 0 0 0 0 0

Change in provisions -15 0 0 0 0

Working capital -147 -66 0 -15 -25

Restructuring cash costs, other -60 -85 -25 -40 -30

Cash Flow from Operations 219 315 408 458 474

0.0 0.0 0.0 0.0 0.0

Capital expenditures -374 -220 -244 -281 -248

Acquisitions / Divestitures 17 0 0 0 0

Other Investing 0 0 0 0 0

Cash Flow from Investing -357 -220 -244 -281 -248

Dividends / Shareholder returns -3 0 125 0 0

Debt issuance 575 0 725 200 750

Debt redemption -98 -185 -1,165 -176 -1,016

Other Financing 0 -14 -27 0 0

Cash Flow from Financing 474 -199 -342 24 -266

0.0 0.0 0.0 0.0 0.0

Change in Cash 336 -104 -178 201 -40

Cash 342 238 59 260 220

Revolver (drawn) 0 0 0 0 0

Senior Bank debt 3,883 3,712 2,152 2,175 1,159

Senior Secured notes 0 0 1,000 1,000 1,750

Senior Unsecured notes 500 460 0 0 0

Sr. Subordinated debt 0 0 461 461 461

Total debt 4,383 4,172 3,613 3,636 3,370

Net debt 4,041 3,934 3,554 3,377 3,151

Financial summary (€m) 2008A 2009A 2010A 2011E 2012E

Revenues 1,602 1,512 1,472 1,457 1,479

Adj. EBITDA 703 730 725 735 744

EBITDA margin 43.9% 48.3% 49.3% 50.4% 50.3%

Funds From Operations (FFO) 441 466 433 513 529

FFO - Capex - W/C Chg. (OpFCF) -140 95 164 177 226

Free Cash Flow (FCF) -157 95 289 177 226

EBITDA / net interest 2.7x 2.8x 2.5x 3.3x 3.5x

FFO / Net debt 10.9% 11.8% 12.2% 15.2% 16.8%

FFO - Capex / Net debt 1.7% 6.3% 5.3% 6.9% 8.9%

FCF / Net Debt -3.9% 2.4% 8.1% 5.2% 7.2%

Capex / Sales 23.3% 14.6% 16.6% 19.3% 16.8%

Net Senior Debt / EBITDA 5.0x 4.8x 2.9x 2.6x 1.3x

Net Senior Notes / EBITDA 5.7x 5.4x 4.3x 4.0x 3.6x

Net debt / EBITDA 5.7x 5.4x 4.9x 4.6x 4.2x

Cash 342 238 59 260 220

Revolver Availability 0 0 300 300 300

Cable Access, €911m,

66%

Internet &

Phone, €232m,

17%

TV and Radio,

€192m, 14%

TKS, €35m,

3%

Spain, 1,502, 100%

467

1

175

1,972

1 0 0 0

1,000

463

0

500

1,000

1,500

2,000

2,500

(€m

)

2,152 2.9

1,000 1.3

0 0.0

461 0.6

3,613 4.9

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal d

eb

t (€

m)

% o

f T

ota

l D

eb

t


Senior bank Sr. Secured Sr. Unsec. Sr. Sub.



December 2011 133

Bond Covenants

ONO covenants summary

Bond ONOSM 8 7/8 12/01/18 ONOSM 11 1/8

07/15/19

ONOSM 10 7/8

07/15/19

Issuer NARA CABLE FUNDING

ONO FINANCE II

PLC

ONO FINANCE II

PLC

Currency €

€

US$

Coupon 8.875%, 01-Jun & 01-Dec

11.125%, 15-Jul &

15-Jan

10.875%, 15-Jul &

15-Jan

Coupon step-up N

N

N

Ranking Secured

Sr Unsecured,

Senior

Subordinated

Sr Unsecured,

Senior Unsecured

Guarantees N

N

Merger

Negative pledge Y

Y

Y

Anti-layering Y

Y

Y

Cross-default Y

Y

Y


N

N

Call schedule 01-Dec-13 108.875 15-Jan-14 111.125 15-Jan-14 110.875

01-Dec-14 104.438 15-Jan-15 105.563 15-Jan-15 105.438

01-Dec-15 102.219 15-Jan-16 102.781 15-Jan-16 102.719

01-Dec-16 100.000 15-Jan-17 100.000 15-Jan-17 100.000

Tax redemption N

Y

Y


Y, 101.000

Y, 101.000

Make-whole call +50 01-Dec-13

N

N

Equity clawback 35% @ 108.875 01-Dec-13

35% 15-Jan-14

35% @ 111.125

15-Jan-14

Equity cure N

N

N

Limitation on debt

Y, Total debt/LTM EBITDA

6.25x; Sr. Debt/LTM EBITDA

5.5x; EBITDA/interest 2.5x Y

Y


Y

Y

Limit on Sale & Leasebacks Y

Y

Y


Y

Y


Y

Y


N

N


Y

Y


N

Y


N

N

MAC clause N

N

N




December 2011 134


ONO – ONO Q3 2011 results

ONO posted fair Q311 results during a seasonally stronger quarter and which were slightly

better than our expectations for both revenues and EBITDA, so continuing this year’s trend of

staying afloat in the face of tough macro headwinds.

Most core operating metrics were essentially flat on a sequential basis. We note

Residential Fibre RGUs declined by 6k during the quarter due to rising churn of lower-tier,

single-play customers and increasing promotional activity in the market.

However, in a seasonally softer quarter, ONO was able to increase not only its top line,

aided by a €1.00/month tariff increase effective from July 2011, but also EBITDA. Although

opex is admittedly seasonally lower in Q3, revenues also tend to be softer given seasonal

subscription patterns, particularly in TV services. In light of these seasonal and tariff increase

factors, we view the respective 2.1pp and 1.6pp sequential and yoy churn increases as

moderate. We believe the DOCSIS 3.0 services suite, delivered primarily via bundles, is

carving its mark on the market. In Q3, ONO posted net adds of 2k RGUs (vs -13k in Q310),

supported by Business RGU growth, in a market that CMT (Spanish regulator) described as

having lost 17k broadband net adds and 62k fixed telephony net adds in Jul-Aug 2011.

We also regard positively the company’s persistent focus on positive cash flow generation,

much of which continues to be applied toward deleveraging: leverage over the quarter

declined from 4.7x to 4.6x and declined by 0.4x from 5.0x one year ago.

Compared to Q310, capex increased during the quarter by €21m to €74m, primarily due to

a one-off investment in a 2.6GHz mobile (4G) spectrum licence and, to a lesser extent,

customer equipment installations (including TiVo) and expenditures for ONO’s Voice Platform

Evolution (VPE), which is a project to upgrade its voice network to IP technology.

ONO mentioned it would ideally like to refinance its syndicated bank facility in order to

streamline its lender base and to afford itself greater investment flexibility (we assume mostly

for gradual TiVo and Mobile rollout in 2012). Even if this were not feasible in the current

market, management feels confident the facility could be rolled by the majority of its lending

syndicate. ONO is currently conducting investor meetings in the US, principally with existing

institutional investors, until Thursday 10 November.

ONO reaffirmed its FY11 guidance that capex will likely be at the high end of its indicated

€250-300m range and FCF would be in the area of €160m. Management is ‚cautiously

optimistic‛ on its near-term outlook.

Next calendar events: Expected Q411 and FY11 earnings in early March 2012.



December 2011 135


OTE is the former telecom monopolist of Greece. Deutsche Telekom controls the company

with a 40% stake but does not explicitly or implicitly guarantee OTE’s bonds. OTE also operates

mobile subsidiaries in Albania, Bulgaria and Romania, holds a 54% stake in RomTelecom and a

20% stake in Telekom Srbija.

OTE’s domestic operations have been very affected by the crisis in Greece, and its foreign

subsidiaries have also suffered as a result of the severe crisis that has impacted the Balkans

since 2008. While the speed of decline in domestic mobile receded in H111, we also saw a

further deterioration of domestic fixed. But this must be put into context: domestic EBITDA

declined by ‚only‛ 16.5% in 2010, still a fraction of what was experienced by more cyclical

sectors during the 2008-2009 crisis, such as Nokia (38%). So the spreads also price in an

element of Greek sovereign risk, partly offset by the presence of DT as a controlling

shareholder, which some hopeful investors believe could translate into actual financial support.

As we discussed in our recent report on extreme scenarios (link), risks from the Greek crisis

include: disruption of the basic system of payments, restricted access to cash reserves and

bank deposits, a wave of customer defaults, default on services provided to the government,

currency redenomination, a breakdown in law and order, unfavourable tariff freezing or

regulation, risk to property rights and a disruption of equipment imports, among others.

OTE’s bond covenant package is very weak, with a negative pledge that does not extend

beyond the domestic fixed line assets. Importantly, it has no restriction on debt at subsidiaries

or asset sales. The company has in the past unsuccessfully tried to sell its Serbian stake and its

segregated real estate assets, and apart from Hellas Sat has little chance of executing a major

asset disposal any time soon. The new EUR2014 bonds have stronger Change of Control

protection against a partial buy out of the company. We believe the company has its EUR2012

maturities covered but will need to borrow to cover its EUR2.2bn of 2013 maturities.

Group structure

Negative

Corporate Ratings

LT ST Outlook MDY B2 NP Negative

S&P B B Negative

Fitch BB NR Watch-Dev



Share price



Bloomberg Ticker OTE.

Analysts








Deutsche Telekom

Hellenic Telecommunication

Organization SA Listed entity, operating subsidiary for domestic

fixed line

EUR1,250m Aug 13 bond (unsecured)

EUR500m Apr 14 bond (unsecured)EUR600m Feb 15 bond (unsecured)EUR900m May 16 bond (unsecured)EUR500m Sep 12 term loan (unsecured)

EUR350m Sep 12 RCF (fully drawn,

unsecured)EUR150m Jan 12 l iquidity RCF from DT(undrawn, unsecured)

Hellenic Republic and associated parties

Cosmote GreeceDomestic mobile

OTE GlobeInternational wholesale

OTEestateReal EstateEUR1.4bn

valutation?

40%10%

RomTelecomRomania fixed line


100% 100% 100%

54%

Free float

50%

OTE PLCFinancial subsidiary

100%+ unconditional/irrevocable guarantee

EUR900m Feb 13 RCF (fully drawn, unsecured)

Negative pledge

KRW9m Mar 14 term loan (unsecured)

KRW20m Aug 18 term loan (unsecured)KRW16m Dec 20 term loan (unsecured)EUR8m Nov 12 term loan (unsecured)

Cosmote RomaniaRomania mobile - GSM

70%

30%

Zapp RomaniaRomania mobile -

100%

GlobulBulgaria mobile

100%

AMCAlbania mobile

97%

Germanos SE EuropeBalkans mobile retail

100%

Hellas SatSatellite services - 1 satellite

EUR120m valutation?

99%

Telkom SrbijaSerbia former

monopolist

20%

0

500

1000

1500

2000

2500

EUR2016 bond ASW EUR2014 bond ASW

0

500

1000

1500

2000

2500

3000

OTE 5yr CDS

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

OTE

Telecommunication Operators

OTE (HELLENIC TLCM)


http://www.sgresearch.com/p/en/2/1358/0/2AA501CDB64D65FAC125790B0050730A.html?sid=ccd866f213ead12044d4f048926e0ec3


December 2011 136

OTE (HELLENIC TLCM) - Bonds


OTE plc B2 / Negative B / Negative BB / Watch-

Dev

900 4.625% 20 May 2016 - Sell


Dev

650 3.75% 11 Nov 2011 - Hold


Dev

600 6.0% 12 Feb 2015 - Hold


Dev

1,250 5.0% 05 Aug 2013 - Buy


Dev

500 7.25% 04 Aug 2014 - Buy


OTE(HELLENIC TLCM) - Financial data


EBITDA split - 2010

Debt maturity profile –July 2011

Debt structure

July 2011 EURm %

Bonds 3,583 67.5

Loans 1,727 32.5

Main shareholders

Deutsche Telekom 40.00%

OTE 10.00%


(in € millions) 2005 2006 2007 2008 2009 2010 2011e 2012e 2013eGroup revenues 5,471 5,891 6,319 6,407 5,984 5,483 5,068 4,792 4,631

Change % 4.8% 7.7% 7.3% 1.4% -6.6% -8.4% -7.6% -5.4% -3.4%

EBITDA 1,996 2,217 2,219 2,271 2,126 1,748 1,507 1,396 1,329

Margins % 36.5% 37.6% 35.1% 35.4% 35.5% 31.9% 29.7% 29.1% 28.7%Cash interest -194 -179 -216 -146 -276 -256 -248 -236 -236Cash taxes -230 -210 -385 -240 -299 -353 -188 -174 -162+/(-) Other cash items 267 206 256 332 43 92 57 25 26FFO 1,839 2,034 1,873 2,216 1,593 1,230 1,128 1,011 957Changes in WC -306 -248 -423 -392 -175 -111 -21 0 0CF from operating activities 1,533 1,786 1,451 1,824 1,418 1,119 1,107 1,011 957CapEx -680 -962 -1,101 -964 -891 -751 -838 -685 -667As % sales -12.4% -16.3% -17.4% -15.0% -14.9% -13.7% -16.5% -14.3% -14.4%

RCF (CFO - CapEx) 853 824 349 860 527 368 269 326 290

As % sales 15.6% 14.0% 5.5% 13.4% 8.8% 6.7% 5.3% 6.8% 6.3%

Disposals/(acquisitions) 35 -1,133 -1,766 -870 -160 -10 -11 0 1

FCF (before div + buybacks) 887 -309 -1,417 -10 367 358 258 326 291

Dividends -192 -117 -351 -368 -367 -89 -54 -54 -54

Buybacks 0 0 0 17 0 0 0 0 0Shareholder remuneration -192 -117 -351 -351 -367 -89 -54 -54 -54As % of CFO-Capex 22.5% 14.2% 100.4% 40.8% 69.7% 24.1% 20.0% 16.5% 18.5%As % of FCF's 21.6% -37.8% -24.8% -3474.3% 100.1% 24.7% 20.8% 16.5% 18.4%New debt YTD/(redemptions) 8 1,157 942 522 -637 -138 -457 -765 -1,253Net cashflows 642 530 -726 112 -559 136 -249 -493 -1,015

Cash and equivalents 1,512 2,042 1,316 1,428 869 1,004 755 263 -753

Gross debt reported 3,448 4,590 5,528 6,048 5,422 5,300 4,841 4,076 2,823

Net debt (reported) 1,936 2,548 4,212 4,620 4,553 4,296 4,086 3,814 3,576

EBITDA/interest coverage 10.3 12.4 10.3 15.5 7.7 6.8 6.1 5.9 5.6

FFO/net debt 95% 80% 44% 48% 35% 29% 28% 27% 27%Net debt-to-EBITDA x 1.0x 1.1x 1.9x 2.0x 2.1x 2.5x 2.7x 2.7x 2.7xOperating leases (5x rents) 390 433 455 477 477 501 501 501 501Employee benefit obligations 373 354 343 392 399 368 353 353 353State pension injection 0 0 0 0 0 0 0 0 1

Adjusted net debt 2,699 3,335 5,009 5,490 5,429 5,165 4,940 4,668 4,431

RCF/adj. net debt 31.6% 24.7% 7.0% 15.7% 9.7% 7.1% 5.4% 7.0% 6.5%

FFO/adj. net debt 68.2% 61.0% 37.4% 40.4% 29.3% 23.8% 22.8% 21.7% 21.6%

Adj. net debt/ prop. EBITDA x 1.7x 1.9x 2.7x 2.5x 2.7x 3.1x 3.4x 3.4x 3.4x

38.0%

31.7%

2.1%

8.2%

7.4%

12.6% OTE (Fixed line)

Cosmote Greece

AMC (Albania)

Cosmote Romania

Cosmote Bulgaria

Romtelecom (fixed)

29.5%

38.2%

3.3%

4.2%

9.9%

8.9%

6.0%OTE (Fixed line)

Cosmote Greece

AMC (Albania)

Cosmote Romania

Cosmote Bulgaria

Romtelecom (fixed)

Other

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2011 2012 2013 2014 2015 2016

bonds loans



December 2011 137

Bond Covenants

OTE - covenants

OTE - 3.75% 11, 7.725% 2013, 6% 2015 and 4.625% 2016 OTE 7.25% 2014

Issuer OTE PLC (financial subsidiary) OTE PLC (financial subsidiary)

Coupon Annually (17Feb) Annually (07Apr)

Ranking within issuer Pari passu vs other unsecured unsubordinated debt -


Pari passu vs other unsecured unsubordinated debt -


Ranking vs. other debt Unsubordinated and unsecured Unsubordinated and unsecured

Guarantees From Hellenic Telecommunications Organization SA

(HTO SA)- unsubordinated and unsecured

From Hellenic Telecommunications Organization SA

(HTO SA)- unsubordinated and unsecured

Negative pledge Yes - covers OTE PLC and HTO SA Yes - covers OTE PLC and HTO SA

Cross default Yes - covers OTE PLC and HTO SA Yes - covers OTE PLC and HTO SA


Call schedule None None

Tax redemption Yes Yes

Restriction on debt at subsidiary No No

Change of control Yes if parties other than Greece gain more than 50% of

voting rights causing a rating downgrade by either S&P or

Moody's

Yes if parties other than Greece - DT or an entity rated

at same level or higher than DT by S&P or Moody's -

gains control of OTE

Limitation on Debt No No

Asset disposals No No

Restricted payments No No

Transaction with affiliates No No

Change in covenant No No




December 2011 138


OTE(HELLENIC TLCM) - Greek mobile stabilising, EBITDA decline now

manageable, spreads excessive – Buy 2013s We are moving to a Buy on the EUR2013 bonds and maintain our BUY2014/Sell 2016.

SG Bond Recommendation: With OTE containing the speed of its EBITDA decline to

levels that are consistent with a stabilisation of credit metrics on current FCF, the focus shifts

to the significant macroeconomic risks associated with Greece. Does it really matter that OTE

is doing better than KPN and Telekom Austria? Yes. As we explore in our report on TMT

credit analysis in extreme scenarios (link), no company in our coverage should be considered

safe or even relatively safer considering the multitude of channels of macroeconomic

contagion and associated default-triggering scenarios, even those least expected to have

difficulties. Also, events of the past two weeks suggest our extreme scenarios may be

becoming central scenarios. The world is converging towards Greece. In this context, while a

disorderly default of Greece could still hurt OTE much more than the other operators, an

orderly default of Greece, one that preserves the banking system, law and order and keeps

the country in the euro, would probably not lead to its default in the first few years. The

EUR2013 bonds look attractive, with an ASW of 1945bp implying a probability of default of

43%, if one believes that the probability of disorderly default is less than 40%.

SG Credit Opinion: We maintain our Negative credit opinion, as we still expect EBITDA to

decline and leverage to rise slightly in an environment of growing downside risk for the Greek

telecoms market. However, we are beginning to see the light at the end of the tunnel for OTE.

OTE produced one of the best surprises of the season, with Q311 domestic EBITDA down

only 7% yoy (vs 20.2%yoy in Q211) and a 6.2% EBITDA decline at the group level (vs -14.4%

yoy in Q211). This means that OTE’s domestic unit outperformed the most recent results of

both KPN and Telekom Austria, again further undermining the simplistic ‚telecoms

north/south‛ (link) divide as explored in our recent note on Portugal Telecom (link) and KPN

(link). The remarkable stabilization of Greek mobile, to a yoy EBITDA decline of only -1% from

as much as -20% in Q111, makes it one of the best performing domestic mobile units in

Europe. However, the significant weakness of Greek fixed-line, with a -13.7% yoy EBITDA

contraction, shows that OTE is not out of the woods yet. While OTE is no longer losing

market share in domestic fixed, it warned that it is still difficult to see when it could stabilise.

Still, with the Bulgarian/Romanian units finally improving after a deep economic crisis, the

current speed of group EBITDA decline is consistent with a stabilization of credit metrics.

With the performance of the Cosmote mobile unit diverging significantly from domestic

(and Romanian) fixed line, we see the risk that OTE might choose to borrow at the level of

Cosmote or one of its subsidiaries, which would add a layer of subordination to the existing

bonds at the OTE level (see capital structure chart attached). With the 2012 maturities already

covered by existing cash reserves, OTE could also sell assets to help refinance the 2013

debt. We believe Telkom Srbija/real estate would be a difficult sell but satellites are an

attractive non-cyclical asset. We disregard the potential support factor from DT in our

analysis of OTE’s credit situation, and not only because of its highly speculative nature.

Considering the amount of money DT would lose in a disorderly default of Greece, it is

becoming increasingly clear that it has an incentive to wait for this possibility to play out (or

not) before increasing its involvement, on a potentially much lower price later. If DT support is

likely to come only AFTER the most likely OTE default trigger, it follows logically that potential

support from DT has little effective value for OTE bondholders.


http://www.sgresearch.com/p/en/2/1358/0/2AA501CDB64D65FAC125790B0050730A.html?sid=ccd866f213ead12044d4f048926e0ec3

http://www.sgresearch.com/p/en/2/1358/0/86A545B6F9B1EC49C12579370024F13A.html?sid=4348f301467a9e4bd6a9e3e17405cbe6

http://www.sgresearch.com/p/en/2/1358/0/9A3D3E19717E86E5C125793D006143E7.html?sid=0455c9d0d41e46d61fb6ecb07a540584

http://www.sgresearch.com/p/en/2/1358/0/A926B388E7FBE0A5C125793400556C2E.html?sid=a6b75d85b73389c2c73f2088b790004d


December 2011 139


PSA Peugeot Citroen manufactures automobiles and light commercial vehicles under the

Peugeot and Citroen brand names. Through subsidiaries, the company manufactures

automobile components and motorcycles, and provides logistics and financing services.

Strengths Second largest carmaker in Europe, with 13.9% market share as at end-June 2011, behind

Volkswagen Group.

Growing market share in promising emerging markets, among which 3.3% in China, 5.9% in

Latin America and 2.7% in Russia. This will support the group’s target to sell half of its

volumes outside Europe by 2015.

Successful group strategy to enter into high-margin premium segment with Citroen sub-

brand DS in addition to new, high-quality Peugeot models like the 508 and RCZ.

Solid liquidity profile despite weak cash flow generation due to active funding management

in the primary bond markets.

Weaknesses PSA is a global mass market carmaker, whose profitability is more impacted than that of

pure premium players by cyclical markets and pricing pressure in competitive auto markets.

Despite a number of joint ventures, PSA is lagging behind consolidated competitors like the

Renault-Nissan alliance or Fiat/Chrysler, which used their JVs as a vehicle to enter the US

market.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Baa3 P-3 Negative

S&P BB+ B Stable

Fitch BB+ B Positive



Share price



Bloomberg Ticker PEUGOT

Pierre Bergeron +331 4213 8915 [email protected]






Faurecia

Ba3Gefco

PSABaa3 / BB+

Banque PSA Finance

Baa1 / BBB€600m 6.0% Sept.2033

€750m 3.875% Jan 2013

€500m 4.0% Jul 2013€750m 3.625% Sept 2013€600m 3.5% Jan 2014

€500m 3.625% April 2014€750m 3.875% Jan 2015

€650m 4.0% June 2015€1.0bn 4.25% Feb. 2016€650m 4.0% June 2015

100%

Peugeot Family

57%

30.3% (capital)

46.26% (voting

rights)

GIE PSA Trésorerie

Baa3 / BB+

€350m 9.375% Dec 2016

100%

99%

Automobile Division

€850m 4% Oct 2013

€750m 8.375% July 2014

€500m 5.625% June 2015

€750m 6.875% March 2016

€650m 5.0% Oct.2016

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Auto & Auto parts

PSA – Peugeot Citroen



December 2011 140

PSA - Financial data

2010 Revenue split


PSA bond debt maturity chart


Bonds 69%

Bank borrowings 28%

Financial leases 1%

Customers deposits 2%

Main shareholders

Peugeot family 30.3%


PSA - INCOME STATEMENT (€m) 2007 2008 2009 2010 2011e 2012e 2013e

Total revenues (Ym) 58,676 54,356 48,417 56,061 59,500 60,400 62,800

Cost of revenues (47,518) (44,920) (40,857) (45,588) (48,870) (49,210) (51,050)

Gross income 11,158 9,436 7,560 10,473 10,630 11,190 11,750

Research & development (2,072) (2,045) (1,950) (2,075) (2,230) (2,250) (2,305)

Other operating income/ (expense) (632) (944) (727) (60) (90) (180) (100)


Depreciation and amortisation (3,573) (3,679) (3,206) (2,966) (2,970) (3,300) (3,520)

Operating income pre-impairment pre-associate income (EBIT) 1,120 (394) (1,416) 1,736 1,260 1,600 2,020

Interest expenses on f inancial debt (306) (343) (491) (455) (320) (290) (270)

Interest income on cash, cash equivalent and short term investments 283 247 85 86 120 120 130

Other interest income/ (expense) (17) (190) (114) (60) (90) (70) (70)

Total net interest income/ (expense) (40) (286) (520) (429) (290) (240) (210)

Pre-tax income 1,080 (680) (1,936) 1,307 970 1,360 1,810

Taxation (302) 103 589 (255) (240) (480) (630)

Tax rate % 28.0% -15.1% -30.4% 19.5% 24.7% 35.3% 34.8%

Net income before minorities 826 (520) (1,274) 1,256 990 1,230 1,650

Minority interests 59 157 113 (122) (190) (200) (250)

Reported net income/ (loss) 885 (363) (1,161) 1,134 800 1,030 1,400

EBITDA margin 8.0% 6.0% 3.7% 8.4% 7.1% 8.1% 8.8%

Operating margin 1.9% -0.7% -2.9% 3.1% 2.1% 2.6% 3.2%



Long-term investments 1,955 1,676 1,711 2,086 2,796 3,501 4,376

Other long-term assets 127 153 269 334 410 400 450


Inventory 6,913 7,757 5,360 5,947 7,081 7,157 7,410

Receivables 2,700 1,855 1,693 1,876 2,975 3,080 3,140

Pre-paid expenses & other current assets 29,115 26,417 25,920 26,814 28,775 29,960 31,850



Total assets 68,975 61,727 64,121 68,491 71,450 73,778 77,499


Deferred tax liabilities 2,053 1,771 996 879 1,200 1,100 1,000

Provisions 35 28 29 23 75 100 110

Other long-term liabilities 2,887 2,793 2,552 2,772 3,180 3,340 3,421



Payables 10,571 8,417 8,414 9,561 11,008 11,174 11,618





Minority interests 310 134 135 475 665 865 1,115





Net industrial debt (1,404) 2,906 1,993 1,236 1,990 1,910 1,830

Financial Leverage (industrial divisions)

FFO / Total debt (%) 66% 42% 12% 30% 33% 38% 44%


CASH FLOW 2007 2008 2009 2010 2011e 2012e 2013e



Other operating cash movements (749) (546) (495) (1,269) (960) (1,230) (1,320)


Change in w orking capital 1,091 (2,755) 2,228 438 (403) 39 1

Cash flow from operating activities 5,081 21 3,570 4,045 2,917 3,879 4,421

Net capital expenditure (2,575) (3,086) (2,583) (2,715) (3,285) (3,630) (3,880)

Free operating cash flow 2,506 (3,065) 987 1,330 (368) 250 541

Acquisitions of subsidiaries, securities & other investments (289) (113) (203) (143) (110) (70) (70)

Disposals of subsidiaries, securities & other investments 11 1 56

Cash flow from investing activities (2,853) (3,199) (2,785) (2,802) (3,395) (3,700) (3,950)

Dividends paid (320) (404) (10) (6) (275) (284) (312)

Other movements in cash f low statement (587) (606) 80 (582) 149 184 (79)

Cash flow from financing activities (907) (1,010) 70 (588) (126) (100) (391)

Free cash flow after financing and investing activities (Total CF) 1,321 (4,188) 855 655 (604) 80 80

Adjustment due to foreign exchange valuation (33) (122) 58 102 (150)

Net increase/ (decrease) in cash resulting from cash flows 1,288 (4,310) 913 757 (754) 80 80

Industrials

Banque PSA

Industrials

Banque PSA

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December 2011 141

Bond Covenants

PSA 4.0% Oct-13 PSA 8.375% July-14 PSA 5.625% June-15 PSA 6.875% March-16 PSA 5.0% October-16 GIE PSA 6.0% Sep-33

Bond

€850m 4.0% senior

notes due 28

October 2013

€750m 8.375% senior

notes due 15 July

2014

€500m 5.625% senior

notes due 29 June

2015

€500m 6.875% senior

notes due 30 March

2016

€650m 5.0% senior

notes due 28

October 2016

€600m 6.0% senior

notes due 19 Sep

2033

Issuer Peugeot SA Peugeot SA Peugeot SA Peugeot SA Peugeot SA GIE PSA Trésorerie

Coupon Annual (28 Oct) Annual (15 July) Annual (29 June) Annual (30 March) Annual (28 October) Annual (19/9)

Mandatory deferral No No No No No No


The Notes are direct, unconditional, unsubordinated and (subject to the provisions of Condition 3 (Negative Pledge) of the Terms and

Conditions of the Notes) unsecured obligations of the Issuer and rank pari passu and without any preference among themselves and

(subject to such exceptions as are from time to time mandatory under French law) equally and rate ably with any other present or

future, unsecured and unsubordinated obligations of the Issuer from time to time outstanding without preference or priority by reason

of date of issue, currency of payment or otherwise.

Ranking vs. other

debt

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Guarantees N/A N/A N/A N/A N/A Guarantee of

Peugeot SA

Negative pledge

So long as any of the Notes remains outstanding (as defined in the Agency Agreement), the Issuer will not create or permit to subsist

and will procure that none of the Principal Subsidiaries (as defined below) will create or permit to subsist any mortgage, charge,

pledge or other security interest upon any of its assets or revenues, present or future, to secure any Relevant Indebtedness (as

defined below) incurred or guaranteed by it (whether before or after the issue of the Notes) unless the Issuer’s obligations under the

Notes are equally and rateably secured therewith.

Coupon step-up No No No No No No

Anti-layering No No No No No No

Cross default Yes Yes Yes Yes Yes Yes

Redemption before

call Yes Yes Yes Yes Yes No

Call schedule None None None None None None

Tax redemption Yes Yes Yes Yes Yes Yes


The terms of the

Notes provide the

Noteholders with an

option to redeem the

Notes prior to their

Maturity Date in the

event of a Change of

Control

No Yes No No

Limitation on Debt No No No No No No

Asset disposals No No No No No No

Restricted payments No No No No No No

Transaction with

affiliates No No No No No No

Change in covenant No No No No No No




December 2011 142


Earnings season is coming: PSA under pressure

We believe that lower-than-expected quarterly sales and pricing pressure at PSA will

mean meeting group guidance for 2011 will prove challenging. As a result, we recommend

buying protection on PSA and selling protection on Renault at the current spread ratio of

1.0x. The target ratio on a 3-month horizon is 1.2x with a stop loss at 3.0x.

We believe that PSA’s guidance for 2011, i.e. recurring operating income higher than 2010

and free cash flow close to neutral, could be revised down on 26 October, the Q3 revenues

publication date. PSA posted sales down 13.3% in September in Europe (60% of PSA’s

sales) impacted by the disruption of some component supplies. In the coming weeks, we

estimate that a combination of announced production cuts and higher incentives to keep

inventories under control are likely to pressure 2011 group operating profit and consequently

operating cash flow.

We expect PSA’s leverage to remain stable yoy at end-2011, or 2.6x excluding

Banque PSA. S&P said it does not expect improvement of PSA’s ratios in 2011 and

thus, in our view, is likely to maintain ratings one notch below the Baa3 assigned by

Moody’s.

Renault reported a slight 1.5% rise in volumes for the same period that was partly

supported by the end of the diesel engine supply disruption that had affected sales in

recent months. Nissan’s recovery is likely to support Renault’s guidance of €500m in

free cash flow generation for 2011 through higher dividends in 2011 than in 2010.

Nissan is 43.5% owned by Renault, in turn 15% owned by Nissan. We estimate

Renault’s dividend from associate companies, mainly from Nissan, at €333.8m in 2011,

up from €88.7m received in 2010.

PSA is rated Baa3 / BB+ stable outlook and Renault Ba1 positive / BB+ stable

outlook.



December 2011 143


Renault SA designs, produces and markets passenger cars and light commercial vehicles.

The company produces the Twingo, Clio, Wind, Kangoo, Megane, Scenic, Laguna, Espace and

Latitude automobiles, and vans of up to seven tons capacity. Renault manufactures Dacia

automobiles in Romania and Samsung cars in South Korea. The company finances vehicles for

dealers and customers with captive finance unit, RCI Banque.

Strengths

Growing support from high-BBB rated Nissan that provides increasing synergies and

dividends to Renault.

Solid liquidity profile due to recent asset disposals e.g. most of its Volvo Trucks B-shares.

More could come from a possible sale of its remaining stake in Volvo or a reduction of its

current stake in Nissan.

Weaknesses

Renault is a global mass market carmaker, whose profitability is more impacted than pure

premium players by cyclical markets and pricing pressure in competitive auto markets.

Doubts in industry over likelihood of success of its unique product strategy of remaining out

of the high-margin premium segment and becoming a leading player in fully electric vehicles.

Group structure

Stable

Corporate Ratings

LT ST Outlook MDY Ba1 NP Positive

S&P BB+ B Stable

Fitch BB+ B Stable


More


Share price



Bloomberg Ticker PEUGOT






Renault

Samsung Motors

Dacia

Volvo ABBaa2 / BBB

NissanBaa1 / BBB+

RCI BanqueBaa2 / BBB

€800m 4.375% May 2013

€750m 6.0% Oct.2014€650m 5.625% June 2015€500m 4.625% May 2016

€500m 5.625% March 2017

€500m 3.375% Jan. 2013

€675m 4.0% July 2013€750m 3.25% Jan. 2014€750m 3.25% July 2014

€600m 4.375% Jan 2015€600m 5.625% Oct. 2015

€700m 4.0% Jan. 2016€750m 4.0% March 2016

100%

French State

44%

Renault SAS

21% A shares

Avtovaz

25%

15%

15%

Renault SABa1 / BB+

Other

80%

100%99%

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Auto & Auto parts

Renault

Pierre Bergeron

+331 4213 8915 [email protected]



December 2011 144

Renault - Financial data

2010 Revenue split


RNO bond debt maturity chart


Bonds 50.2%

Bank borrowings 16.9%

Others 32.9%

Main shareholders

French State 15.0%

Nissan 15.0%


RNO - INCOME STATEMENT (€m) 2007 2008 2009 2010 2011e 2012e 2013e

Total revenues (Ym) 40,682 37,791 33,712 38,971 42,100 43,400 45,500

Cost of revenues (32,529) (30,951) (27,931) (31,433) (34,140) (35,200) (36,450)

Gross income 8,153 6,840 5,781 7,538 7,960 8,200 9,050

Other operating income/ (expense) (160) (160) (160)


Depreciation and amortisation (2,865) (2,850) (3,146) (3,069) (2,700) (2,700) (2,600)

Operating income pre-impairment pre-associate income (EBIT) 1,354 212 (396) 1,099 1,150 1,250 1,750

Associate income/ (loss) before taxation 1,675 437 (1,561) 1,289 1,310 1,890 2,120

Interest expenses on f inancial debt (101) (530) (589) (646) (595) (560) (500)

Other interest income/ (expense) 177 657 (51) 1,978 30

Total net interest income/ (expense) 76 441 (404) 1,624 (175) (160) (100)

Pre-tax income 2,989 761 (2,920) 3,548 2,415 2,980 3,770

Taxation (255) (162) (148) (58) (100) (300) (440)

Tax rate % 8.5% 21.3% -5.1% 1.6% 4.1% 10.1% 11.7%

Associate income/ (loss) after taxation

Net income before minorities 2,734 599 (3,068) 3,490 2,315 2,680 3,330

Minority interests (65) (28) (57) (70) (70) (85) (100)

Reported net income/ (loss) 2,669 571 (3,125) 3,420 2,245 2,595 3,230

EBITDA margin 10.4% 8.1% 8.2% 10.7% 9.1% 9.1% 9.6%

Operating margin 3.3% 0.6% -1.2% 2.8% 2.7% 2.9% 3.8%



Long-term investments 13,583 14,750 13,110 15,927 17,175 18,671 18,718

Other long-term assets 504 420 424 435 400 400 400


Inventory 5,932 5,266 3,932 4,567 4,908 5,060 5,304

Receivables 4,458 4,600 2,928 3,192 3,342 3,561 3,733

Pre-paid expenses & other current assets 21,889 19,633 19,395 20,780 23,159 23,794 24,818



Total assets 68,198 63,831 63,978 70,107 73,843 76,787 81,550

Employee benefits obligations


Deferred tax liabilities 118 132 114 125 170 200 200

Financial liabilities (derivatives instrument)

Provisions 2,718 2,807 2,743 3,208 3,466 3,573 3,745

Other long-term liabilities



Payables 8,224 5,420 5,911 6,348 6,693 6,900 7,233





Minority interests 492 457 490 522 654 739 839





Industrial Leverage

FFO / Total debt (%) 73% 41% 8% 45% 31% 31% 27%


CASH FLOW 2007 2008 2009 2010 2011e 2012e 2013e



Net interest income received/ (expense paid) 76 441 (404) 1,624 (175) (160) (100)

Taxation paid (255) (162) (148) (58) (100) (300) (440)

Other operating cash movements (1,202) (653) (539) (525) (525)


Change in w orking capital 241 (1,807) 2,923 395 (117) (105) 11

Cash flow from operating activities 5,217 2,270 4,010 5,565 3,252 3,354 3,905

Net capital expenditure (3,558) (3,385) (2,054) (1,644) (2,100) (2,280) (2,480)

Free operating cash flow 1,659 (1,115) 1,956 3,921 1,152 1,074 1,425

Acquisitions of subsidiaries, securities & other investments (659) (50) (50) (50) (50) (50)

Disposals of subsidiaries, securities & other investments 4 50 50 3,000 50 50 50

Cash flow from investing activities (3,554) (3,994) (2,054) 1,306 (2,100) (2,280) (2,480)

Dividends paid (1,013) (1,143) (87) (444) (591)

Other movements in cash f low statement 467 (1,912) 606 643 (496) (410) (743)

Cash flow from financing activities (546) (3,055) 606 643 (583) (854) (1,335)

Free cash flow after financing and investing activities (Total CF) 1,117 (4,779) 2,562 7,514 569 220 90

Adjustment due to foreign exchange valuation

Net increase/ (decrease) in cash resulting from cash flows 1,117 (4,779) 2,562 7,514 569 220 90

Auto94%

Sales financing

6%

-200

-100

0

100

200

300

400

500

600

700

800

Auto Sales financing

Series1

0

500

1000

1500

2000

2500

3000

3500

4000

2011 2012 2013 2014 2015 2016 2017 2049



December 2011 145

Bond Covenants

Renault 4.375% May 2013 Renault 6.0% Oct. 2014 Renault 5.625% June 2015 Renault 4.625% May 2016 Renault 5.625% March 2017

Issuer Renault SA Renault SA Renault SA Renault SA Renault SA

Coupon Annual (24 May) Annual (13 October) Annual (30 June) Annual (25 May) Annual (22 March)

Ranking within issuer Unsecured. Ranking pari

passu


passu


passu


passu


passu

Ranking vs. other debt Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Unsubordinated and

unsecured

Guarantees N/A N/A N/A N/A N/A

Negative pledge Yes Yes Yes Yes Yes

Coupon step-up No No No No No

Anti-layering No No No No No

Cross default Yes Yes Yes Yes Yes

Redemption before call Only for tax reasons In

whole at 100%

Only for tax reasons In

whole at 100%


whole at 100%


whole at 100%


whole at 100%

Call schedule NA NA NA NA NA

Tax redemption Only for tax reasons In

whole at 100%


whole at 100%


whole at 100%


whole at 100%


whole at 100%

Change of control No No No No No

Limitation on debt No No No No No

Asset disposals No No No No No

Restricted payments No No No No No

Transaction with

affiliates No No No No No

Change in covenant No No No No No




December 2011 146

Latest research published on 24 June 2011

Nissan provides strong support for Renault

We believe that Nissan’s faster-than-expected recovery after the earthquake in Japan last

March will positively impact Renault, Nissan’s largest shareholder (with 43% share).

The Japanese carmaker detailed the FY11 outlook on 23 June ahead of Nissan’s new plan,

to be disclosed on 27 June. Nissan said that normal production levels will be restored as of

October 2011, which makes realistic the sales estimates for FY11 (year end 31 March 2012).

Nissan estimates retail volume will rise by 9.9% yoy in 2011 due to China (+12.3%) and North

America (+6.8%).

However, the currency rate effect, higher raw material costs and selling expenses will

impact the EBIT margin by 1.7pp to 4.8%, Nissan added. Despite the negative impact on free

cash flow, Nissan announced a higher dividend to JPY20 per share for FY11 up from JPY10

for FY10. This will support Renault’s free cash flow and deleveraging in 2012.

Last April, Moody’s affirmed Nissan’s mid-BBB ratings despite the earthquake/tsunami

impact and highlighted that a group operating margin above 5.0% in addition to improvement

in Renault’s financial performance could positively affect Nissan’s ratings.

The global weakness of financial markets moved Renault CDS spreads wider to attractive

levels. We reiterate our recommendation to sell protection on Renault and buy the iTraxx

Main index at the current spread ratio of 2.1x with a 3-month target revised at 1.8x: stop-loss

at 3.0x.



December 2011 147


Reynolds Group Holding Limited (RGHL) was incorporated in New Zealand in 2006 and

through a series of large acquisitions has become a global manufacturer and supplier of

consumer food, beverage packaging and storage products. The most recent deals include

Pactiv for $4.5bn in November 2010, Dopaco for $396m in May 2011 and Graham for $4.5bn in

September 2011. All acquisitions were funded through a mix of secured and unsecured debt.

The group operates through six segments: SIG, Evergreen, Closures, Reynolds Consumer

Products, Pactiv Foodservice and Graham Packaging.

SIG, Evergreen and Closures segments, as well as Reynolds consumer products and

Reynolds foodservice packaging businesses, have been under common ownership and control

through entities ultimately 100% owned by Graeme Hart, RGHL’s strategic owner, for over

three years. However, they were not owned by a single company that consolidated their

financial results or managed them on a combined basis until 2009. Graham Packaging is

reported as a separate segment within the RGHL Group.

Strengths

Strong consumer and foodservice packaging platforms

Increasing product, geographic and customer diversification

Extensive and diverse distribution network

Good degree of stability of earnings and cash flows

Weaknesses Very aggressive M&A and high leverage stripping out significant EBITDA add-backs

Input price volatility causes large working capital swings

Limited free cash flow generation

Communication policy could improve

Group structure


Negative

opinion

Corporate Ratings

LT Outlook MDY B2 Negative

S&P B+ Negative Fitch NR NR



na

Share price


Market cap.(m)

Bloomberg Ticker SIG_CH

Analysts

Roberto Pozzi


Barbora Matouskova






40

60

80

100

120

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

Sec 7.75% 16s 8% 16 Sub 9.5% 17

Paper & Packaging

Reynolds Group



December 2011 148

Reynolds Group - Eurobonds

Issuer Size Coupon Maturity Mdy S&P Price Yield Z-spread Next call Next call Reco

REYNOLDS GRP ISS/REYNOLD 450 8.75 15/10/16 Ba3 BB- 101.5 8.2 625 103.875 15/10/12 Sell

BEVERAGE PACKAGING HOLD 480 8 15/12/16 Caa1 B- 82.9 12.4 1036 104 21/12/11 Sell

BEVERAGE PACKAGING HOLD 420 9.5 15/06/17 Caa1 B- 79.8 14.7 1265 104.75 15/06/12 Sell


Reynolds Group - Financial data Revenue split

Revenue split

Bond maturities (ex loans)

Debt structure

Main shareholders Rank Group 100%


SIG14%

Evergreen 12%

Closures9%

Consumer Products

19%

Pactiv Foodservic

e26%

Graham Packaging

20%

North America

76%

Europe14%

Asia6%

South America

3%

Other1%

0

2000

4000

6000

8000

0

4,000

8,000

12,000

16,000

20,000

2007 2008 2009 2010 Sep-11

Subordinated notes Unsecured notes

Secured notes Secured loans



December 2011 149

Bond Covenants

€450m 7.750% senior secured 2016s

Ranking/Security/Guarantee Senior secured debt of the issuer to the extent of the collateral securing the notes

Pari passu to all senior debt

Effectively subordinated to other First Lien debt to the extent of the value of the property not also securing the notes

Security interest granted on a first priority basis in certain assets of RGHL, BP I and certain of BP I’s subsidiaries

BP II will also grant a security interest in respect of the proceeds loans in relation to the 2007 Notes

Call schedule 15 Oct 2012: 103.875, 15 Oct 2013: 102.583, 15 Oct 2014: 101.292, 15 Oct 2015: 100

CoC 101%

Debt test Senior secured leverage <3.5x



The inter creditor arrangements not governed by the laws of the State of New York will be governed by the laws of

England


€480m 8% senior 2016s

Ranking/Security/Guarantee Pari passu with all existing and future senior indebtedness of the issuer

Subordinated upstream guarantees of subs representing ~80% of sales, EBITDA and assets

Structurally subordinated to debt of non-guarantors of the senior notes

Call schedule 15 Jun 11: 104, 15 Jun 2012: 102, 15 Jun 2013: 100

CoC 101%

Debt test Fixed charge cover ratio >2.0x




€420m 9.5% subordinated 2017s

Ranking/Security/Guarantee Subordinated to existing and future senior indebtedness of the issuer (including the Senior 8% Notes)

Subordinated upstream guarantees of subs representing 80% of sales, EBITDA and assets

Structurally subordinated to debt of non-guarantors of the senior notes

CoC 101%

Debt test Fixed charge cover ratio >2.0x






December 2011 150


Reynolds Group – No free cash flow yet but already contemplating new acquisitions

We maintain our Sell recommendation on all Reynolds bonds following the company’s Q3

conference call, held on 23 November. We also recommend investors who wish to maintain

exposure to the name to switch from the unsecured to the secured notes despite the spread

differential between the two. In Q3, the company showed limited progress in terms of de-

leveraging and free cash flow generation. Having already achieved over half of the planned

synergies from its recent acquisitions, it is far from clear that the group will generate positive

and meaningful free cash flow next year whilst management is already contemplating

additional small- to medium-sized acquisitions. We therefore maintain our negative credit

opinion and our Sell recommendation.

At around 40bp, the spread differential between Reynolds’ and Ardagh’s senior secured

notes remains unattractive in our view given the difference in leverage between the two

issuers: 3.7x for Reynolds and 2.7x for Ardagh, both through the secured notes measured on

gross debt, or 207bp per turn of leverage for ARGI 7.75% 2017 and 168bp for REYNOL

7.75% 2016. Reynolds’ senior secured 8.75% notes have gained 6 points since our last

update in August, versus a gain of 5 points for the unsecured 8% notes and no change for

the 9.5% high yield notes. Accordingly, the spread differential between the subordinated and

the senior secured Eurobonds issued by Reynolds has increased substantially over the past

four months, hovering around 430-630bp in recent weeks.

Reynolds reported LTM EBITDA was $1.70bn in Q3 versus $1.58bn in the previous

quarter, an improvement of around 8%. The higher reported EBITDA has slightly reduced the

gap between what the company believes to be a fairer measure of its earnings - company

adjusted LTM EBITDA was $2.79bn in Q3, broadly unchanged from Q2 – and the reported

figure, but the gap remains fairly high. Operating free cash flow turned positive at $65m in Q3

but remains negative YTD at -$81m. A weaker euro helped lower net debt by $338m, or 2%,

to $17.05bn at the end of September. The combination of higher reported EBITDA and lower

euro-denominated debt translated into US dollars resulted in improved net leverage if

measured based on reported figures, namely from 11x in June to 10x in September. Leverage

is much lower if measured after the many company adjustments, or 6.1x, but is unchanged

from June. It is far from clear whether the group will throw off cash in 2012, having already

achieved over three-quarters of the expected synergies from the Pactiv acquisition and

having ‚only‛ $130m of synergies left, including the integration of Graham. Also, management

stated that it intends to increase capex to up to $700m next year, from $464m YTD. We

would not be surprised if the group were to embark on another significant acquisition sooner

than expected. Therefore we maintain our negative credit opinion.



December 2011 151


South Africa based Sappi is the world's largest producer of coated fine paper and chemical

cellulose pulp, with operations in Europe, North America and Southern Africa. Its European

operations represent over half of group revenue but only a third of its profits (EBITDA). North

America’s and Southern Africa contribute a third of group EBITDA each.

Sappi took the first steps towards consolidating the European paper industry at the end of

2008, by paying €750m for M-real’s graphic paper activities, which it partly funded through a

capital increase. Sappi now controls over 30% of the manufacturing capacity for coated fine

paper, while Lecta, Burgo, UPM and Stora Enso each have shares of around 10-15% each.

Group debt decreased since post-acquisition peak of $3.3bn in 2009 to $2.1bn in

September 2011, half of which is represented by secured notes. The notes together with the

refinanced bank debt and certain other indebtedness benefit from senior upstream guarantees

from almost all material operating subsidiaries of the group excluding the South African

operations. In addition, these obligations are partially secured through a first-lien security

interest in certain subsidiaries' property, plant and equipment, real estate and inventories, as

well as share pledges on the stock of certain of Sappi's operating subsidiaries, and a senior

downstream guarantee by the ultimate holding company Sappi Ltd.

Strengths Leading market shares in coated fine paper and chemical cellulose

Good geographic diversification

Strong reduction in debt and leverage after a period of external growth and cyclical

downturn

Large cash balance access to committed facility

Weaknesses Focused on cyclical and structurally declining paper industry

Overcapacity in coated fine paper

Volatile input costs, partly offset by vertical integration into pulp

Satisfactory but inconsistent free cash flow generation

Group structure


Stable

Corporate Ratings


S&P BB- B Stable

Fitch NR NR NR

Bonds price: SAPSJ 11.75% 2014


na

Share price


Market cap.(m)

Bloomberg Ticker SAPJ_SA

Analysts

Roberto Pozzi


Barbora Matouskova






90

95

100

105

110

115

120

0

1000

2000

3000

4000

5000

6000

7000

Ju

l-0

8

Oc

t-0

8

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oc

t-0

9

Ja

n-1

0

Ap

r-1

0

Ju

l-1

0

Oc

t-1

0

Ja

n-1

1

Ap

r-1

1

Ju

l-1

1

Oc

t-1

1

Paper & Packaging

Sappi



December 2011 152

Sappi – Eurobonds

Issuer Currency Size Coupon Maturity Mdy S&P Price Yield Z-spread Next call Next call Reco

PE PAPER ESCROW GMBH EUR 350 11.750 01/08/14 Ba2 BB 105.6 9.0 607 105.9 01/08/12 Sell

SAPPI PAPIER HOLDNG GMBH EUR 250 6.625 15/04/18 Ba2 BB 86.7 9.2 703 103.313 15/04/15 Buy


Sappi - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

Allan Gray LTD 22.5%

Old Mutual Fund 13.29%

Public Investment Corp. 11.47%


North America

22%

Europe53%

Southern Africa25%

North America

29%

Europe34%

Southern Africa37%

0

200

400

600

800

1,000

1,200

Liquid. 2011-122012-132013-142014-152015-16Beyond

Credit lines Cash South Africa debt

Overdraft Securitisation Term debt

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 Sep-11

Unsecured debt Secured debt Securitisation



December 2011 153

Bond Covenants

Sappi €350m and $300m 12% and 11.75% senior secured notes (private placements)

Issuer PE Paper Escrow GmbH

Guarantors Sappi Limited, plus 21 key subsidiaries in the U.S., Europe and Asia

Amount $800m: $300m and €350m tranches

Maturity 01-Aug-14

Coupon 12.0% and 11.75%

Ranking within issuer Senior secured notes

Ranking vs. other debt Pari passu with all existing and future senior indebtedness of SPH, including the indebtedness under the RCF, OeKB

Facility, Vendor Loan Notes and existing SPH bonds

Security Collateral shared with RCF, OeKB Facility, Vendor Loan Notes & OeKB China Funding Bilateral

2 U.S. mills: Somerset & Cloquet 4 European mills: Gratkorn (Austria), Kirkniemi (Finland), Maastricht (Netherlands)

and Nijmegen (Netherlands). Share pledges over substantially all Guarantors (subject to legal restrictions); Sappi

Manufacturing (South Africa) and certain additional subsidiaries’ U.S. inventory, with certain exceptions.

Intercompany loans, with certain exceptions

Change of control Put at 101%

Covenants: Customary for an offering of this type

Escrow Conditions Closing and funding of new RCF and OeKB Facilities having a minimum aggregate committed or funded amount of

at least €500m and a cash balance of at least $250m

Security and Guarantees in place




December 2011 154


Sappi - Buying opportunity despite weaker earnings

Recommendation: We changed our recommendation to Buy from Sell on the SAPSJ 18s

after they lost approximately 8 points in the last few days to currently trade at 91 indicatively

and a yield-to-worst of over 8% (callable at 103.3 from April 2015). Meanwhile, we maintain

our Sell recommendation on the dual currency notes maturing in 2014, which still trade five

points above the August 2012 call. Management openly stated that their redemption is the

next funding priority. That said, the improved entry points for the notes had little to do with

the company’s slightly disappointing earnings update last Thursday.

Q3 highlights

Weaker demand in Europe and maintenance shutdowns in South Africa affected Sappi’s

results for the three months to June, despite a good performance by its North American

operations. Recurring EBITDA came at $160m, down 7% yoy and 29% sequentially. On an

LTM basis, EBITDA was $863m at the end of June, resulting in net leverage of 2.9x, still low

but slightly worse than the 2.7x posted in March. After previous strong improvements,

Sappi’s leverage has stabilised at a 2.7-3.0x range since September last year. A seasonal

reduction in working capital and the initial benefits from ongoing cost savings totalling $100m

should slightly lower net debt and leverage in the next quarter. Management expects a

significant sequential earnings improvement in the next three months, but a strong decline

yoy: Q4 EBITDA should therefore be around $190m, bringing expected FY10/11 EBITDA to

approximately $800-850m, well short of the $1bn we previously expected.

Sappi spent $200m on capex on an LTM basis and is accelerating a $340m expansion of

its South African pulp capacity. Although management did not give precise indications about

future capex, we estimate around $300m this year and next. Interest expenses amounted to

$260m LTM and are likely to remain around this level for the foreseeable future given broadly

stable financial debt. Note that the company has yet to reinstate a dividend since it last paid a

reduced dividend of $37m in late 2008 (before the cut, the dividend was around $70m). On an

LTM basis, free operating cash flow was 4% of net debt. Based on our estimates, the debt

reduction capacity of the company could increase to 5-10% before reinstating the dividend.

Still weak pricing power in the paper businesses remains a concern, however, despite Sappi

controlling a quarter of the coated fine paper markets in both Europe and North America.

Sappi had $362m of cash on its balance sheet and $508m available under a revolving

credit facility recently extended to 2016. Term debt to be repaid in less than one year was

$266m and $274m in 1-2 years and both are likely be repaid using the available cash/RCF

and free cash flow. The €350m 11.75% and $300m 12% notes maturing in August 2014 are

callable at 105.875 and 106, respectively, well below the current market price of around

110/114.



December 2011 155


Smurfit Kappa Group (SKG) is the largest integrated manufacturer of containerboard and

corrugated boxes in Europe and LatAm. Operating in 30 countries - 21 in Europe and 9 in Latin

America -, it is the European leader in containerboard, corrugated and solid board packaging

and has a key position in several other packaging and paper market segments including graphic

board and sack paper. SKG has twice the manufacturing capacity of the next largest

competitors in Europe in both containerboard and corrugated boxes and has dominant market

positions also in Latin America.

The company was the target of a leveraged-buy-out in 2002, saw a debt-funded merger in

2005 and deleveraged via a partial IPO in 2007. Madison Dearborn Partners, Cinven and CVC

remain major shareholders, with 45% of the shares combined. Currently, group debt mainly

includes secured bank debt and notes. Having essentially achieved its debt reduction target

and leverage improved to 2.8x, management is now likely to shift focus to growth, though this

will also depend on how the economy as a whole evolves.

Strengths Relatively stable end markets: >50% of boxes are sold to food/beverage industry

Vertical integration into containerboard supports operating margins over the cycle

Twice the size of its closest competitor, economies of scale

Consistent free cash flow generation and relatively conservative financial policy

Weaknesses Still relatively fragmented industry structure

Significant sales to cyclical markets with 25-30% yoy EBITDA decline in 2009

Exposure to volatile recycled paper and virgin fibre prices

Latent M&A risk

Group structure


Stable

Corporate Ratings


S&P BB- NR Stable

Fitch BB NR Stable

Bonds price: MDPAC 7.75% 2019


Share price


Market cap.(m)

Bloomberg Ticker 137514ZID

Analysts

Roberto Pozzi


Barbora Matouskova






85

90

95

100

105

110

0

200

400

600

800

1,000

1,200

Paper & Packaging

Smurfit Kappa



December 2011 156

Smurfit Kappa - Eurobonds

Issuer Size Coupon Maturity Mdy S&P Fitch Price Yield Z-spread Next call Next call Reco

SMURFIT KAPPA ACQUISITIO 500 7.25 15/11/17 Ba2 BB BB+ 103.4 6.39 417 103.625 15/11/13 Hold

SMURFIT KAPPA ACQUISITIO 500 7.75 15/11/19 Ba2 BB BB+ 103.7 7.00 464 103.875 15/11/14 Hold

SMURFIT KAPPA FUNDING 218 7.75 01/04/15 B2 B BB- 101.0 7.16 413 102.583 21/12/11 Hold


Smurfit Kappa - Financial data Revenue split

EBITDA split


Debt Structure

Main shareholders CVC & Cinven 24.00%

Madison Dearborn

Partners & co 21.00%


Corrugated boxes73%

Containerboard8%

Specialties11%

Other8%

Western Euirope

81%

Latam17%

Eastern Europe

2%

0

250

500

750

1,000

1,250Credit lines Cash

Bonds Bank loans

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 LTM

PIK notes and other debt

High yield notes

Senior unsecured notes

Senior secured notes

Sr secured loans & other debt



December 2011 157

Bond Covenants

€500m 7.75% sr secured 2019 notes

Ranking/Security/Guarantee Senior secured debt of the issuer, pari passu with Senior Facility Agreement

Guaranteed by guarantors on a senior secured basis

Call schedule 15/11/14: 103.625, 15/11/15: 102.583%, 15//11/16: 101.292%, 15/11/17: 100%

CoC 101%

Debt test Fixed charge cover ratio >2x




€218m 7.75% sub 2015 notes

Ranking/Security/Guarantee Subordinated debt of the issuer

Call schedule 31/1/10: 103.875%, 31/111: 102.583%, 31/112: 101.212%, 31//13 100%

CoC 101%

Debt test Fixed charge cover ratio >2x






December 2011 158


Smurfit Kappa - Ready to pounce, but not quite yet

Smurfit Kappa’s leverage, which further improved to 2.8x in September, is at the low end

of management’s 2.5-3.5x target range. The company will therefore embark on acquisitions at

some stage, although it may be too soon given deteriorating market conditions and general

economic uncertainty. That said, since our last update, the 7.25% and 7.75% have

outperformed strongly, gaining 8 points, leaving little or no upside. At 103.25/104.25 and

yields of 6.0% and 6.87% respectively, we change our recommendation to Hold from Buy.

That said, these notes clearly remain amongst the most resilient paper in the high yield space.

We also move to Neutral in 5-year CDS at 390bp.

SKG reported good Q3 results, with underlying EBITDA up 9% to €264m, positive free

cash flow and a net debt reduction of €82m, bringing the net debt reduction over 9M to

€189m. Net leverage further improved to 2.7x from 3.0x in June on net debt of €2.92bn,

which approaches the debt reduction target of €2.85bn.

Softening European box demand: The slowing European economy is barely showing in the

company’s Q3 figures, though box demand was softening in October (-2%) from flat in

September. Higher inventory levels generated some downward pressure on paper prices in

Europe (€55/ton or 11%), causing some margin compression given that the company’s OCC

costs are falling by less (€30/ton from the Q2 peak) reflecting lower European and Chinese

demand. Box pricing remains strong, up 2% in Q3 and 6.5% YTD, with management

expecting stable pricing in Q4.

Structurally, the supply/demand balance in Europe’s cartonboard market remains relatively

tight, with moderate capacity additions from Saica (400k tons) and Stora Enso (370k tons). In

LatAm (23% of group EBITDA), both volumes and price continue to increase and

management is confident it is able to keep pushing prices up, despite increasing capex, in

order to sustain volume growth.

Cost savings of €75m were achieved so far this year with a target of €150m by 2012, with

the bulk of the cash costs already sustained. Management believes it has additional cost

savings potential, although it does not deny SKG is an acquisitive company and that the debt

reduction target has been achieved. Capex will likely be trimmed from around €350m this

year and interest costs will not materially decrease from current levels at approximately

€260m. Management gave no update in terms of refinancing on the dividend next year.



December 2011 159


Stora Enso is the world’s second-largest integrated paper producer with approximately 12m

of manufacturing capacity including paper board, mainly used in its packaging operations.

Paper production still represents over two-thirds of the group’s production capacity, with

newsprint at 20% and magazine 23%. In terms of revenues, paper represented over half of

group sales compared to consumer and industrial packaging with slightly less than one third.

The remaining 15% of revenues come from wood products, mostly exposed to the construction

industry. The group intends to increasingly focus on packaging, however, currently representing

just under one-third of its manufacturing capacity. The role of the company in the consolidation

of Europe’s paper industry remains unclear.

Stora Enso would likely consider opportunistic deals if value-enhancing and has a strong

balance sheet. Expanding packaging (consumer packaging in emerging markets in particular)

and consolidating paper are not mutually exclusive, according to management. Asked about a

maximum leverage target, management stated that it would be happy to increase leverage for

the right opportunity while maintaining adequate debt ratios.

Stora Enso’s capital structure has remained unchanged over the years and remains

straightforward with half of its gross debt represented by unsecured bank loans and finance

leases and half by unsecured notes. Cash on balance sheet is fairly but not unusually high at

€1.2bn, with liquidity further enhanced by a €700m revolving credit facility recently extended to

January 2015 (no financial covenants) and the ability to tap into an additional €700m Finnish

secured pension loans.

Strengths

One of the world's largest forest products companies

Good product and geographic diversification

Moderate financial leverage and traditionally conservative financial policy

Strong liquidity

Weaknesses

Structural overcapacity in paper markets

Cyclical earnings in most business areas

Improving but still weak profitability and cash generation

Inconsistent free cash flow generation

Group structure


Stable

Corporate Ratings


S&P BB Stable

Fitch BB Stable

Bonds price: STERV 5.125% 2014


Share price


Market

cap.(SEKm)

22,829

Bloomberg Ticker STER SS.

Analysts

Roberto Pozzi


Barbora Matouskova






60

70

80

90

100

110

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

0

200

400

600

800

Price MA 100

30

50

70

90

2010 2011

Paper & Packaging

Stora Enso



December 2011 160

Stora Enso - Eurobonds

Issuer Size Coupon Maturity Mdy S&P Fitch Price Yield Z-spread Next call Next call

STORA ENSO OYJ 750 5.125 23/06/14 Ba2 BB BB 102.4 3.8 209 NC NC

STORA ENSO OYJ 390 5.768 07/10/16 na BB na 106.4 4.1 na NC NC


Stora Enso - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

Finnish State 6.77%

Ilmarinen Mutual

Pension Insurance

Company

2.82%


Newsprint and book paper

12%

Magazine paper21%

Fine paper20%

Consumer board23%

Industrial packaging

9%

Wood products15%

Newsprint and book paper

16%

Magazine paper21%

Fine paper20%

Consumer board30%

Industrial packaging

10%

Wood products6%

0

500

1,000

1,500

2,000

2,500

3,000

Liq. 2011 2012 2013 2014 2015 2016 >2016

Secured pension laons RCF due 2014

Cash on b/s Commercial paper

Loans and other debt Bonds



December 2011 161

Bond Covenants

Stora Enso - 5.125% 2014

Bond €518m due 23/06/2014

Issuer Stora Enso Oyj

Coupon 5.125% annually: 23rd June

Ranking within issuer Senior Unsubordinated

Ranking vs. other debt Pari passu vs all other unsecured obligations

Guarantees No

Negative pledge Yes

Anti-layering No

Cross default Yes - default under any other indebtedness having an aggregate principal amount > €20m


Call schedule No

Tax redemption In whole at 100%

Clawback No



Asset disposals No






December 2011 162


Stora Enso - Weak outlook

Recommendation: We recommend Buying Stora Enso 5-year protection at 425bp based

on a bleaker-than-expected outlook for demand in Q4. At current levels, we believe that Stora

is trading too tight to solid investment grade cyclical names such as Xstrata, trading at 386bp

in 5-year CDS, and therefore recommend investors implement a long Xstrata (Baa2

Pos/BBB+ Stable, net leverage 1.7x LTM) short Stora (Ba2 Pos / BB Pos, net leverage 2.0x

LTM) pair trade at a ratio of approximately 1.1 with a target of 1.4 over three months. We

expect Stora’s currently positive credit rating outlooks to be changed to Stable or worse over

the coming weeks. At current levels, the spread ratio between Stora and Xstrata is the lowest

it has been since the beginning of the year, compared to a peak of 2.1 in August.

Stora Enso reported resilient Q3 numbers with underlying EBITDA down only 7% yoy and

5% qoq to €339m mainly reflecting weaker earnings in the fine paper and wood products

divisions. Despite the weaker results, free cash remained positive at the operating level and

even improved in percentage of net debt, reaching 4% on an LTM basis, up from 1% last

quarter but lower than the 10% achieved in December. However, net debt (excluding

derivatives) rose by €90m to €2.65bn due to a small acquisition that a guarantee provided to

New Page (Stora’s former US operations). Net leverage was broadly unchanged at 2.0x

versus 1.9x in June.

Although Stora’s financials remain solid, the operating outlook has deteriorated, with

demand pressure on almost all fronts, and especially in newsprint and coated magazine,

whilst coated fine paper was the only segment where demand is expected to stabilise after

two weak quarters. Customer destocking seems to be part of the problem, whilst underlying

demand is holding up better for the time being, according to management. In particular,

inventory levels rose in consumer board and printing paper during the summer. Management

announced higher production curtailments in Q4 to keep inventories and liquidity under

control. Pricing conditions are expected to remain broadly stable across products with some

weakness in industrial packaging and wood products as well as in coated fine paper. Cost

inflation is expected to remain around 4% this year.

Summing up, management expects the Q4 operating results to be ‚somewhat‛ lower than

in Q410, when it posted an EBITDA of €289m. On this basis, we expect leverage to remain

broadly stable by year-end, assuming working capital remains under control. Management is

seeking to increase prices, specifically in newsprint, although it refrained from indicating the

magnitude.



December 2011 163


Sunrise is the second-largest mobile operator in Switzerland, with approximately 23%

network market share in mobile and 13% in fixed broadband. The Swiss fixed and mobile

telecoms market currently has three integrated operators – Swisscom, Orange and Sunrise.

Former monopolist Swisscom enjoys almost unequalled dominance in western Europe, which

provides a degree of competitive stability.

The adoption of the iPhone in mid-2010 has supported the company’s revenue growth in the

mobile segment, but with a less impressive performance on mobile EBITDA given the zero-

margin nature of phone sales. In contrast, the fixed line segment is experiencing double-digit

revenue decline, caused by the contraction of hubbing and the wind-down of carrier pre

selection (CPS). Sunrise has a generally better mobile network and market position than

Orange, which is the market’s weakest. Our equity research estimates a CHF200m payout for

Sunrise on the upcoming Q1 12 spectrum auctions, about half of Swisscom’s total payout. In

preparation for the auction, Sunrise has recently concluded the CHF300m upsize of its TLB loan

to CHF300m. On this price tag, we estimate unadjusted net debt/EBITDA would rise by 0.4x to

2.6x and 3.9x at the secured and unsecured levels respectively.

Sunrise tightened in late 2010/early 2011 on the view that Swiss companies would be safe in

a sovereign crisis. The company took advantage of that to upsize its senior unsecured bonds

and raise a PIK at the TopCo level to redeem some of CVC’s equity. This, combined with

investors’ growing scepticism that Sunrise would be immune, led to a poor performance in H1

11 and further pain came in mid-2011 when the secured loans were also upsized to raise

reserves for the spectrum auction. CVC’s Preferred Equity Certificates (PEC/Convertible PEC)

do not pay dividends but are redeemable before maturity.

Group structure

Positive

Corporate Ratings

LT ST Outlook MDY B3 NR Stable

S&P B NR Negative

Fitch NR NR NR



na

Share price

na


B

l

o

o

m

b

e

r

g

T

i

c

k

e

r

S

U

N

_

C

R

E

Analysts



Source: Company Data / SG Credit Research





CVCControlling shareholder

EUR561m 8.5% Dec 18 senior unsecured

Mobile Challenger Group Sarl "TopCo"

Non-guarantor subsidiaries

(100%)PEC/CPEC

PIK loan (EUR75m originally)

Sunrise Communications Holdings SA

The Senior (unsecured) Notes Issuer

(100%)PEC

(100%)PEC

Sunrise Communications International SA

The Senior Secured Notes Issuer

EUR371m 7% Dec 17 senior secured

CHF300m 7% Dec 17 senior securedLoss sharing with Senior credit facilities to ensure equalization of recovery proceeds

Skylight Sarl

PEC (100%)

Sunrise Communications AG Sunrise

(75%)

Intercompany loans (unknown amount)

(25%)

IShareholder and ntercompany loans (unknown amount)

CHF500m Secured Term Loan ACHF520m Secured Term Loan BCHF150m Secured RCFCHF100m Secured Acquisition Facility

Loss sharing with Senior Secured Notes to ensure equalization of recovery proceeds

TelCommunication Services AG

(100%) (100%)

Guarantor of Senior Secured Notes

Guarantor of Senior (unsecured) Notes

Guarantor of Senior Secured Notes and of Senior (unsecured) notes

-

100

200

300

400

500

600

700

800

Sunrise Senior Unsecured EUR2018 ASW

Sunrise Senior Secured EUR2017 ASW

Diversified Telecommunication Services

Sunrise



December 2011 164

Sunrise - Bonds

Issuer Rating MDY Rating S&P Rating Fitch Amount (m) Coupon Maturity Call date Reco

Sunrise Communications Holding B3 / Stable B / Negative NR / NR EUR561 8.5 31 Dec 2018 31 Dec 2014 Sell

Sunrise Communications International Ba3 / Stable BB / Negative NR / NR EUR371 7 31 Dec 2017 31 Dec 2013 Hold

Sunrise Communications International Ba3 / Stable BB / Negative NR / NR CHF300 7 31 Dec 2017 31 Dec 2013 No Reco


Sunrise - Financial data

Revenue split – 2010pf

EBIT split

na

Debt maturity Jun-11 (CHFm)

Debt structure

Jun 11e CHFm %

Senior Secured

Note

800 31.8

Term Loan A 500 19.9

Term Loan B 320 12.7

Senior Unsecured

Note

756 30.0

Main shareholders

CVC 100.00%


Q3 10 FY10pf FY11e FY12e FY13e FY14e FY15e FY16eEBITDA adjustments 31-Sep-10 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16

Reported annualized EBITDA 558 542 578 571 587 602 618 635Adjustment for operating leases 23 23 23 23 23 23 23 23Adjusted EBITDA 581 565 600 593 609 625 641 657

Net debt structure and leverage - Sunrise (after increase of Senior Notes and PIK loan)

Q3 10 FY10pf FY11e FY12e FY13e FY14e FY15e FY16e31-Sep-10 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16

Cash and Equivalents 90 127 560 612 619 617 617 688

Senior Secured debtTerm Loan A FRN CHF 500 500 500 463 400 308 196 71 Term Loan B FRN CHF 2017 220 220 322 322 322 322 322 322 Term Loan B FRN EUR 2017 98 100 321 321 321 321 321 321 Finance leases 53 51 58 58 58 58 58 58 Acquisition facilities CHF100m (amount drawn) - - - - - - - - RCF CHF135m+Ancillary facility of CHF15m (amount drawn) - - - - - - - - Senior Secured Notes CHF 2017 300 300 300 300 300 300 300 300 Senior Secured Notes EUR 2017 493 500 500 500 500 500 500 500

Senior Subordinated debtSenior (unsecured) Notes EUR 2018 745 756 756 756 756 756 756 756

Mobile Challenger levelPik Loan - - 75 82 90 98 108 118

Preferred Equity/Convertible Preferred EquityPEC 87 87 87 87 87 87 87 87 CPEC 719 719 719 719 719 719 719 719

AdjustmentsOperating leases 181 178 178 178 178 178 178 178 Pension liabilities - - - - - - - - Other - - - - - - - -

Purchase obligations (PO) 288 256 256 256 256 256 256 256

Unadjusted net debt - Senior Secured 1,573 1,544 1,441 1,351 1,282 1,192 1,079 883 Unadjusted net debt - Senior Secured + Senior Subordinated 2,319 2,300 2,197 2,107 2,038 1,948 1,835 1,639 Unadjusted net debt - Senior Secured + Senior Subordinated +PIK 2,319 2,300 2,272 2,189 2,128 2,046 1,943 1,757 Unadjusted net debt - S Secured + S Sub + PIK + PEC/CPEC 3,125 3,106 3,077 2,995 2,934 2,852 2,748 2,563

Adjusted net debt excl PO - Senior Secured 1,755 1,723 1,619 1,529 1,460 1,370 1,257 1,062 Adjusted net debt excl PO - Senior Secured + Senior Subordinated 2,500 2,479 2,375 2,285 2,216 2,126 2,013 1,817 Adjusted net debt - Senior Secured + Senior Subordinated +PIK loan 2,500 2,479 2,450 2,367 2,306 2,224 2,121 1,936 Adjusted net debt excl PO - S Secured + S Sub + PIK + PEC/CPEC 3,306 3,284 3,255 3,173 3,112 3,030 2,927 2,741

Adjusted debt incl PO - Senior Secured 2,043 1,979 1,875 1,785 1,716 1,626 1,513 1,317 Adjusted debt incl PO - Senior Secured + Senior Subordinated 2,788 2,735 2,631 2,541 2,472 2,382 2,269 2,073 Adjusted debt incl PO - Senior Secured + Senior Subordinated + PIK loan2,788 2,735 2,706 2,623 2,562 2,480 2,377 2,191 Adjusted debt incl PO - S Secured + S Sub + PIK + PEC/CPEC 3,594 3,540 3,511 3,429 3,368 3,286 3,183 2,997

Credit metrics Q3 10 FY10pf FY11e FY12e FY13e FY14e FY15e FY16e

Unadjusted net debt/EBITDA- Senior Secured 2.8x 2.8x 2.5x 2.4x 2.2x 2.0x 1.7x 1.4xUnadjusted net debt/EBITDA - Senior Secured + Senior Subordinated 4.2x 4.2x 3.8x 3.7x 3.5x 3.2x 3.0x 2.6xUnadjusted net debt/EBITDA - Senior Secured + Senior Subordinated + PIK4.2x 4.2x 3.9x 3.8x 3.6x 3.4x 3.1x 2.8xUnadjusted net debt/EBITDA - S Secured + S Sub + PIK + PEC/CPEC 5.6x 5.7x 5.3x 5.2x 5.0x 4.7x 4.4x 4.0x

Adjusted net debt excl PO/EBITDA - Senior Secured 3.1x 3.2x 2.8x 2.7x 2.5x 2.3x 2.0x 1.7xAdjusted net debt excl PO/EBITDA - Senior Secured + Senior Subordinated4.5x 4.6x 4.1x 4.0x 3.8x 3.5x 3.3x 2.9xAdjusted net debt excl PO/EBITDA - Senior Secured + Senior Subordinated + PIK4.5x 4.6x 4.2x 4.1x 3.9x 3.7x 3.4x 3.0xAdjusted net debt excl PO/EBITDA - S Secured + S Sub + PIK + PEC/CPEC 5.9x 6.1x 5.6x 5.6x 5.3x 5.0x 4.7x 4.3x

Adjusted debt incl PO/EBITDA - Senior Secured 3.7x 3.7x 3.2x 3.1x 2.9x 2.7x 2.4x 2.1xAdjusted debt incl PO/EBITDA - Senior Secured + Senior Subordinated 5.0x 5.0x 4.6x 4.5x 4.2x 4.0x 3.7x 3.3xAdjusted debt incl PO/EBITDA - Senior Secured + Senior Subordinated + PIK5.0x 5.0x 4.7x 4.6x 4.4x 4.1x 3.8x 3.5xAdjusted debt incl PO/EBITDA - S Secured + S Sub + PIK + PEC/CPEC 6.4x 6.5x 6.1x 6.0x 5.7x 5.5x 5.1x 4.7x

32.6%

62.5%

9.0%

Landline Mobility Internet

756

320

800

38 63 92 113 12571

142

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

2011 2012 2013 2014 2015 2016 2017 2018

PIK loan Term Loan A Senior Secured Notes Term Loan B Senior Notes



December 2011 165

Bond Covenants

Sunrise - covenants

SUNCOM 7% due 2017 SUNCOM 8.5% due 2018

Bond €371m 7% senior secured notes due 31/12/2017 €561m 8.5% senior unsecured notes due 31/12/2018

Issuer Sunrise Communications International SA Sunrise Communications Holdings SA

Coupon Semi-annually Semi-annually

Ranking within issuer Structurally and effectively senior to unsecured notes Structurally and effectively subordinated to secured

notes

Ranking vs. other debt

Loss sharing agreement with secured loans at Sunrise

Communications AG level. Subordinated to debt of non-

guarantor subsidiaries

Structurally subordinated to all debt of the issuer's

subsidiaries and to the loans at Sunrise

Communications AG

Guarantees

Guaranteed by Skylight Sarl on a senior basis; guarantee

by Sunrise Communications AG, TelCommunications

Services AG and Sunrise Communications Holdings SA

on a senior basis

Guaranteed by Skylight Sarl on a subordinated basis;

Guaranteed by Sunrise Communications International

SA on a subordinated basis

Negative pledge Yes for restricted subsidiaries Yes for restricted subsidiaries

Cross default Yes Yes


Call schedule 2014: 105.25%; 2015:103.50%; 2016: 101.75%; 2017 and

after: 100.00%

2015: 104.25%; 2016: 102.125%; 2017 and after:

100.00%

Tax redemption Yes Yes

Change of control Yes at 101%, ownership of 50% of more, not applicable

to issuer becoming subsidiary of successor parent

Yes at 101%, ownership of 50% of more, not applicable

to issuer becoming subsidiary of successor parent

Limitation on debt Yes, debt incurrence at 4.25x consolidated (unsecured

bond level) leverage + carve outs

Yes, debt incurrence at 4.25x consolidated (unsecured

bond level) leverage + carve outs

Asset disposals Restrictions Restrictions if senior net debt/consolidated EBITDA

>3.5x and other conditions

Restricted payments Yes Yes

Transaction with affiliates Yes Yes

Change in covenant Yes for some covenants, if notes achieve investment

grade status

Yes for some covenants, if notes achieve investment

grade status




December 2011 166


Sunrise - Weak trends but guidance reiterated – ratings might be safe if spectrum

comes at CHF200m We maintain our Sell on the EUR2018 Senior Unsecured and our Hold on the EUR2017

Senior Secured bonds

SG Bond Recommendation: The EUR2017 Senior Secured bonds have widened

significantly in the past three weeks, together with the rest of the European High Yield market,

and trade close to fair value at an ASW of 525bp/OAS of 600bp. The EUR2018 Senior

Unsecured bonds are still expensive at an ASW of 651bp/OAS of 731bp, vs comparables

such as the Nara (Ono) EUR2018 bond (ASW 840bp, OAS995bp), and indeed have slightly

outperformed the X-Over.

Fortunately, at this point we believe Sunrise’s spreads are no longer excessively distorted

and depressed by its status as a Swiss-based company, a welcome change from the

situation of early 2011. Sunrise today pointed out in its conference call the growing concerns

of Swiss companies about the significant appreciation of the CHF vs other currencies and its

potential future impact on growth and exports, but so far the company has not seen any

major impact on business revenues. We have previously noted the major correction of the

spreads of TMT companies that are low beta or based in countries once considered ‚safe‛,

which took place a couple of weeks ago (see France Telecom). As a result, the HY companies

we cover no longer reflect what we see as a false hope, although this is still the case for

certain companies and sectors in IG TMT.

SG Credit Opinion: We maintain our Positive credit opinion. The company has reiterated

its EBITDA growth guidance for 2011 despite the weak Q2 11 yoy trends. Q2 11 EBITDA

declined 2% yoy on flat yoy revenue trends. The company noted in the call that marketing

efforts were in wind-down mode in the same quarter of last year in anticipation of the

Sunrise-Orange merger that was later blocked by the Swiss anti-trust regulator – so

marketing costs were artificially depressed and EBITDA unusually high as a result. The

company had previously mentioned in conference calls the potential impact of these distorted

2010 comparables on yoy trends for quarterly numbers, so this was not a surprise and the

2011 guidance of single digit EBIDTA growth still looks achievable to us. However, we

estimate that this might require a reduction of the rate of growth of marketing costs in H2 11,

especially in yoy terms.

Revenue growth was concentrated in the mobile segment – mobile revenues rose 10%

yoy to CHF327m, with much of it due to zero-margin mobile phone sales. However, landline

revenues saw a 19% yoy contraction, and even non-hubbing landline revenues saw a 12%

decline. The company blames the landline weakness on its ongoing migration of broadband

customers to ULL and the wind-down of the CPS customer base. At this point, we believe

that most of the EBITDA weakness was concentrated in the mobile segment. This should not

be a problem as long as Sunrise delivers on its plans to contain marketing expenses later in

the year. While there is a risk of competitor retaliation, with the recent announcement from

France Telecom that it plans to sell its Swiss unit, we believe it might not materialise before a

new owner is found.

Our equity research estimates a CHF200m payout for Sunrise on the upcoming Q1 12

spectrum auctions, about half of Swisscom’s total payout. In preparation, Sunrise has

recently concluded the CHF300m upsize of its TLB loan to CHF300m (see capital structure

attached). With a spectrum price of CHF200m, we estimate unadjusted net debt/EBITDA

would rise by 0.4x to 2.6x and 3.9x at the secured and unsecured levels respectively. As a

result, we are likely to see an increase in leverage in 2012, but this might not trigger a

downgrade if EBITDA remains relatively resilient.



December 2011 167


Telenet, a Belgian cable system operator 50.2% owned by Liberty Global Inc. (LGI), is the

largest cable company outside the US, operating in 14 countries with 17.7m customers.

Telenet is Belgium’s second-largest cable operator with 2.2m unique customers in Flanders

and Brussels. Telenet offers analogue and digital TV, broadband Internet as well as fixed and

mobile telephony services. Telenet’s hybrid-fibre coaxial (‚HFC‛) cable network spans the

Flanders region, covering approximately 61% of Belgium by homes passed and includes the

metropolitan centres of Antwerp and Ghent and approximately one-third of Brussels.

Strengths Good earnings and cash flow growth capacity

Network technological advantage, particularly with DOCSIS 3.0

Strong operating cash flow generating ability and a judicious leverage target of 3.5x-4.5x

Weaknesses Need to balance share buyback and dividend levels in order to maintain moderate leverage

Potential for moderate increase in capex due to development of the mobile segment

Group structure


Stable

Corporate Ratings

LT ST Outlook

MDY Ba3 NR Stable

S&P NR NR NR

Fitch BB NR Stable

Bond z-spreads

CDS 5Y spread

Share price (€)


Asset Research


Equity Ticker TNET BB

Analyst

Alejandro Núñez

[email protected]





Telenet Group Holding

NV

Telenet NV (Sr. Credit

Facility Co-borrower &

Co-guarantor) (4)

Telenet International

Finance S.A. (Sr. Credit

Facility Co-Borrower

and Co-Guarantor(4)

Other Operating

Subsidiaries (5)

Senior Credit

Facility

€1,300m Sr. Sec.

Notes (2)

Facility O (3)

Telenet Finance

Luxembourg III

S.a.r.l (Issuer) (1)

Finco Loan

(1) Telenet Finance Luxembourg is a special purpose financing company formed for the primary purpose of facilitating the offering of

the Notes and is owned 100% by a foundation established under the laws of The Netherlands.

(2) The Notes will be senior obligations of the Issuer. The Notes will be secured by, among other things, a first ranking sec urity interest over the Issuer’s rights to and benefit in the Finco Loan (including all rights of the Issuer as a lender under the Senior Credit

Facility).

(3) The proceeds from the issuance of the Notes will be used by the Issuer to fund a Finco Loan, denominated in euro, under a n

additional facility borrowed by Telenet International Finance under the SeniorCredit Facility.

(4) Both Telenet NV and Telenet International Finance are, and will continue to be following the offering of the Notes, the f unding of

the Finco Loan and the application of the proceeds of the Finco Loan, borrowers and guarantors under the Senior Credit Facili ty See

‘‘Description of the Senior Credit Facility and the Related Agreements—The Senior Credit Facility’’.

(5) Substantially wholly owned subsidiaries of Telenet NV that are not part of the Guarantor group under the Senior Credit Fa cility:

Telenet Vlaanderen NV, Hostbasket NV, Telenet Mobile NV, T-VGAS NV, C-CURE NV, Telenet Luxembourg Finance Center S.A. and Telenet Solutions Luxembourg S.A.

200

400

600

800

1000

Z-s

pre

ad

(b

ps

)

TNETBB 6.375 20 EUR

TNETBB 6.625 21 EUR

iBoxx HY Global

iBoxx € HY TMT

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

(600)

(400)

(200)

0

200

400

600

800

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

TLNET CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyTLNET - XOTLNET / XO (RHS)

0

5

10

15

20

25

30

35

40

(€)


Telenet



December 2011 168

Telenet – bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m) Out (m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask) (%)

YTC

(Ask) (%) Next call Rec

TNETBB 5.3

16 €

TELENET FINANCE

LUXEMBOU Sr. Sec. NR

Ba3

STABLE

BB+

STABLE 3.6 100 100 97.50 379 5.8 7.8 15-Nov-13

TNETBB 6.375

20 € TELENET FINANCE LUX Sr. Sec. NR

Ba3

STABLE

BB+

STABLE 3.6 500 500 96.86 435 6.8 7.9 15-Nov-15

TNETBB 6.625

21 €

TELENET FINANCE III

LUX Sr. Sec. NR

Ba3

STABLE

BB+

STABLE 3.6 300 300 97.19 458 7.0 8.1 15-Feb-16 Hold

TNETBB 0

6/15/21 €

TELENET FINANCE IV

LUXEM Sr. Sec. NR

Ba3

STABLE

BB+

STABLE 3.6 400 400 97.94 n.a. 5.7 7.0 15-Jun-14


Telenet - Financial data


Geographic split (Dec-10)



Equity shareholders

Binan (Liberty Global) 50.2%

BNP Paribas Inv Partner 4.9%

Fortis 3.8%

Norges Bank 3.0%

Massachusetts Fin Svcs 1.9%


€m 2008A 2009A 2010A 2011E 2012E

Total revenues 1,019 1,197 1,299 1,377 1,446


Revenue growth 0.0% 17.5% 8.5% 6.0% 5.0%

EBITDA growth 0.0% 20.0% 10.0% 7.0% 6.0%

EBITDA margin 49.7% 50.8% 51.5% 52.0% 52.5%



Cash taxes 0 -0 0 0 -5

Other -7 -7 -11 0 0

Change in provisions 0 0 0 0 0

Working capital -0 -46 -17 -5 -10

Restructuring cash costs, other 0 0 0 0 0



Acquisitions / Divestitures -203 -6 -2 0 0



Dividends / Shareholder returns 0 -56 -250 -756 -299

Net Debt redemption 77 5 526 0 0

Other Financing -7 -30 -38 -10 0

Cash Flow from Financing 71 -81 238 -766 -299

Change in Cash -11 80 494 -513 -2

Cash 66 146 640 127 125


Senior Bank debt 1,900 1,613 2,530 1,230 1,230

Senior Secured notes 0 0 0 1,300 1,300



Total debt 1,900 1,613 2,530 2,530 2,530

Net debt 1,834 1,468 1,890 2,403 2,405


Revenues 1,019 1,197 1,299 1,377 1,446

Adj. EBITDA 506 608 669 716 758

EBITDA margin 0 1 1 1 1


FFO - Capex - W/C Chg. (OpFCF) 121 167 258 253 297

Free Cash Flow (FCF) 121 111 8 -503 -2


FFO / Net debt 19.2% 33.1% 27.6% 23.2% 24.5%


FCF / Net Debt 6.6% 7.6% 0.4% -20.9% -0.1%

Capex / Sales 22.7% 22.9% 18.9% 21.8% 19.5%




Cash 66 146 640 127 125


Liquidity 241 321 815 285 283

Residenti

al

Internet/T

el, €683m,

53%

Cable

televis ion,

€532m,

41%

Business,

€85m, 6%

Belgium,

€1,299m,

100%

441

0 0 0 0

100

431

0

799

500

700

0

100

200

300

400

500

600

700

800

900(€

m)

1,230 1.7

1,300 1.8

0 0.00 0.02,530 3.6

0

500

1,000

1,500

2,000

2,500

3,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%T

ota

l de

bt

(€m

)

% o

f T

ota

l D

eb

t





December 2011 169

Bond covenants

Telenet – covenants summary

Bond TNETBB 5.3 16

TNETBB 6.375

20

TNETBB 6.625

21

TNETBB 0

6/15/21

Issuer

TELENET

FINANCE

LUXEMBOU

TELENET

FINANCE LUX

TELENET

FINANCE III

LUX

TELENET

FINANCE IV

LUXEM

Currency €

€

€

€

Coupon 5.3%, 15-May

& 15-Nov

6.375%, 15-

May & 15-Nov

6.625%, 15-

Aug & 15-Feb

5.402%, 15-

Sep & 15-Dec

Coupon step-up N

N

N

N

Ranking 1st lien, Sr.

Sec. Sr. Sec.

1st lien, Sr.

Sec.

1st lien, Sr.

Sec.

Guarantees Y

Y

Y

Y

Negative pledge N

N

N

N

Anti-layering Y

Y

Y

Y

Cross-default Y

N

N

N


N

N

N

Call schedule 15-Nov-13 102.650 15-Nov-15 103.188 15-Feb-16 103.313 15-Jun-14 102.000

15-Nov-14 101.770 15-Nov-16 102.125 15-Feb-17 102.209 15-Jun-15 101.000

15-Nov-15 100.880 15-Nov-17 101.063 15-Feb-18 101.104 15-Jun-16 100.000

15-Nov-18 100.000 15-Feb-19 100.000 15-Nov-16 100.000

Tax redemption N

N

N

N

Change of control N

N

Y, 101.000

Y

Make-whole call N

+50 15-Nov-

15

+50 15-Jun-

14

+50 15-Jun-

14

Equity clawback N

N

N

N

Equity cure N

N

N

N

Limitation on debt N

N

N

N

Asset sales / Conveyance N

N

N

N


N

N

N

Restricted payments N

N

N

N


N

N

N


N

N

N


N

N

N

Limitation on sub debt N

N

N

N


N

N

N

MAC clause N

N

N

N




December 2011 170


Telenet – Belgian sweets

Recommendation We maintain a Hold recommendation on the Telenet (TNETBB) €300m

6.625% 2021 bond.

SG Credit Opinion We maintain a Stable outlook on Telenet as its Q311 results were in line

with our FY11 expectations.

We were reassured by the progress in triple-play penetration, now at 35% and up

3 percentage points since Dec-10 in ARPU (up 9% yoy to €42.50) and in RGUs/sub to 1.97.

Triple-play and analogue-to-digital strategies continue to drive 5%+ annual growth, and

we expect these trends to continue over the next year given Telenet’s still comparatively

moderate triple-play penetration level and 853k analogue cable subscriber base.

We also note the 266k (-24%) net decline in analogue cable TV subscribers, partially offset

by a net gain of 192k (+16%) higher-value digital cable TV subscribers. The organic

(excluding in-network customers converting to digital) net loss of basic (analogue) cable TV

subscribers YTD stands at -60k. Some of this churn was precipitated by a 4.2% price

increase announced in July 2011 and effective as of October 2011. The churn effects should

be offset by the longer-term revenue uplift. For the most part, the analogue subscriber losses

comprise lower-ARPU and often single-play basic cable subs which the company recognises

are more prone to churn towards the competitive alternatives (such as free digital terrestrial

TV (DTT), satellite, telecoms’ IPTV, over-the-top). We are not as concerned by the moderate

losses at the analogue basic cable subs level, considering instead the analogue-to-digital

conversion rates, accompanying ARPU and RGUs/sub trends as more indicative of Telenet’s

multi-play penetration and digitalisation objectives.

We also highlight two notable one-off expenses: a €28.5m impairment on DTT

infrastructure, which had the effect of increasing opex, and a €68.3m (-€47.9m for 9M11) loss

on interest-rate derivatives.

Capex also increased due to one-off expenses for Belgian football broadcasting rights

(€86.8m) and 3G spectrum licence fees (€71.5m), without which normalised capex (€77m)

would have been in line with guidance. A yoy FCF decline reflects primarily these one-off

payments and an increase in interest costs following the refinancing of term loans this year.

We are encouraged by the updated FY11 guidance - higher adj. EBITDA margin (increased

from 51.5% to 52.5%); confirmed FCF at €240m – while also noting a rise in the FY11

forecast (normalised) capex/sales of 22% (vs 21%), a trend worth watching in 2012.

Next calendar events Q411/FY11 results expected late-Feb 2011.



December 2011 171


TUI’s radically changed business mix over the past decade is akin to a corporate

metamorphosis. The final change into a single business focused on tourism was the product of

activist-shareholders rather than management in pursuit of a coherent strategy. Given the

financial turmoil, any further improvement to TUI’s balance sheet from selling its remaining

38.4% stake in Hapag-Lloyd, the shipping unit is questionable, except for one thing. TUI AG

can tender 33.3% of its 38.4% stake to the Ballin Consortium for cash on 2 January 2012,

which explain in a recent report. Should the Consortium be willing and able, TUI AG would

stand to gain a considerable cash amount and get a time-consuming distraction off its agenda,

which would be a welcome and material credit positive. TUI AG is a holding company

headquartered in Hanover and has historically been the main public debt issuer of the Group.

The group comprises TUI Travel, TUI Hotels & Resorts and the Cruises Sector. TUI Travel is the

key subsidiary of the group producing around 96% of revenues generating 86% of the

underlying EBITA. The uncertainty surrounding the lack of a TUI group strategy remains an

unpredictable risk element.

Tourism is a low-margin, highly seasonal and competitive business given its myriad offerings

in a highly fragmented market, except for a few giants such as TUI. Customers increasingly use

the internet for price comparisons and to purchase components for their holiday. These are

structural and permanent threats to TUI’s business model. Yet TUI’s large size provides

economies of scale benefits, broadening source-markets, geographic diversity of destination,

as well as winter and summer season offerings. While we are convinced there is a place for

large multiple-product providers such as TUI Travel in the long term, the pressures on TUI’s slim

margins are permanent with meagre cash flows as the consequence.

Group structure

Negative

Corporate Ratings


S&P B- Stable

Fitch NR NR

Perp. bond price evolution

CDS price evolution

Share price



Bloomberg Ticker TUI1 GR

Analyst

Torstein Jorstad

[email protected]

Source: Company Data / SG Credit Research





TUI AG Group €3.3bn consolidated financial debt

of which €2.1bn at HoldCo€2.6bn npv operating leases€1.46bn consolidated cash of which €0.8bn at HoldCo

as at 30 June 2011

49% 51%

HAPAG-LLOYD€1.8bn financial debt

€0.6bn cashas at 30 September 2011

HOTELS50% JV with Riu

50% Iberotel100& Robinsonplus many more

Riu Hotel 5.10%, CDG Group 5%

Nero Finance SPV€ exchangeable

Tui Travel PLC £1.56bn financial debt£0.37bn pension liabs.

£1.9bn est. npv operating leases£0.38bn cash

as at 31 March 2011

cut to 38.4% in May 201155.6% of votes (35.3% economic)

€0.35bn hybrid loan finance

Widely dispersed 49.44%

TUI AG HoldCo € 2.75% Sept. '12 conv.

€ 5.125% Dec '12 (ref. CDS) € Exchange (Nero) Apr. '13€ Private placement Aug. '14

€ 5.5% Nov. '14 conv.

€ 2.75% Mar. '16 conv.€ Bank debt (Antium) € Hybrid perpetual

50% - 100%

TUI Travel PLC £6% Oct '14 conv.

£4.9% April '17 conv. w put

£1.155bn RCF

S-Group Travel Holding(Alexei Mordashov)

25.1%

Monterey Enterprises Ltd(John Fredriksen)

15.01%

Antium Finance SPV€ bank debt

(7.8%)

TUI tender right for 33.3% to Ballin Consortium on

2nd Jan 2012

Free float 44.5%

(12.3%)

0

20

40

60

80

100

120

12/05 12/06 12/07 12/08 12/09 12/10

0

200

400

600

800

1000

1200

1400

1600

12/10 02/11 04/11 06/11 08/11 10/11

0.0

5.0

10.0

15.0

20.0

25.0

Hotels Restaurants & Leisure

TUI AG



December 2011 172

TUI AG - Bonds


TUI AG Caa1 / Stable B- / Stable NR / NR 273 5.125% 10 Dec 2012 - NA

TUI AG Caa2 / Stable CCC- / Stable NR / NR 300 8.625% Perpetual 30 Jan 2013 NA


TUI AG - Financial data extract

Revenue split

EBITDA split


Debt structure, 2010

Cash 2,274.0

Bank loans 1,001.5

Senior Unsecured

notes

1,503.9

Convertibles 1,534.4

Other 472.1

NPV of outstanding

operating leases

2,540

Main shareholders

S-Group Travel Holding 25%

Monterey Enterprises

Ltd 15%

Riu Hotels S.A. 5%

CDG Group 5%


€m 2005A 2006A 2007A 2008A SFY2009 2010A 2011E 2012E

Total revenues 14,085.0 15,759.0 18,546.0 13,130.8 16,350.1 17,167.6 17,854.3

EBITDA 779.0 644.0 557.0 698.6 664.0 698.9 730.3

Revenue growth 11.9% 17.7% -29.2% 24.5% 5.0% 4.0%

EBITDA growth -17.3% -13.5% 25.4% -5.0% 5.3% 4.5%

EBITDA margin 5.5% 4.1% 3.0% 5.3% 4.1% 4.1% 4.1%

Normalised EBITDA 716.4 737.3 776.0 810.9

Interest -246.9 -352.2 -217.5 -216.3

Cash taxes 33.2 -64.2 -67.6 -70.6

Other 163.4 363.7 200.0 200.0

Change in provisions -21.6 -213.0 0.0 0.0

Working capital 997.8 413.1 0.0 0.0

Restructuring cash costs 0.0 0.0 0.0 0.0

Cash Flow from Operations 1,624.5 811.4 613.8 643.4

Cash Flow from Operations as reported 1,134.6 818.1 na na

Capital expenditures -338.5 -302.4 -318.3 -332.6

Acquisitions / Divestitures 38.6 -0.3 914.0 0.0

Other Investing -200.6 1.6 0.0 0.0

Cash Flow from Investing -500.5 -301.1 595.8 -332.6

Bond issues 107.9 1,245.0 734.0 300.0

Dividends / Shareholder returns -65.2 -113.1 -119.0 -124.4

Net Debt redemption -1,239.0 -454.7 -762.0 -20.7

Other Financing -174.0 -393.9 0.0 0.0

Cash Flow from Financing -1,370.3 283.3 -881.0 -145.1

Change in Cash -246.3 793.6 328.5 165.7

Cash 1,452.0 2,274.0 2,602.5 2,768.2

Bank loans 1,100.5 1,001.5 1,000.0 1,000.0

Senior Secured notes 0.0 0.0 0.0 0.0

Senior Unsecured notes 1,612.0 1,503.9 273.2 273.2

Convertibles 613.7 1,534.4 2,004.7 1,984.0

Other 388.6 472.1 472.0 472.0

Total debt 3,715 4,512 3,750 3,729

Net debt 2,263 2,238 1,147 961

NPV of outstanding operating leases 2,446 2,540 2,540 2,540

Total adjusted debt 6,161 7,052 6,290 6,269

Net adjusted debt 4,709 4,778 3,687 3,501

Financial summary (€m) 2009A 2010A 2011E 2012E

Revenues 13,130.8 16,350.1 17,167.6 17,854.3

Adj. EBITDA 716.4 737.3 776.0 810.9

Adj. EBITDA margin 5.3% 4.1% 4.1% 4.1%

Funds From Operations (FFO) 666.1 684.6 690.9 724.0

FFO - Capex - W/C Chg. (OpFCF) 1,325.4 795.3 372.7 391.4

Free Cash Flow (FCF) 1,220.8 395.9 176.5 186.4

EBITDA / net interest 4.3x 2.6x 5.4x 5.7x

FFO / Net debt 29.4% 30.6% 60.2% 75.3%

FFO - Capex / Net debt 14.5% 17.1% 32.5% 40.7%

FCF / Net Debt 54.0% 17.7% 15.4% 19.4%

Capex / Sales 2.6% 1.8% 1.9% 1.9%

Net debt / EBITDA 3.2x 3.0x 1.5x 1.2x

Total debt / EBITDA 5.2x 6.1x 4.8x 4.6x

Net adjusted debt / EBITDA 6.6x 6.5x 4.8x 4.3x

Total adjusted debt / EBITDA 8.6x 9.6x 8.1x 7.7x

Travel97%

Hotels & Resorts

2%

Cruises1%

Travel69%

Hotels & Resorts

29%

Cruises2%

0

200

400

600

800

1000

1200

1400

1600

2012 2013 2014 2015 2016 2017 2049

Convertible

RCF

Loans

Bonds



December 2011 173

Bond Covenants

Bond TUIGR 5 1/8% 10 Dec 2012 TUIGR 8 5/8% perpetual

Issuer TUI AG TUI AG

Currency € €

Coupon 5.125% 8.625%

Coupon step-up N Y, 5% if COC

Ranking Senior unsecured Jnr. Sub.

Guarantees N N

Negative pledge Y N

Anti-layering N N

Cross-default Y N

Redemption before call N N

Call schedule

30/01/2013, 100% or 7.3%+Euribor

Quarterly perpetual call

Deferral language

Y

Tax redemption Y Y

Change of control Y, 101.00 Y, step-up

Make-whole call N Y

Equity clawback N N

Equity cure N N

Limitation on debt N N

Asset sales / Conveyance N N

Limit on Sale & Leasebacks N N

Restricted payments Y N

Transactions with affiliates Y N

Merger/Sale restrictions Y N

Restriction on bus. activities N N

Limitation on sub debt Y N

Financial reporting N N

MAC clause N N



December 2011 174


TUI AG - Divorced with strings attached

SG Bond Recommendation: TUI’s ‘tender right’ discussed in this report is not new, but its

upside potential could soon become more certain. We gauge the credit downside to be

relatively small compared to the credit upside of this upcoming event. For that reason we

recommend to speculatively Sell 5-year CDS at 1553 mid-price with a view that should our

speculation prove correct this trade could have a 200bp tightening potential against the

iTraxx Xover index (803 mid price). At the same time, we close our coverage (currently a ‘Buy’)

of the TUI 5.125% 2012s given the short maturity. This bond is beginning to be illiquid and

trades just above its redemption price (mid) with three half-coupon payments remaining.

TUI’s longer bond issues in the market are convertible bonds and the 8.625% perpetual. We

have no recommendation on any of these issues at this time.

Event: According to TUI’s CFO, as reported on Bloomberg last week, TUI AG will seek to

exercise its contractual rights to tender a 33.3% stake in Hapag-Lloyd to the Ballin

Consortium, which bought the majority stake in Hapag-Lloyd from TUI in March 2009. This is

not fresh news, but brings the issue to the fore in financial markets.

Opinion: Should the Ballin Consortium want to maintain its control over Hapag-Lloyd,

which we speculate it will, it needs to find the funding to buy a 33.3% stake from TUI AG at

the price that the independent firm deems appropriate. Should the Consortium be willing and

able to do so, TUI AG would stand to gain a considerable cash amount and get a time-

consuming distraction off its agenda. This would be a welcome and material credit positive

for TUI AG’s CDS pricing, in our view. While there is a risk that this issue could instead

become a drawn-out legal wrangling, we suspect there will be much more clarity on the issue

over the coming months. E.g. we would expect the issue to become a considerable part of

the upcoming results presentations’ Q&A sessions with analysts.

Next calendar events: TUI Travel plc preliminary FY results 5 December 2011. TUI AG FY

results release and conference call on 14 December 2011.

A messy ‘divorce’ with strings attached: The final change in TUI AG’s corporate

metamorphosis took place in March 2009 when it sold the majority of its shipping group,

Hapag-Lloyd AG, to a privately held consortium (incl. the City of Hamburg) of investors called

‚Albert Ballin Holding GmbH & Co. KG‛, based in Hamburg. The container shipping company

was sold at an enterprise value of €4.45bn and left TUI AG holding 43.3% of Hapag-Lloyd. At

that time, it lost its consolidation right, but was for a time obligated to provide liquidity to

Hapag-Lloyd. The timeframe for such liquidity provision we gather was about one year after

the completed sale, i.e. March 2010 and, hence, this is no longer a legal or ‘moral obligation’

for TUI AG. TUI sold an additional stake in Hapag-Lloyd in spring 2011 and was left with the

38.4% stake in Hapag-Lloyd that it still owns. TUI AG had planned to sell the remaining stake,

either to interested parties or via an IPO. The April 2011 plan to IPO was abandoned due to

volatile market conditions.



December 2011 175


Unitymedia is an indirect subsidiary of Liberty Global Inc. (LGI), the largest cable company

outside the US, operating in 14 countries with 17.9m customers. LGI is the leading

international cable operator offering advanced video, telephone, and broadband internet

services operating broadband communications networks in 14 countries mainly located in

Europe operating under the brands UPC, Unitymedia (Germany), and Telenet (Belgium), VTR

(Chile), and AUSTAR (Australia). Unitymedia is Germany’s second-largest cable, serving

customers in North Rhine-Westphalia (NRW) and Hesse, Germany’s first and fifth most

populous states, respectively. Unitymedia offers analogue and digital TV, broadband Internet,

fixed and mobile telephony services. As of 30 Sep-11, Unitymedia served c.4.5m video

revenue generating units (RGUs) (including 1.7m digital cable RGUs), 964,200 broadband

internet RGUs and 961,400 telephony RGUs over a broadband communications network that

passed approximately 8.7m homes.

Strengths Good earnings and operating cash flow growth

Network technological advantage, particularly as DOCSIS 3.0 roll-out progresses

Fair liquidity and a benign maturity profile with material maturities from 2017

Weaknesses Relatively high leverage target and financial policy compared to sector peers

Comparatively high capex and low free cash flow levels

Group structure

Stable

Corporate Ratings

LT ST Outlook

MDY B1 NR Stable

S&P B+ NR Stable

Fitch BB NR Stable

Bond z-spreads

CDS 5Y spread

Share price – LGI (US$)


Asset Research

Market cap.(US$m) 11,027

Equity Ticker LBTYA US

Analyst

Alejandro Núñez

[email protected]

Source: Company Data, SG Credit Research





250

500

750

1000

Z-s

pre

ad

(b

ps

)

LBTYA 8.125 17 EUR

LBTYA 8.125 17 USD

LBTYA 9.625 19 EUR

iBoxx HY Global

iBoxx € HY TMT

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

(200)

0

200

400

600

800

1,000

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

IESY CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyIESY - XOIESY / XO (RHS)

0

5

10

15

20

25

30

35

40

45

50

(US

$)


Unitymedia



December 2011 176

Unitymedia – bonds summary

Bond Issuer Rank S&P Corp Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch

Corp Rtg

/ Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out (m) Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%)

Next call Rec

LBTYA 8.125

17 €

UNITYMEDIA

HESSEN / NRW

Senior

Sec. BB- STABLE B1 STABLE NR 3.7 1,430 1,430 102.95 540 7.2 12.6 01-Dec-12 Hold

LBTYA 8.125

17 US$

UNITYMEDIA

HESSEN / NRW

Senior

Sec. BB- STABLE B1 STABLE NR 3.7 845 845 100.88 678 7.9 14.9 01-Dec-12 Hold

LBTYA 9.625

19 €

UNITYMEDIA

GMBH

Senior

Sub. B- STABLE B3 STABLE NR 4.8 665 665 103.39 668 8.8 9.6 01-Dec-14 Buy


Unitymedia - Financial data





Equity shareholders

Liberty Global, Inc. 100.0%



(€m) 2008A 2009A 2010A 2011E 2012E

Total revenues 823 879 935 980 1,021

Normalised EBITDA (OCF) 410 471 521 559 595

Revenue growth 0.0% 6.8% 6.4% 4.8% 4.3%

EBITDA growth 0.0% 15.0% 10.5% 7.3% 6.5%

EBITDA margin 49.8% 53.6% 55.7% 57.0% 58.3%



Cash taxes -25 -21 -12 -40 -47

Other 2 5 0 0 0


Working capital -12 15 52 -5 -2

Restructuring cash costs 0 0 0 0 0



Acquisitions / Divestitures 244 0 0 0 0

Other Investing 11 7 -1,880 0 0

Cash Flow from Investing 18 -251 -2,141 -260 -276

Dividends / Shareholder returns 0 -46 0 0 0

Net Debt redemption 30 -30 -612 0 0

Other Financing -232 0 2,531 0 0

Cash Flow from Financing -202 -76 1,919 0 0

Change in Cash 46 18 66 1 35

Cash 215 185 59 60 95


Senior Bank debt 100 100 0 0 0

Senior Secured notes 1,024 1,024 2,023 2,058 2,058



Other debt 0 0 1,081 1,178 1,279

Total debt 1,729 1,699 2,753 2,743 2,723

Net debt 1,514 1,514 2,694 2,683 2,628


Revenues 823 879 935 980 1,021

Adj. EBITDA 410 471 521 559 595

EBITDA margin 49.8% 53.6% 55.7% 57.0% 58.3%


FFO - Capex - W/C Chg. (OpFCF) -7 86 28 1 35

Free Cash Flow (FCF) -7 41 28 1 35


FFO / Net debt 16.0% 21.8% 8.8% 9.9% 11.9%

FFO - Capex / Net debt 0.4% 4.7% -0.9% 0.2% 1.4%

FCF / Net Debt -0.4% 2.7% 1.0% 0.1% 1.3%

Capex / Sales 28.8% 29.4% 27.9% 26.5% 27.0%




Total debt / EBITDA 4.2x 3.6x 5.3x 4.9x 4.6x

Cash 215 185 59 60 95

Subscripti

ons -

Video,

€618.0m,

66%Subscripti

ons -

Internet,

€88.8m,

9%

Subscripti

ons -

Telephony

,

€117.5m,

13%

Other,

€110.9m,

12%

Germany,

€935m,

100%

152

0 0 0 0 0

2,058

0

665

0 0

0

500

1,000

1,500

2,000

2,500

(€m

)

0 0.0

2,058 3.7

665 1.2

2,723 4.8

0

500

1,000

1,500

2,000

2,500

3,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal d

eb

t (€

m)

% o

f T

ota

l D

eb

t


Senior bank Sr. Secured Sr. Unsec.



December 2011 177

Bond covenants

Unitymedia - covenants summary

Bond LBTYA 8.125 17

LBTYA 8.125 17

LBTYA 9.625 19

Issuer UNITYMEDIA

HESSEN / NRW

UNITYMEDIA

HESSEN / NRW

UNITYMEDIA

GMBH

Currency €

US$

€

Coupon 8.125%, 01-Jun

& 01-Dec

8.125%, 01-Jun &

01-Dec

9.625%, 01-Jun &

01-Dec

Coupon step-up N

N

N

Ranking 1st lien, Senior

Sec.

1st lien, Senior

Sec.

Sr Unsec., Senior

Sub.

Guarantees Merger

N

Restricted

Payments

Negative pledge Y

Y

Y

Anti-layering Y

Y

Y

Cross-default Y

Y

Y


N

N

Call schedule 01-Dec-12 108.125 01-Dec-12 108.125 01-Dec-14 104.813

01-Dec-13 104.063 01-Dec-13 104.063 01-Dec-15 103.208

01-Dec-14 102.031 01-Dec-14 102.030 01-Dec-16 101.604

01-Dec-15 100.000 01-Dec-15 100.000 01-Dec-17 100.000

Tax redemption N

N

N


Y, 101.000

Y, 101.000

Make-whole call +50 01-Dec-12

+50 01-Dec-12

+50 01-Dec-14

Equity clawback 35% @ 108.125

01-Dec-12

35% @ 109.625

01-Dec-12

35% @ 109.625

01-Dec-12

Equity cure N

N

N

Limitation on debt

Y, 4.0x Sr. Lev.,

5.0x Total lev.

(incurrence only)

Y, 4.0x Sr. Lev.,

5.0x Total lev.

(incurrence only)

Y, 4.0x Sr. Lev.,

5.0x Total lev.

(incurrence only)


Y

Y


N

N


Y

Y


Y

Y


N

N


Y

Y


Y

Y


N

N

MAC clause N

N

N




December 2011 178


Unitymedia – TMTing Bytes: Unitymedia posts robust Q311 results

SG Bond Recommendation: We maintain a Buy on Unitymedia’s € 9.625% 2019 notes, a

Hold on its € 8.125% 2017s and a Sell on 5y CDS.

Unitymedia posted strong Q311 results on the back of record quarterly RGU performance

across its broadband, telephony and digital video business lines. In addition, continued take-

up of Unitymedia’s key Unity3play service contributed to further ARPU expansion and triple-

play penetration which, in turn, sustained year-to-date revenue and EBITDA growth trends.

Unitymedia’s results were generally in line with our expectations for the quarter and we

expect the positive earnings trend to continue into Q411.

We interpret these subscriber trends as affirming the customer value proposition offered

by Unitymedia’s bundles. With service bundles that are essentially cheaper and faster than

competing service packages (particularly those of DT), Unitymedia has been steadily gaining

market share over the last year.

In the context of 3% sequential revenue growth, we note that EBITDA remained roughly

flat at €155m (vs Q211’s €154m), resulting in EBITDA margin dilution of 150bp relative to

Q211. This was largely a result of marketing promotions (e.g. the ‚DSL switcher‛ campaign

aimed at attracting new subscribers to Unitymedia’s higher speed dual- and triple-play

services) and higher costs associated with RGU growth. We see these cost factors as

manageable and moderate in light of the RGU growth registered.

We also highlight that LGI remains ‚positive‛ on the rationale and regulatory process

underway for its acquisition of KabelBW, despite the German regulator’s expressed

reservations last week. LGI has submitted concessions proposals addressing cable’s role in

German housing association contracts and in the feed-in market for programming

distribution. A final regulatory decision is expected by 15 December 2011.

Next calendar events: German Federal Cartel Office regulatory decision regarding the

KBW acquisition expected by 15 Dec 11. Q411/FY11 results expected late Feb 12.



December 2011 179


UPC is an indirect subsidiary of Liberty Global Inc. (LGI), the largest cable company

outside the US, operating in 14 countries with 17.9m customers. LGI is the leading

international cable operator offering advanced video, telephone, and broadband internet

services, with broadband communications networks in 14 countries mostly located in Europe.

They operate under the brand names UPC, Unitymedia (Germany), Telenet (Belgium), VTR

(Chile), and AUSTAR (Australia). UPC is Europe’s largest cable operator with 8.9m customers

in nine western, central and eastern European countries. UPC offers analogue and digital TV,

broadband Internet, fixed and mobile telephony services. At 30-Sep-11, they owned and

operated networks serving more than 17.6m homes and 17.6m revenue generating units

(RGUs), consisting of 9.4m video subscribers, 4.8m broadband internet subscribers and 3.3m

telephone subscribers.

Strengths Robust earnings and cash flow growth capacity

Network technological advantage, particularly with DOCSIS 3.0 services

Solid FCF, fair liquidity and no significant maturities through 2014

Weaknesses Relatively high leverage target and financial policy compared to sector peers

M&A event risk

Group structure


Stable

Corporate Ratings

LT ST Outlook

MDY Ba2 NR Stable

S&P BB- NR Positive

Fitch BB NR Stable

Bond z-spreads

CDS 5Y spread

Share price (LGI) (US$)


Asset Research

Market cap.(US$m) 11,027

Equity Ticker LBTYA US

Analyst

Alejandro Núñez

[email protected]





Liberty Global

Europe Holding B.V.

Telenet

Chellomedia B.V.

50.2%

100.0% 100.0%Unitymedia GmbH

UPC Holding B.V.€300m 2016 Sr. Unsec. Nts

€400m 2018 Sr. Unsec. Nts

$400m 2018 Sr. Unsec. Nts

UPC Broadband

Holding B.V.UPC Financing

UPC Broadband

Holding Bank

€5.1bn Sr. Sec. Bank

Credit Facilities

VTROther European

subsidiaries

100.0% 80.0%

UPCB

Finance Ltd

€500m 2020

Sr. Sec. Nts

UPCB

Finance II

€750m 2020

Sr. Sec. Nts

UPCB

Finance III

$1.0bn 2020

Sr. Sec. Nts

Credit

Facility V

Credit

Facility Y

Credit

Facility Z

0

200

400

600

800

1,000

Z-s

pre

ad

(b

ps

)

LBTYA 7.625 20 EURLBTYA 6.375 20 EURLBTYA 8 16 EURLBTYA 9.75 18 EURLBTYA 8.375 20 EURiBoxx HY Global

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

(200)

0

200

400

600

800

1,000

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

UPC CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyUPC - XOUPC / XO (RHS)

0

5

10

15

20

25

30

35

40

45

50

(US

$)


UPC



December 2011 180

UPC – bond summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch

Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-

spread

(Ask)

(bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%) Next call Rec

LBTYA 7.625 20 € UPCB FINANCE

LTD Sr. Sec.

B+

STABLE

Ba3

STABLE NR 3.8 500 500 98.45 549 7.9 9.3 15-Jan-15

LBTYA 6.375 20 € UPCB FINANCE

II LTD Sr. Sec.

B+

STABLE

Ba3

STABLE NR 3.8 750 750 91.83 522 7.7 9.9 01-Jul-15

LBTYA 6.625 20 US$ UPCB FINANCE

III LTD Sr. Sec.

B+

STABLE

Ba3

STABLE NR 3.8 1,000

1,00

0 98.25 500 6.9 8.0 01-Jul-15

LBTYA 8 16 € UPC HOLDING

BV Sr. Sub.

B-

STABLE

B2

STABLE NR 4.6 300 300 100.83 601 7.7 49.7 27-Dec-11

LBTYA 9.75 18 € UPC HOLDING

BV Sr. Sub.

B-

STABLE

B2

STABLE NR 4.6 400 400 101.41 752 9.3 12.0 15-Apr-13 Buy

LBTYA 9.875 18 US$ UPC HOLDING

BV Sr. Sub.

B-

STABLE

B2

STABLE NR 4.6 400 400 105.50 717 8.3 9.1 15-Apr-14

LBTYA 8.375 20 € UPC HOLDING

BV Sr. Sub.

B-

STABLE

B2

STABLE NR 4.6 640 640 93.89 697 9.4 11.4 15-Aug-15 Buy


UPC – financial data

UPC Europe revenues (Dec-10)

UPC Europe Op. CF (Dec-10)



Equity shareholders

Liberty Global (LGI) 100.0%


Bond covenants

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 3,473 3,454 3,740 3,946 4,103

Normalised EBITDA (OCF) 1,646 1,663 1,776 1,869 1,953

Revenue growth 0.0% -0.5% 8.3% 5.5% 4.0%

EBITDA growth 0.0% 1.0% 6.8% 5.3% 4.5%

EBITDA margin 47.4% 48.1% 47.5% 47.4% 47.6%

Normalised EBITDA 1,646 1,663 1,776 1,869 1,953


Cash taxes -12 -7 -8 -13 -14

Other 141 -185 -250 -225 -225



Restructuring cash costs 0 0 0 0 0

Cash Flow from Operations 1,175 1,034 1,083 1,101 1,180


Acquisitions / Divestitures -44 120 -3 -613 0

Other Investing -19 -10 -1 0 0

Cash Flow from Investing -1,042 -743 -806 -1,481 -862

Dividends / Shareholder returns 0 0 0 0 0

Net Debt redemption -113 -167 131 0 0

Other Financing -16 -79 50 350 -200

Cash Flow from Financing -129 -246 181 350 -200

Change in Cash 4 45 458 -30 118

Cash 109 160 123 93 211


Senior Bank debt 6,654 6,645 5,882 5,111 5,111

Senior Secured notes 0 0 496 2,000 2,000

Senior Unsecured notes 1,100 1,100 1,595 1,595 1,595


Other debt 22 24 25 72 25

Total debt 7,776 7,769 7,998 8,778 8,731

Net debt 7,667 7,609 7,875 8,685 8,520


Revenues 3,473 3,454 3,740 3,946 4,103

Adj. EBITDA 1,646 1,663 1,776 1,869 1,953

EBITDA margin 47.4% 48.1% 47.5% 47.4% 47.6%

Funds From Operations (FFO) 1,191 1,095 1,108 1,106 1,190


Free Cash Flow (FCF) 195 180 280 233 318


FFO / Net debt 15.5% 14.4% 14.1% 12.7% 14.0%


FCF / Net Debt 2.5% 2.4% 3.6% 2.7% 3.7%

Capex / Sales 28.2% 24.7% 21.5% 22.0% 21.0%




Total debt / EBITDA 4.7x 4.7x 4.5x 4.7x 4.5x

Cash 109 160 123 93 211

Subscription -Video, €1,838m, 49%

Subscription -Broadb

and, €945m,

25%

Subscription -Tel.,

€526m, 14%

Other, €431m,

12%

Netherlands,

€508m, 31%

Switzerland,

€448m, 28%

Other -W.Euro, €284m,

18%

CEE, €374m,

23%

1670 0 46

523435

2,880

1,526

656

0

2,634

0

500

1,000

1,500

2,000

2,500

3,000

3,500

(€m

)

5,111 2.7

1,994 1.1

1,596 0.8

0 0.0

8,7014.6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal D

eb

t (€

m)

% o

f T

ota

l D

eb

t





December 2011 181

UPC – covenants summary

Bond

LBTYA

7.625 20

LBTYA

6.375 20

LBTYA

6.625 20

LBTYA 8

16

LBTYA

9.75 18

LBTYA

9.875 18

LBTYA

8.375 20

Issuer

UPCB

FINANCE

LTD

UPCB

FINANCE

II LTD

UPCB

FINANCE

III LTD

UPC

HOLDING

BV

UPC

HOLDING

BV

UPC

HOLDING

BV

UPC

HOLDING

BV

Currency €

€

US$

€

€

US$

€

Coupon

7.625%,

15-Jul &

15-Jan

6.375%,

01-Jul &

01-Jan

6.625%,

01-Jul &

01-Jan

8%, 01-

May & 01-

Nov

9.75%,

15-Oct &

15-Apr

9.875%,

15-Oct &

15-Apr

8.375%,

15-Feb &

15-Aug

Coupon step-up N

N

N

N

N

N

N

Ranking 1st lien,

Sr. Sec.

1st lien,

Sr. Sec.

1st lien,

Sr. Sec.

3rd lien,

Sr. Sub. Sr. Sub.

Sr. Sub.

Sr. Sub.

Guarantees N

N

N

N

N

N

N

Negative pledge Y

Y

N

Y

Y

Y

Anti-layering Y

Y

Y

Y

Y

Y

Y

Cross-default N

N

N

Y

Y

Y

Y

Redemption before

call N

N

N

N

N

N

N

Call schedule 15-Jan-15 103.813 01-Jul-15 103.188 01-Jul-15 103.313 01-Nov-12 102.660 15-Apr-13 104.875 15-Apr-14 104.938 15-Aug-15 104.188

15-Jan-16 102.542 01-Jul-16 102.125 01-Jul-16 102.208 01-Nov-13 101.330 15-Apr-14 102.437 15-Apr-15 102.469 15-Aug-16 102.792

15-Jan-17 101.271 01-Jul-17 101.063 01-Jul-17 101.104 01-Nov-14 100.000 15-Apr-15 100.000 15-Apr-16 100.000 15-Aug-17 101.396

15-Jan-18 100.000 01-Jul-18 100.000 01-Jul-18 100.000

15-Nov-16 100.000 15-Nov-16 100.000 15-Aug-18 100.000

Tax redemption N

N

N

N

N

N

N


Y

Y, 101.000

Y, 101.000

Y, 101.000

Y, 101.000

Y, 101.000

Make-whole call +50 15-

Jan-15 N

+50 01-

Jul-15

+50 01-

Nov-09

+15-Apr-

13 N

N

Equity clawback N

N

N

35% @

108 01-

Nov-09

35% @

109.75

15-Apr-12

N

35% @

108.375

15-Aug-13

Equity cure N

N

N

N

N

N

N

Limitation on debt Y

Y

N

Y, 5.0x

Consol.

Lev.,

CHF155m

carve-out

Y

Y

Y

Asset sales /

Conveyance N

N

Y

Y

Y

Y

Y

Limit on Sale &

Leasebacks N

N

N

N

N

N

N

Restricted

payments N

N

N

Y,

CHF40m

general

carve-out

Y

Y

Y

Transactions with

affiliates Y

Y

Y

Y

Y

Y

Y

Merger/Sale

restrictions N

N

N

N

N

N

N

Restriction on bus.

activities Y

Y

Y

Y

Y

Y

Y

Limitation on sub

debt N

N

N

Y

Y

Y

Y


N

N

N

N

N

N

MAC clause N

N

N

N

N

N

N




December 2011 182


UPC – TMTing bytes: UPC up and up in Q3 11

SG bond recommendation: Buy maintained on UPC Holding 8.375% 2020 notes.

UPC reported one of its strongest quarters in Q3 11, with RGU growth at more than triple

the rate of Q3 10. Earnings were driven by record RGU growth, ARPU expansion and market

share gains on the back of its triple-play bundle strategy. We believe this continues to

underscore the attractive value proposition UPC’s cable network represents to customers vs

its competitors and, in particular, incumbent telecoms.

Overall, Q3 11 organic RGU adds reached +180k (compared to Q3 10’s +53k) and RGU

adds from acquisitions, primarily Aster in Poland, came to +619k, totalling nearly +800k

RGUs.

On a regional basis, particularly strong growth was generated in Ireland (+12% rebased

revenues, +20% rebased OCF for the third consecutive quarter), the Netherlands (+7%

rebased OCF), in central and eastern Europe (CEE) (+5% rebased OCF) and Switzerland

(+4% rebased OCF).

Operational leverage, combined with UPC’s increasing scale, is also driving margin

improvement (to 51% for UPC Europe) as LGI maintains its programming costs below an

average of €5/month per subscriber (compared to a Q3 ARPU of €28.09).

As of end-Q3, nearly half (45%) of UPC’s customers had subscribed to bundled services

with 26% taking a triple-play package.

Capex/sales in Q3 11 declined to 18% (vs 22% in Q3 10) and was 20% at the nine-month

mark (vs 22% in Q2 10), largely due to increasing use of vendor financing arrangements.

In September 2011, UPC finalised the acquisition of Aster in Poland for which it paid

PLN2.45bn (€569m). This acquisition largely explained the rise in UPC’s total debt to €8.77bn

at the end of Q3 (vs €8.20bn at 30 June 2011), resulting in Senior and Total debt/EBITDA of

3.83x and 4.64x, respectively.

UPC continued to see a brisk pace of subscriber growth in early Q4 which should help

maintain the 5%+ growth momentum through the end of 2011.

LGI remains ‚positive‛ on the rationale and regulatory process underway for its acquisition

of KabelBW, despite the German regulator expressing reservations last week. LGI has

submitted concessions proposals which address cable’s role in German housing association

contracts and in the feed-in market for programming distribution. A final regulatory decision is

expected by 15 December 2011.

Next events: German Federal Cartel Office decision on the KBW acquisition expected by

15 December 2011. Q4 2011/FY11 results expected late February 2012.



December 2011 183


UPM is the world’s leading manufacturers of magazine paper, with approximately 20% of the

global market, and one of the leading manufacturers of all paper grades. The group has no

exposure to packaging, unlike Stora Enso. Despite the size of its paper operations, the majority

of profits have recently come from the group's pulp and energy activities.

The company is currently focused on integrating Myllykoski, its recent acquisition.

Integration costs are estimated at €100-150m over two years versus expected synergies of at

least €100m after 2012. Persistent overcapacity in the paper industry may threaten the

retention of the expected cost savings, however. Following the acquisition of Myllykoski,

UPM has become Europe’s undisputed leader in publication papers. Based on the

companies’ production capacity, UPM now has 14m tons of capacity and a 29% share of the

European market, followed by Stora and Sappi with approximately 8m and 4m, respectively.

UPM’s capital structure is fairly simple with the majority of the €3.6bn of gross debt being

extended on an unsecured basis with the exception of €874m of drawn Finnish pension

loans. The company has traditionally relied on the debt capital markets for its funding.

However, given current debt capital market conditions, UPM will likely redeem the €600m

notes due next January with a mix of cash on balance sheet, free cash flow and potentially

tapping its €1.4bn credit lines, including €900m of bilateral loans and a syndicated facility

reduced to €500m from €1bn earlier this year. Both facilities are committed, with maturities

spread between 2014 and 2017 and subject to a covenant based on maximum gearing of

90% (compared to 52% in September).

Strengths Market leader in magazine papers

High integration in energy and pulp

Consistent and strong free cash flow generation

Low financial leverage and conservative financial policy

Weaknesses Structural overcapacity in paper markets

Cyclical earnings in most business areas

Limited product diversification

Magazine papers not immune from structural concerns

Group structure

Source: Company data, SG Cross Asset Research

Stable

Corporate Ratings


S&P BB B Stable

Fitch BB B Stable



Share price



Bloomberg Ticker UPM1V FH.

Analysts

Roberto Pozzi


Barbora Matouskova






60

70

80

90

100

110

25/07/08 25/07/09 25/07/10 25/07/11

6.125% 12 $ 6.625% 17

0

100

200

300

400

500

600

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Price MA 100

7

10

13

16

2010 2011

Paper & Packaging

UPM-Kymmene



December 2011 184

UPM-Kymmene - Eurobonds

Issuer Rating MDY Rating S&P Rating Fitch Amount (€m) Coupon Maturity Next call Call date

UPM-Kymmene Corp Ba1 / Stable BBB- / Negative BB+ / Stable 600 6.125% 23 Jan 2012 NC NC


UPM-Kymmene - Financial data

Revenue split

EBITDA split


Debt structure

Main shareholders

William Blair & C 0.99%

Vanguard Group 0.96%

JPM Morgan Chase 0.61%


Bond Covenants €600m 6.125% unsecured 2012 notes


Call schedule No

CoC No

Debt test No



Law English law


Energy3% Pulp

12%

Forest and timber12%

Paper59%

Label materials

9%

Plywood3%

Other2%

Energy12%

Pulp37%

Forest and timber

1%

Paper43%

Label materials

7%

Plywood0%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Credit lines

Cash on b/s

ST debt

Loans

Bonds

0

1,000

2,000

3,000

4,000

5,000

2007 2008 2009 2010

Other debt Senior unsecured notes

Unsecured bank and other loans Secured loans and other debt



December 2011 185


UPM-Kymmene – Long UPM / Short Stora still makes sense, especially if you’re

bearish

Recommendation: We recommend investors Sell UPM 5-year CDS versus Buy Stora Enso

5-year CDS at a spread ratio of approximately 1.0 with a target of 1.2 over three months, with

further upside potential in the longer term. The first argument for our pair trade is that UPM

has rarely, and barely, traded wider than Stora Enso. Only after the acquisition of Myllykoski

at the end of last year did UPM underperform Stora Enso, with the spread ratio (Stora/UPM)

falling from 1.1 to a low of 0.92 last February. Since then, UPM has outperformed, with the

spread ratio inching up to the current 1.0. Despite UPM’s recent outperformance, the spread

ratio remains at historically low levels: since 2007, the range has been 0.92-1.56.

We argue that operating risk is higher for Stora than UPM: The main trigger for our pair

trade is a potential further weakening of demand for paper products in Q4 and in 2012, as

highlighted in the recent updates from the two companies. Despite Stora Enso’s greater

business diversification, we argue that in a weak economic environment, UPM tends to

perform much better. Stora Enso’s EBITDA has historically weakened much more than UPM’s

and CDS spreads have reflected this. Further, UPM is now 200k net short pulp, compared to

Stora with its 1m net long pulp position. As pulp prices usually decrease in a weak economic

environment, Stora Enso looks more vulnerable than UPM.

M&A risk also favours UPM: UPM made two key acquisitions in the past two years (Fray

Bento’s pulp mill and, recently, Myllykoski) whilst Stora Enso made none, which explains

Stora’s lower leverage (currently 2x vs 2.7x for UPM). Whilst we could argue that Stora Enso

is now more likely to make a move, we actually expect UPM to benefit from potential

disposals: UPM retains an 11% stake in Metsa Botnia, majority owned by Metsalliitto. We

understand that the latter has an incentive to exercise a call on the remaining stake before

June (to be confirmed) next year. We estimate the value of UPM’s stake at around €200m,

which would positively impact UPM’s leverage, thus accelerating its convergence towards

Stora Enso’s.

Hedging from loan books likely to be limited: Some risk to our recommendation could

arise if UPM taps the bond markets or draws on its committed credit facilities and loan books

hedge via CDS. It has €600m of notes maturing next January and has so far ruled out coming

to the bond markets, instead relying on a mix of cash on balance sheet, free cash flow and

available credit lines to repay/refinance this maturity. In addition to €335m of cash on the

balance sheet, of which we believe two-thirds is available for debt repayment (the cash

position fell to less than €100m at one stage), UPM tends to generate particularly strong free

cash flow in the last two quarters and especially in the last three months of the year (€252m in

Q410 and €223m in Q311). This suggests that UPM’s refinancing needs should be limited

next year. We also note that there has been limited hedging activity on UPM so far, however,

and that high spreads have reduced the attractiveness of the CDS market as a source of

cheap insurance for loan books. Also and more structurally, banks have been reluctant to

hedge their loans, particularly if comfortable with the risk, given lack of clarity over regulatory

rules.



December 2011 186

UPM has generated remarkably stable EBITDAs over the past several quarters and its Q3

numbers were once again resilient, despite the profit warning issued recently. As previously

anticipated, EBITDA was €331m in Q3, i.e. in the middle of the €280-380m range generated

since the end of Q409. Consensus EBITDA is currently around €310m for Q4, or €1.4bn for

the full year, and €1.5bn for 2012. UPM’s underlying EBITDA was €1.37bn in 2009, down 7%

from 2008 which was down 5% from 2007, suggesting that UPM is not a highly volatile

business.

UPM’s cash flow generation has in the past been more volatile than reported underlying

EBITDA but it has also been countercyclical: net cash from operations, i.e. after working

capital changes, was €867m in 2007, €628m in 2008, €1.26bn in 2009, €982m in 2010 and

€1.07bn in the last 12 months to the end of September 2011. Nevertheless and thanks to

much reduced investments, UPM consistently generated positive free cash flow since the end

of 2008. Operating free cash flow remains strongly positive at around €500m (LTM), or as

much as 13% of net debt. Whilst the operating outlook remains uncertain, capex likely will

remain at low levels also next year.

After consolidating Myllykoski, UPM’s net leverage is 2.7x compared to 2.2x in June and

2.4x at the end of last year. Considering the synergies expected from integrating the recent

acquisition (i.e. closing down 1.2m paper capacity, mainly magazines), leverage would be

2.3x with most of the synergies to materialise next year.

We expect UPM to redeem the €600m notes due next January with a mix of cash on

balance sheet, free cash flow and potentially tapping its €1.4bn credit lines, including €900m

of bilateral loans and a syndicated facility reduced at the request of the company to €500m

from €1bn earlier this year. Both facilities are committed, with maturities spread between

2014 and 2017 and subject to a covenant based on maximum gearing of 90% (compared to

52% in September).



December 2011 187


Virgin Media (VMED) is the UK’s number two telecommunications company, behind BT;

the UK’s number two pay-TV operator, behind BSkyB; the UK’s third-largest broadband

Internet provider (behind BT and TalkTalk); and a UK mobile telephony provider. VMED’s

network passes approximately 50% of UK households, or nearly 13m UK homes, and

provides services to 4.8m cable customers (a 37% penetration rate). In addition, VMED

provides mobile telephony services to 1.9m prepaid mobile customers and 1.2m post-paid

contract customers as the U.K.’s leading Mobile Virtual Network Operator (MVNO) over T-

Mobile’s network. VMED also provides voice, data and internet solutions to businesses,

public sector organisations and service providers in the UK through Virgin Media Business

(re-branded from the former ntl/Telewest Business).

Strengths

Investment-grade business profile and potential for medium-term rise to investment-grade

Moderate financial policy with leverage target of 3.0x Net debt/OCF by YE12-13

Strong liquidity, robust FCF, modest leverage and no sizeable maturities before 2015-16

Weaknesses Strong competition in UK broadband, TV and telephony markets

Need to balance share buyback and dividend levels in order to maintain moderate leverage

Group structure

Positive

Corporate Ratings

LT ST Outlook

MDY Ba1 NR Stable

S&P BB NR Positive

Fitch BB+ NR Stable

Bond z-spreads

CDS 5Y spread

Share price (€)


Asset Research

Market cap.(£m) 4,121

Equity Ticker VMED LN

Analyst

Alejandro Núñez

[email protected]






0

200

400

600

800

1,000

1,200

Z-s

pre

ad

(b

ps

)

VMED 7 18 GBPVMED 5.5 21 GBPVMED 9.5 16 USDVMED 9.5 16 EURVMED 8.875 19 GBPiBoxx HY GlobaliBoxx € HY TMT

0.0

0.2

0.4

0.6

0.8

1.0

1.2

(400)

(200)

0

200

400

600

800

1,000

No

v-0

9

Ja

n-1

0

Ma

r-1

0

Ma

y-1

0

Ju

l-1

0

Se

p-1

0

No

v-1

0

Ja

n-1

1

Ma

r-1

1

Ma

y-1

1

Ju

l-1

1

Se

p-1

1

No

v-1

1

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

VMED CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyVMED - XOVMED / XO (RHS)

0

500

1,000

1,500

2,000

2,500

(£ p

en

ce

)


Virgin Media



December 2011 188

Virgin Media – bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%) Next call Rec

VMED 7 18 £ VIRGIN MEDIA

SECURED FIN

Senior

Secured

BBB-

STABLE

Baa3

STABLE

BBB-

STABLE 2.1 875 875 105.96 371 5.4 5.6 15-Jan-14

VMED 6.5 18

US$

VIRGIN MEDIA

SECURED FIN

Senior

Secured

BBB-

STABLE

Baa3

STABLE

BBB-

STABLE 2.1 1,000 1,000 n.a. 298 3.8 3.8 15-Jan-14

VMED 5.25 21

US$

VIRGIN MEDIA

SECURED FIN

Senior

Secured

BBB-

STABLE

Baa3

STABLE

BBB-

STABLE 2.1 500 500 n.a. 246 4.4 n.a.

VMED 5.5 21 £ VIRGIN MEDIA

SECURED FIN

Senior

Secured

BBB-

STABLE

Baa3

STABLE

BBB-

STABLE 2.1 650 650 98.64 333 5.7 n.a.

VMED 9.5 16

US$

VIRGIN MEDIA

FINANCE PLC

Senior

Unsecured

BB-

STABLE

Ba2

STABLE

BB+

STABLE 3.2 1,350 1,350 111.75 413 4.9 4.9 15-Aug-13

VMED 9.5 16 € VIRGIN MEDIA

FINANCE PLC

Senior

Unsecured

BB-

STABLE

Ba2

STABLE

BB+

STABLE 3.2 180 180 110.26 422 5.8 5.8 15-Aug-13

VMED 8.875

19 £

VIRGIN MEDIA

FINANCE PLC

Senior

Unsecured

BB-

STABLE

Ba2

STABLE

BB+

STABLE 3.2 350 350 107.66 549 7.2 7.3 15-Oct-14 Buy

VMED 8.375

19 US$

VIRGIN MEDIA

FINANCE PLC

Senior

Unsecured

BB-

STABLE

Ba2

STABLE

BB+

STABLE 3.2 600 600 111.00 465 5.5 5.5 15-Oct-14

VMED 6.5 16

US$ VIRGIN MEDIA INC

Senior

Unsecured B+ STABLE NR NR 3.7 1,000 1,000 n.a. n/a n/a n/a


Virgin Media - financial data





Equity shareholders

RBC Trustees 14.8%

Capital World Investors 13.6%

Capital Research Global 11.5%

Fidelity 4.7%

Norges Bank 3.9%

£m 2008A 2009A 2010A 2011E 2012E

Total revenues 3,655 3,664 3,858 3,974 4,093


Revenue growth 0.0% 0.2% 5.3% 3.0% 3.0%

EBITDA growth 0.0% 3.6% 12.0% 5.0% 4.5%

EBITDA margin 35.6% 36.8% 39.1% 39.9% 40.5%



Cash taxes -0 3 23 0 0

Other 17 19 29 0 0



Restructuring cash costs, other 0 -40 -53 -30 -10

Cash Flow from Operations 757 891 1,058 1,111 1,212


Acquisitions / Divestitures 2 -13 203 0 0



Dividends -29 -33 -34 -40 -45

Shareholder returns 0 0 -367 -213 -300

Debt issuance 448 1,610 3,072 957 0

Debt redemption -846 -1,737 -3,240 -1,077 -300

Other Financing 1 91 17 0 0

Cash Flow from Financing -427 -70 -552 -373 -645

Change in Cash -139 250 94 102 -67

Cash 182 431 480 581 514


Senior Bank debt 4,189 3,113 718 718 568

Senior Secured notes 0 0 2,452 2,452 2,452

Senior Unsecured notes 1,256 2,190 2,068 1,948 1,798

Sr. Convertible 546 505 535 535 535

Other (Cap. Leases) 179 168 247 247 247

Total debt 6,170 5,975 6,020 5,950 5,600

Net debt 5,989 5,544 5,541 5,369 5,086


Revenues 3,655 3,664 3,858 3,974 4,093

Adj. EBITDA 1,302 1,349 1,510 1,586 1,657

EBITDA margin 0 0 0 0 0

Funds From Operations (FFO) 803 967 1,125 1,156 1,232


Free Cash Flow (FCF) 250 290 395 435 533


FFO / Net debt 13.4% 17.4% 20.3% 21.5% 24.2%


FCF / Net Debt 4.2% 5.2% 7.1% 8.1% 10.5%

Capex / Sales 13.1% 15.5% 16.3% 16.0% 15.5%

Net Bank debt / EBITDA 3.1x 2.0x 0.2x 0.1x 0.0x

Net Sr. Sec. Nts / EBITDA 3.1x 2.0x 1.8x 1.7x 1.5x

Net Sr. Unsec. Nts / EBITDA 4.0x 3.6x 3.2x 2.9x 2.6x

Total Net debt / EBITDA 4.6x 4.1x 3.7x 3.4x 3.1x

Cash 182 431 480 581 514


Liquidity 262 511 730 838 914

Consum

er - Cable,

£2,642m,

68%

Consum

er -

Mobile,

£560m,

15%

Consum

er - Non-

cable,

£77m, 2%

Busines

s - Data,

£242m,

6%

Busines

s - Voice,

£163m,

4%

Wholes

ale,

£160m,

4%

Busines

s - LAN,

£32m, 1%

United Kingdo

m, £3,876

m, 100%

838

0 0 0 0

800

1,541

0

1,497

724

0

1,053

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

(£m

)

800 0.5

2,550 1.6

1,720 1.1

759 0.5

5,829 3.7

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal D

eb

t (£

m)

% o

f T

ota

l D

eb

t

Debt (£m) Debt/EBITDA (x)

Senior bank Sr. Secured Sr. Unsec. CB/Other



December 2011 189

Bond covenants

Virgin Media – covenants summary

Bond VMED 7 18

VMED 6.5 18

VMED 5.25 21 VMED 5.5 21

Issuer VIRGIN MEDIA

SECURED FIN

VIRGIN MEDIA

SECURED FIN

VIRGIN MEDIA

SECURED FIN

VIRGIN MEDIA

SECURED FIN

Currency £

US$

US$ £

Coupon 7%, 15-Dec & 15-

Jun

6.5%, 15-Dec & 15-

Jun

5.25%, 15-Jan & 15-

Jul

5.5%, 15-Jan & 15-

Jul

Coupon step-up N

N

N N

Ranking 1st lien, Sr. Sec.

1st lien, Sr. Sec.

1st lien, Sr. Sec. 1st lien, Sr. Sec.

Guarantee restrictions Restricted

Payments

Restricted

Payments Merger

Limit of

Indebtedness

Negative pledge Y

Y

Y Y

Anti-layering Y

Y

Y Y

Cross-default Y

Y

Y Y


N

N N

Call schedule 15-Jan-14 103.500 15-Jan-14 103.250

15-Jan-15 101.750 15-Jan-15 101.625

15-Jan-16 100.000 15-Jan-16 100.000

Tax redemption Y

N

Y Y


Y, 101.000

Y, 101.000 Y

Make-whole call +50 15-Jan-14

+50 15-Jan-14

+25 +25

Equity clawback 40% @ 107

15-Jan-13

40% @ 106.5 15-

Jan-13 N N

Equity cure N

N

N N

Limitation on debt Y, 5.0x, £300m

basket

Y, 5.0x, £300m

basket

Y, 5.5x, £300m

basket

Y, 5.5x, £300m

basket


Y

Y Y


Y

Y Y

Restricted payments

Y, 5.0x lev.; since

Jun-06 cum.

EBITDA – 1.4x int.;

£75m general

basket

Y, 5.0x lev.; since

Jun-06 cum.


£75m general

basket

Y, 5.0x lev.; since

Jun-06 cum.


£75m general

basket

Y, 5.0x lev.; since

Jun-06 cum.


£75m general

basket


Y

Y Y


N

N N


Y

Y Y


Y

Y Y


N

N N

MAC clause N

N

N N




December 2011 190

Virgin Media – covenants summary (continued)

Bond VMED 9.5 16

VMED 9.5 16

VMED 8.875 19

VMED 8.375 19

Issuer

VIRGIN MEDIA

FINANCE PLC

VIRGIN MEDIA

FINANCE PLC

VIRGIN MEDIA

FINANCE PLC

VIRGIN MEDIA

FINANCE PLC

Currency US$

€

£

US$

Coupon 9.5%, 15-Feb

& 15-Aug

9.5%, 15-Feb

& 15-Aug

8.875%, 15-

Apr & 15-Oct

8.375%, 15-

Apr & 15-Oct

Coupon step-up N

N

N

N

Ranking Sr. Unsec.

Sr. Unsec.

Sr. Unsec.

Sr. Unsec.

Guarantee restrictions Limit of

Indebtedness N

Asset Sales

Dividend

Payment

Negative pledge Y

Y

Y

Y

Anti-layering Y

Y

Y

Y

Cross-default Y

Y

Y

Y


N

N

N

Call schedule 15-Aug-13 104.750 15-Aug-13 104.750 15-Oct-14 104.438 15-Oct-14 104.188

15-Aug-14 102.375 15-Aug-14 102.375 15-Oct-15 102.958 15-Oct-15 102.792

15-Aug-15 100.000 15-Aug-15 100.000 15-Oct-16 101.479 15-Oct-16 101.396

15-Oct-17 100.000 15-Oct-17 100.000

Tax redemption N

Y

N

N


Y, 101.000

Y, 101.000

Y, 101.000

Make-whole call +50 15-Sep-

13

+50 15-Aug-

13 +50 15-Oct-14

+50 15-Oct-14

Equity clawback 40% @ 109.5

15-Sep-12

40% @ 109.5

15-Aug-12

40% @

108.375 15-

Oct-12

35% @

108.375 15-

Oct-12

Equity cure N

N

N

N

Limitation on debt Y

Y

Y

Y


Y

Y

Y


Y

Y

Y

Restricted payments

Y, 5.0x lev.;

since Jun-06

cum. EBITDA –

1.4x int.; £75m

general basket

Y, 5.0x lev.;

since Jun-06

cum. EBITDA –

1.4x int.; £75m

general basket

Y, 5.0x lev.;

since Jun-06

cum. EBITDA –

1.4x int.; £75m

general basket

Y, 5.0x lev.;

since Jun-06

cum. EBITDA –

1.4x int.; £75m

general basket


Y

Y

Y


N

N

N


Y

Y

Y


Y

Y

Y


N

N

N

MAC clause N

N

N

N




December 2011 191


Virgin Media – Tricks and treats

Recommendation: We move to Hold from Buy on VMED £ 8.875% 2019 bonds while

maintaining a Sell recommendation on 5-year CDS given tight spreads as we see more

upside via CDS.

Q3 2011 results: key takeaways and highlights

Virgin Media (VMED) reported Q3 results generally in line with consensus, although

significantly more negative at the net income level due to a number of one-off items

(derivatives, FX losses, loss on retirement of debt), which provided a few early tricks and

treats, particularly regarding the initial performance of TiVo, Business and Mobile segments.

We view VMED’s Q3 results as positive overall even though OCF yoy growth continues to

ebb in comparison to its strong double-digit pace from H2 09 to the beginning of 2011,

having been impacted by a slowdown in the rate of both broadband and video net adds.

While the marginal negative loss of video net adds (-6k) is not as worrisome considering

that they are mostly lower ARPU (c. 20% lower than the £47.86 Q3 ARPU level), the fact that

VMED reported comparatively low Q3 11 broadband net adds of 24k (vs Q3 10’s +34k)

sequentially after its first broadband subs net loss in Q2 (seasonal effects) suggests to us that

the broadband train continues to lose steam. Given: 1) increasing competition in the low/mid-

level broadband tier space (which we would categorise as 10MB-30MB broadband services)

from the likes of BT’s fibre-based services (albeit admittedly technologically inferior FTTC-

based); 2) continued tough competition from Sky and BT as well as from upcoming new free-

view offers such as YouView (subscription-free, catch-up TV w/optional pay VoD); 3) a

stagnant or potentially worsening macro environment, we expect this slower growth trend to

continue.

However, the treats in VMED’s bag included strong take-up numbers from VMED’s TiVo

launch in Q3, in addition to encouraging news from the fledgling Business segment and from

the developing Mobile segment. Despite the Business segment’s less visible and bumpier

revenue/earnings profile, and Mobile’s growth from a relatively smaller base, we believe that

both of these segments have the potential to provide additional growth drivers to

complement VMED’s broadband segment and nascent TiVo campaign.

We are optimistic on the 2012 prospects for TiVo, particularly given VMED’s open

approach to embracing and collaborating with over-the-top (OTT) alternatives such as Netflix.

We would also highlight VMED’s decision to augment its Capital Return Program by

adding £250m (from the £348 UKTV sale proceeds) to its existing £1.0bn program ending

December 2012. Nevertheless, we note VMED’s reiteration of its 3.0x net debt/OCF target.

Next calendar events: Q4 2011, FY 2011 results in late February 2012.



December 2011 192


Wendel is a French investment company with an asset portfolio worth approximately €6.9bn.

The group's investments mainly include shares in three listed assets representing almost 90%

of the portfolio value: 17.1% of Saint-Gobain share capital, 51.1% of Bureau Veritas and, after

the completion of a recent sale, 5.8% of Legrand. Other investments include majority stakes in

smaller and highly leveraged unlisted companies (Materis, Stahl and Deutsch) with all three

reporting a much improved operating performance in 2010.

As a holding company with no cash flow of its own, Wendel’s ability to meet its debt

obligations mainly depends on the flow of dividends received and asset disposals. The

coverage of interest and dividends will likely remain well below 1x this year. Wendel incurred

significant debt in 2007 to fund the acquisition of the Saint-Gobain stake at historically high

share prices. Since then, Wendel has both reduced and lengthened the maturities of its debt,

including but not limited to the recent disposal of a 4.9% stake in Legrand for €313m in early

November.

The volatility of the capital markets is keeping pressure on Wendel’s loan-to-value ratios,

however, thus limiting the group's financial flexibility. That said the portfolio's liquidity remains

adequate, albeit not ample. A substantial portion of the shares held in Saint-Gobain, Legrand

and Bureau Veritas are still pledged to secure bank debt.

Strengths Investment portfolio focused on strong and stable companies

Focused on debt reduction and extension of debt maturities

Adequate liquidity

Traditionally strong bank relationships

Weaknesses Relatively high leverage

Free cash flow negative - margin calls on bank debt

Covenanted revolving credit facility

Still relatively short term oriented debt maturity profile

Group structure


Stable

Corporate Ratings

LT Outlook MDY NR NR

S&P BB- Negative

Fitch NR NR



Share price



Bloomberg Ticker MF_FP

Analysts

Roberto Pozzi


Barbora Matouskova






0

20

40

60

80

100

120

Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11

4.875% 2014 4.875% 2016

6.75% 2018

0

200

400

600

800

1000

1200

1400

Price MA 100

40

60

80

100

2010 2011

Industrial Conglomerates

Wendel



December 2011 193

Wendel - Bonds

Issuer Size Coupon Maturity Mdy S&P Price Yield Z-spread Nex call

WENDEL 700 4.875 04/11/14 NR BB- 96 6.1 446 NC

WENDEL 400 4.875 21/09/15 NR BB- 90.5 7.6 576 NC

WENDEL SA 700 4.875 26/05/16 NR BB- 85 8.8 686 NC

WENDEL 700 4.375 09/08/17 NR BB- 80.4 8.7 653 NC

WENDEL SA 300 6.75 20/04/18 NR BB- 88.9 8.9 665 NC


Wendel - Financial data

Asset portfolio

Financial debt split


Debt structure

Main shareholders

SLPS and Manager 35.9%

Present and former

employees 4.9%

Free float 59%


Saint Gobain

38%

Bureau Veritas

42%

Legrand10%

Unlisted and other

investments10%

Bonds57%

Stgbn bank loans33%

RCF10%

0

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016 2017 2018

Liquidity Debt

0

2,000

4,000

6,000

8,000

Q210

RCF Stgbn bank loans Bonds



December 2011 194

Bond Covenants

€400m 4.875% due 2014

Bond €400m 4.875% due 04/11/2014 Unsecured Senior Note

Issuer Wendel Investissement

Coupon Annual payment:4 November

Ranking within the issuer Unsecured and unsubordinated

Ranking vs other debt -

Guarantees No

Negative pledge Yes - Applicable for listed securities only - Not applicable in connection with acquisitions

Anti-layering No

Cross default Yes for any debt repayment > US$20m or if failure to pay interest or principal on any Notes


Call schedule No


Clawback No

CoC Yes at the higher of nominal or DBR 4.25% July 2014 +25bp. Ownership of more than 50% of share capital or voting rights or Potential Change of Control leading to a downgrade to sub-IG within (the longer of) COC announcement + 90 days or 150 days.

Limitation on debt No

Assets disposals No




€400m 4.875% due 2015

Wendel - 4.875% due 2015



Coupon Annual payment: 21 September



Guarantees No

Negative pledge Yes - Applicable for listed securities only - Not applicable in connection with acquisitions

Anti-layering No

Cross default Yes, for any debt repayment >US$20m or if failure to pay interest or principal on any Notes


Call schedule No


Clawback No

CoC Yes at the higher of nominal or DBR 3.25% July 2015 +25bp. Ownership of more than 50% of share capital or voting rights or Potential Change of Control leading to a downgrade to sub-IG within (the longer of) COC announcement + 90 days or 180 days.


Assets disposals No






December 2011 195

€400m 4.876% due 2016

Wendel - 4.875% 2016



Coupon Annual payment:26 May



Guarantees No

Negative pledge Yes, applicable to listed securities only – Not applicable in connection with acquisitions

Anti-layering No



Call schedule No


Clawback No

CoC Yes at the higher of nominal or DBR 3.5% Jan 2016 +25bp. Ownership of more than 50% of share capital or voting rights or Potential Change of Control leading to a downgrade to sub-IG within (the longer of) COC announcement + 90 days or 150 days


Assets disposals No




€700m 4.375% due 2017

Wendel - 4.375% 2017



Coupon Annual payment: 9 August



Guarantees No

Negative pledge Yes, applicable to listed securities only – Not applicable in connection with acquisitions

Anti-layering No



Call schedule No


Clawback No

CoC Yes at the higher of nominal or DBR 4% July 2017 +25bp


Assets disposals No






December 2011 196


Wendel - Market reaction overdone but no trigger to stop the widening

The recent equity market weakness has brought back Wendel’s loan-to-value ratio to

50-55%, after an improvement to 40-45% in the first half of the year. Since the beginning of

the year, the company has reduced loans with margin calls from €2.7bn as at Dec-10 to

€1.6bn, thus reducing the sensitivity of its cash position to changes in equity market

valuations, and has paid off all short-dated debt, leaving no debt maturing before July 2013.

Without a sustainable recovery of equity markets, the company will likely struggle to

improve its leverage without reducing value for shareholders. However, its liquidity remains

more than adequate, in our view, with around €900m of cash free of pledges and €700m still

available under the revolver, drawn for the first time and whose covenants are loosely

defined. The recent spread widening – the 5-year closed yesterday at 843bp – looks

overdone to us but, absent a sustained recovery in market sentiment, we believe spreads

will continue to drift wider and the curve to flatten despite the company’s adequate liquidity

position. That said, we maintain our Neutral/Hold recommendations for the CDS/bonds

respectively.

After improving to 44% at the end of March 2011, the loan-to-value ratio went back up

to around 52% at the end of August, reflecting weaker equity markets. S&P requires the LTV

ratio to remain consistently below 50% for the current BB- rating. Since the end of 2010,

management has reduced net debt by €295m through net asset disposals, the largest of

which was the sale of 21.8m of Legrand shares for €627m, partly offset by acquisitions and

interest payments. The table below shows the key figures and ratios as calculated based on

the figures reported in the company’s presentations.

Key figures and LTV ratio

€m 25-Aug-10 31-Dec-10 31-Mar-11 25-Aug-11

Gross asset value incl. cash 9,737 11,138 10,879 9,008

Gross debt 6,547 6,220 5,921 5,215

Cash 1,611 1,763 1,960 1,053

Net debt 4,936 4,457 3,961 4,162

LTV as calculated by S&P (est.) 61% 48% 44% 52%

Source: Company Data

Wendel has reduced loans with margin calls from €2.7bn as at Dec-10 to €1.6bn and paid

off the loans without margin calls, which had the shortest maturities. It has drawn €500m of

the revolving credit facility, thus also achieving a reduction of 180bp on that portion of debt.

Debt evolution and structure

€m Aug-10 31-Dec-10 Mar-11 Aug-11

Bonds including accrued interests 2,639 2,875 2,562 2,862

Bank debt related to Saint Gobain financing - margin calls 2,986 2,686 2,686 1,625

Bank debt related to Saint Gobain financing - no margin calls 1,275 729 729 0

Net value of hedging related to StGbn financing -377 -96 -75 155

Syndicated loan 0 0 0 500

Gross debt 6,523 6,194 5,902 5,142


Wendel further lengthened the maturity profile of its debt during the first half of the year

and now faces no debt maturities in 2011 and 2012. The first maturity is represented by

€516m of loans – approximately evenly split between margin loans and the RCF – coming to

maturity from July 2013. In 2014, €1.54bn of debt comes to maturity, €800m in 2015, €982m

in 2016, €913m in 2017 and €300m in 2018.



December 2011 197


€m Liquidity 2013 2014 2015 2016 2017 2018

Bonds 700 400 700 700 300

Loans with margin calls August 2011 266 594 400 213 213

Syndicated RCF 250 250

Eufor - credit lines tied to StGobn

financing

69

Unrestricted cash 902

Credit lines – covenanted 700

Available lines tied to StGobn financing 690

Mechaterm acquisition -110

Total 2,182 516 1,544 800 982 913 300


Cash on balance sheet was €1.05bn on 22 August, of which €151m was given as collateral

and €902m free of pledges. The value of the listed shares in Bureau Veritas and Legrand given

in pledge was approximately €1.2bn on 22 August. The reduction in the amount of loans with

margin calls has reduced the sensitivity of the cash position to changes in the price of listed

companies, although this was partly achieved by drawing on the covenanted revolving facility.

The company’s cash position is underpinned by a further €700m available under the

syndicated revolver and unpledged listed securities worth €5.79bn at the end of June. The

company has also access to €690m of credit lines tied to the Saint Gobain financing.

Liquidity

31-Dec-10 30-Jun-11 22-Aug-11

Total cash 1,763 1,167 1,053

Free cash 1,154 1,021 902

Cash given as collateral 609 146 151

Listed securities given as collateral 3,279 2,355 NA

Unpledged listed securities 4,601 5,786 NA

Available lines tied to StGobn financing 900 NA 690

Source: Company Data and SG Cross Asset Research

The €1.2bn syndicated credit line matures in September 2013 (€950m) and September

2014 (€250m). This facility is subject to two financial covenants based on the market value of

Wendel’s assets and on the amount of its net debt and, as such, is sensitive to changes in

equity market valuations. Based on our calculations, we estimate the first ratio at 39% versus

a covenant of <50% and the second ratio at 0.54x versus a covenant of <1.0x, thus still

leaving significant room under both covenants. Covenants are tested in June and December.

Wendel will likely continue to burn cash in 2011, although at a reduced rate. We expect a

cash burn of approximately €160m this year, down from €197m in 2010. Interest expenses,

dividends paid and operating expenses should remain well above the dividends the company

receives from its listed investments. We estimate a total charge cover at 0.6x this year, only

modestly better than 0.5x last year.



December 2011 198

Estimated cash flows at holding company level

€m 2006 2007 2008 2009 2010 2011

Saint Gobain 109 93 107

Bureau Veritas 41 47 65

Legrand 56 46 45

Stallergenes 3 3 0

Total dividends received 141 235 291 209 189 217

Interest expense 84 177 171 324 298 278

Net operating expense and taxes 11 17 41 43 38 40

Dividends paid 98 100 100 50 50 57

Fixed charge cover 1.5 1.2 1.4 0.6 0.6 0.7

Total charge cover 0.7 0.8 0.9 0.5 0.5 0.6

Free op cash flow -52 -59 -21 -208 -197 -158

Source: Company Data and SG Cross Asset Research

The performance of the listed and unlisted assets continued to be satisfactory in H1 11.

Bureau Veritas’ (~41% of gross asset value excluding cash) organic growth continues to be

strong at 6.6%; the net operating margin broadly stable and strong at 16% in H1 and the

company made four acquisitions, thus increasing financial debt and leverage. Saint Gobain

(~38% of gross asset value excluding cash) reported organic growth of 6.7%, an improved net

operating margin at 8.2% from 7.4% and stable net debt in H1. Legrand’s (10% of gross asset

value) organic growth was also strong and its operating margins and debt were broadly stable.

By far the most valuable amongst the unlisted assets, Deutsch reported very strong organic

and EBITDA growth in H1 on stable debt. Materis remains highly leveraged and its equity

value negligible in our view, but its operating performance was stable despite high input cost

inflation. After the sale of Legrand shares this year, asset concentration has increased, with

Bureau Veritas’ and Saint Gobain’s shares now representing approximately 80% of the value

of the company’s investment portfolio excluding cash.



December 2011 199


Wind is Italy’s leading alternative telecommunications company, behind the incumbent

Telecom Italia, and has been operating since 1999. It is Italy’s #3 mobile telephony provider

(by subscribers), behind Telecom Italia (#1) and Vodafone (#2), as well as Italy’s second-

largest fixed-line operator (behind Telecom Italia) by revenues. Wind’s mobile network

provides mobile telephony services to 20.6m subscribers. In addition, Wind’s fixed-line

network provides fixed telephony services to 3.1m voice customers and, as Italy’s second-

largest broadband operator, broadband internet services to 2.1m customers (as of June

2011). In addition, it provides voice, data and internet solutions to small- and medium-sized

enterprises in Italy. Wind operates virtually exclusively in Italy and now forms part of a larger

international telecoms group, US-listed VimpelCom.

Strengths

Good track record of operational outperformance and market share gains

Diversified services suite: mobile, fixed-line voice and data, broadband internet

Robust liquidity, solid free cash flow generation and a benign maturity profile through 2016

Weaknesses Intense competition amidst a worsening macroeconomic environment

Minimal deleveraging over next two years

Group structure

Positive

Corporate Ratings

LT ST Outlook

MDY Ba3 NR Negative

S&P BB- NR Stable

Fitch BB NR Negative

Bond z-spreads

CDS 5Y spread

Share price (€)

Unlisted


Asset Research

Market cap. N/A

Equity Ticker WIND IM

Analyst

Alejandro Núñez

(44) 20 7676 7613 [email protected] Source: Company Data, SG Credit Research





Wind Telecom SpA

(previously Weather

Investments SpA)

Wind Acquisition

Holdings Finance SpA

Wind Acquisition

Finance SA

Wind

Telecomunicazioni SpA

11.75% 2017s

(€2.8bn)

Sr. Sec. 2018s

TL A-B (€3.4bn)

RCF (€400m)

12.25% 2017 PIK

(€0.87bn)

100%

100%

0

500

1000

1500

2000

Z-s

pre

ad

(b

ps

)

WINDIM 7.375 18 EURWINDIM 11.75 17 EURiBoxx HY GlobaliBoxx € HY TMT

0.0

0.5

1.0

1.5

2.0

2.5

(200)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

5-y

ea

r C

DS

/ 5

-ye

ar

XO

CD

S (

x)

5-y

ea

r C

DS

(b

ps

)

WINDIM CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyWINDIM - XOWINDIM / XO (RHS)


Wind Telecomunicazioni



December 2011 200

Wind Telecomunicazioni – bonds summary

Bond Issuer Rank

S&P Corp

Rtg /

Outlook

Moody’s

Corp Rtg /

Outlook

Fitch Corp

Rtg /

Outlook

Total debt/

EBITDA (x)

(Sep-11 A)

Issue

(m)

Out

(m)

Price

(Ask)

Z-spread

(Ask) (bp)

YTW

(Ask)

(%)

YTC

(Ask)

(%) Next call Rec

WINDIM 7.375

18 €

WIND ACQUISITION

FIN SA Sr. Sec.

BB

STABLE Ba2 NEG BB+ NEG 2.9 1,750 1,750 84.00 876 11.0 20.1 15-Nov-13 Buy

WINDIM 7.25

18 US$

WIND ACQUISITION

FIN SA Sr. Sec.

BB

STABLE Ba2 NEG BB+ NEG 2.9 1,300 1,300 87.38 847 10.0 17.6 15-Nov-13 Buy

WINDIM 11.75

17 €

WIND ACQUISITION

FIN SA

Sr.

Unsec.

BB-

STABLE B2 NEG BB- NEG 4.1 1,250 1,250 80.60 1,516 17.3 30.8 15-Jul-13 Buy

WINDIM 11.75

17 US$

WIND ACQUISITION

FIN SA

Sr.

Unsec.

BB-

STABLE B2 NEG BB- NEG 4.1 2,000 2,000 87.13 1,383 15.2 25.0 15-Jul-13 Hold

WINDIM 12.25

17 €

WIND ACQUISITION

HOLDING

Sr.

Sub.

B

STABLE B3 NEG B+ NEG 4.6 325 392 75.00 n.a. 19.4 39.2 15-Jul-13 Hold

WINDIM 12.25

17 US$

WIND ACQUISITION

HOLDING

Sr.

Sub.

B

STABLE B3 NEG B+ NEG 4.6 625 754 n.a. n.a. n.a. n.a. 15-Jul-13 Hold


Wind Telecomunicazioni - financial data

Revenue split (9M 2011)

Geographic revenues (9M 2011)



Equity shareholders

Vimpelcom 11.0%

Source: Company data


(€m) 2008A 2009A 2010A 2011E 2012E

Total revenues 5,519 5,726 5,898 5,995 6,065


Revenue growth 4.7% 3.8% 3.0% 1.6% 1.2%

EBITDA growth 9.9% 6.6% 2.0% 2.3% 1.4%

EBITDA margin 36.4% 37.4% 37.1% 37.3% 37.4%



Cash taxes -70 -69 -82 -149 -147

Other -10 1 0 0 0

FFO 1,448 1,586 1,245 1,375 1,388

Working capital -80 -22 10 9 4

Cash flow from operations 1,368 1,564 1,254 1,384 1,392


Other 0 0 0 0 0

Dividends 0 0 0 0 0

Op. Free Cash Flow (ex-dividends) 653 792 258 458 402

FFO - Capex 733 815 249 448 398

Free cash flow 652.8 792.3 258.3 457.7 402.4

Acquisitions 0.0 0.0 0.0 0.0 1.0

Change in equity 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0

Cash flow for debt repayment 652.8 792.3 258.3 457.7 403.4

Debt (repayment) / increase -412 -363 -132 400 -121

Cash 379 584 406 518 703

Revolver availability 400 400 400 400 400

Liquidity 779 984 806 918 1,103

Cash & other adjustments 379 584 406 518 703

Senior bank debt 4,237 4,151 3,404 3,804 3,554

Junior bank debt (2nd lien) 688 664 0 0 0

Senior Sec. Notes 0 0 2,689 2,689 2,689

Senior Notes 1,425 4,040 2,793 2,793 2,793

PIK notes 0 773 874 988 1,117

Total cash-pay debt (ex-PIK) 6,350 8,855 8,886 9,286 9,036

Net cash-pay debt (ex-PIK) 5,972 8,272 8,480 8,767 8,333

Total debt (incl. PIK) 6,350 9,628 9,760 10,274 10,153

Net debt (incl. PIK) 5,972 9,045 9,354 9,755 9,450

Total Sr. Sec. Debt / EBITDA 2.5x 2.2x 2.8x 2.9x 2.8x

Total cash-pay debt / EBITDA 3.2x 4.1x 4.1x 4.2x 4.0x

Net cash-pay debt / EBITDA 3.0x 3.9x 3.9x 3.9x 3.7x

Total debt (incl. PIK) / EBITDA 3.2x 4.5x 4.5x 4.6x 4.5x

EBITDA / Net cash interest 4.2x 4.4x 2.5x 3.1x 3.1x

EBITDA - Capex / Net cash interest 2.7x 2.8x 1.4x 1.8x 1.7x

FFO / Net cash-pay debt 24.2% 19.2% 14.7% 15.7% 16.7%

FFO - Capex / Net cash-pay debt 12.3% 9.9% 2.9% 5.1% 4.8%

Capex / Sales (%) 13.0% 13.5% 16.9% 15.5% 16.3%

Mobile, €3,036m, 73%

Fixed, €1,110m, 27%

ITALY, €4,146

m, 100%

1,000

0 0 0 0 0

1,435

5,546

2,728

0 0

0

1,000

2,000

3,000

4,000

5,000

6,000

(€m

)

3,352 1.6

2,728 1.3

2,693 1.3

936 0.4

9,709 4.6

0

2,000

4,000

6,000

8,000

10,000

12,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal D

eb

t (€

m)

% o

f T

ota

l D

eb

t





December 2011 201

Bond covenants

Wind Telecomunicazioni – covenants summary

Bond

WINDIM 7.375

18

WINDIM 7.25 18

WINDIM

11.75 17

WINDIM

11.75 17

WINDIM

12.25 17

WINDIM

12.25 17

Issuer

WIND

ACQUISITION

FIN SA

WIND

ACQUISITION

FIN SA

WIND

ACQUISITI

ON FIN SA

WIND

ACQUISITI

ON FIN SA

WIND

ACQUISITI

ON

HOLDING

WIND

ACQUISITI

ON

HOLDING

Currency €

US$

€

US$

€

US$

Coupon 7.375%, 15-

May & 15-Nov

7.25%, 15-

May & 15-Nov

11.75%,

15-Jan &

15-Jul

11.75%,

15-Jan &

15-Jul

12.25%,

15-Jul &

15-Jan

12.25%,

15-Jul &

15-Jan

Coupon step-up N

N

N

N

N

N

Ranking 1st lien, Sr.

Sec.

1st lien, Sr.

Sec.

Sr. Unsec.,

Sub.

Sr. Unsec.,

Sub. Sub.

Sub.

Guarantees N

Asset Sales

N

N

N

N

Negative pledge Y

Y

N

Y

Y

N

Anti-layering Y

Y

Y

Y

Y

Y

Cross-default Y

Y

N

Y

Y

N

Redemption

before call N

N

N

N

N

N

Call schedule 15-Nov-13 105.531 15-Nov-13 105.438 15-Jul-13 105.875 15-Jul-13 105.875 15-Jul-13 106.125 15-Jul-13 106.125

15-Nov-14 103.688 15-Nov-14 103.625 15-Jul-14 102.938 15-Jul-14 102.938 15-Jul-14 103.063 15-Jul-14 103.063

15-Nov-15 101.844 15-Nov-15 101.813 15-Jul-15 100.000 15-Jul-15 100.000 15-Jul-15 100.000 15-Jul-15 100.000

15-Nov-16 100.000 15-Nov-16 100.000

Tax redemption N

N

N

N

N

N

Change of

control Y, 101.000

Y, 101.000

Y, 101.000

Y, 101.000

Y, 101.000

Y

Make-whole call +50 15-Nov-

13

+50 15-Nov-

13

+50 15-

Jul-13 N

+50 15-

Jul-13

+50 15-

Jul-13

Equity clawback N

35% @ 107.25

15-Nov-13

35% @

111.75 15-

Jul-12

35% @

109.75 15-

Jul-17

35% @

112.25 15-

Jul-12

35% @

112.25 15-

Jul-12

Equity cure N

N

N

N

N

N

Limitation on

debt

Y, 3.0x

Secured

Debt/EBITDA;

5.0x Total

debt/EBITDA

incurrence

Y, 3.0x

Secured

Debt/EBITDA;

5.0x Total

debt/EBITDA

incurrence

Y, 5.0x

Total debt/

EBITDA

incurrence

Y, 5.0x

Total debt/

EBITDA

incurrence

Y

N

Asset sales /

Conveyance Y

Y

N

Y

Y

Y

Limit on Sale &

Leasebacks Y

Y

N

Y

Y

N

Restricted

payments Y

Y

N

Y

Y

Y

Transactions

with affiliates Y

Y

N

Y

Y

N

Merger/Sale

restrictions N

N

N

N

N

N

Restriction on

bus. activities Y

Y

N

Y

Y

N

Limitation on

sub debt Y

Y

N

Y

Y

N

Financial

reporting N

N

N

N

N

N

MAC clause N

N

N

N

N

N




December 2011 202


Wind Telecomunicazioni – Softer tailwinds but still weathering the storm

We initiate coverage on Wind with a Buy recommendation on Wind’s 7.375% 2018 Senior

Secured Notes and the € 11.75% 2017 Senior Notes, a Hold on the $ 11.75% 2017 Senior

Notes and 2017 PIKs, and a Sell on 5-year CDS.

We initiate coverage on Wind Telecomunicazioni (Wind), Italy’s third-largest mobile

communications company and second-largest fixed-line operator offering mobile and fixed

telephony and broadband services, with a Stable credit opinion. We believe its operational

and financial positive momentum will continue in the near to medium term albeit at a slower

pace than over the last two years.

Although it came at a €682m up-front cost, we endorse Wind’s successful bids for Italian

4G spectrum in Sep 2011 as this will position Wind well to compete in the LTE/4G mobile

data services market in the medium term.

We view positively Wind’s ability to moderate and counter to some degree the effects of

adverse regulatory decisions including Mobile Termination Rate reductions and Local Loop

Unbundling fee increases through operational efficiencies.

We view favourably the potential for support from Wind’s new parent, VimpelCom, a larger

and better resourced international telecoms group.

Although the group management’s financial policy objectives are focused on deleveraging,

we would suggest monitoring Wind’s commitment to deleveraging from 2012 after incurring

at least €600m in additional debt to finance its 4G spectrum bids.

We are cautious regarding the evolving impact on Wind’s revenues and earnings of

heightened competitive pressures in the Italian telecoms market, and in mobile services in

particular, as well as from the softening Italian macroeconomic environment.

As a result, Wind’s historical outperformance gap vs its competitors will probably narrow in

2012 but we consider it well placed to manage its operating challenges.

SG Recommendations: On a fundamental basis, we see value across Wind’s capital

structure and particularly in its 2018 Senior Secured and 2017 Senior Notes. Between the two

we have a preference for the 2018s. In the currently uncertain environment, we recommend

the more insulated Wind € Senior Secured Note 2018s and, to a lesser extent, the 2017 €

Senior Notes. The € 7.375% 2018 Senior Secured Notes (YTW of 8.8% at an indicative price

of 93.2) offer a respectable yield for a solid credit exhibiting stable operating fundamentals

while still affording some scope for price appreciation. Nonetheless, despite exhibiting greater

interim volatility while eurozone debt crisis events oscillate, the € 11.75% 2017 Senior Notes

(12.4% YTW @ 97.2) also offer value particularly if considered in a YTC context were they to

be called in Nov 2013 as part of a group refinancing exercise. We have a Hold on the $

11.75% 2017 Senior Notes and PIKs, and a Sell 5-year Wind CDS vs Buy XO 5-year CDS at

the current spread ratio of 1.6x with a target ratio of 1.25x and stop-loss of 2.0x over 4-6

months.



December 2011 203



December 2011 204



December 2011 205

APPENDIX

ANALYST CERTIFICATION

The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately

reflect his or her personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation

was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Tim Barker,

Barbora Matouskova, Pierre Bergeron, Torstein Jorstad, Alejandro Núñez, Roberto Pozzi, Juliano Hiroshi Torii, CFA.

EXPLANATION OF CREDIT RATINGS

SG credit research may contain both a credit opinion of the company and market recommendations on individual bonds

issued by the company and/or its Credit Default Swap.

Credit Opinion:

Positive: Indicates expectations of a general improvement of the issuer's credit quality over the next six to twelve months,

with credit quality expected to be materially stronger by the end of the designated time horizon.

Stable: Indicates expectations of a generally stable trend in the issuer's credit quality over the next six to twelve months,

with credit quality expected to be essentially unchanged by the end of the designated time horizon.

Negative: Indicates expectations of a general deterioration of the issuer's credit quality over the next six to twelve months,

with the credit quality expected to be materially weaker by the end of the designated time horizon.

Individual Bond recommendations:

Buy: Indicates likely to outperform its iBoxx subsector by 5% or more

Hold: Indicates likely to be within 5% of the performance of its iBoxx subsector

Sell: Indicates likely to underperform its iBoxx subsector by 5% or more

Individual CDS recommendations:

SG Credit research evaluates its expectation of how the 5 year CDS is going to perform vis-à-vis its sector.

Sell: CDS spreads should outperform its iTraxx sector performance

Neutral: CDS spreads should perform in line with its iTraxx sector performance

Buy: CDS spreads should underperform its iTraxx sector performance

CONFLICTS OF INTEREST

This research contains the views, opinions and recommendations of Société Générale (SG) credit research analysts and/or

strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or

relative value, it may differ from the fundamental credit opinions and recommendations contained in credit sector or company

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trading desk and firm revenues and competitive factors. As a general matter, SG and/or its affiliates normally make a market

and trade as principal in fixed income securities discussed in research reports.



December 2011 206

IMPORTANT DISCLOSURES

CMA CGM SG acted as joint dealer manager in CMA CGM's tender offer and joint lead manager of the following bond

issue.

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Deutschland, Lafarge, Nexans, ONO, Peugeot Citroen PSA, Renault, TUI, Telenet, Virgin Media, Wendel.



December 2011 207

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December 2011 208

CROSS ASSET RESEARCH – CREDIT ANALYSIS GROUP Global Head of Research Head of Sector Research Head of Credit Research Deputy Head of Credit Research

Patrick Legland

Fabrice Theveneau

Tim Barker

Hervé Gay

(33) 1 42 13 97 79 (33) 1 58 98 08 77 (44) 20 7676 7168 (33) 1 42 13 87 50

[email protected] [email protected] [email protected] [email protected]

Financials (Banks)

Hank Calenti, CFA

Stéphane Le Priol

Jean Luc Lepreux

(44) 20 7676 7262 (33) 1 42 13 92 93 (33) 1 42 14 88 17 [email protected] [email protected] [email protected]

Financials (Insurance)

Rötger Franz


Auto & Transportation

Pierre Bergeron

(33) 1 42 13 89 15 [email protected]

Consumers & Services

Marc Blanc

Torstein Jorstad

(33) 1 42 13 43 87 (44) 20 7676 7030 [email protected] [email protected]

Industrials

Roberto Pozzi

Barbora Matouskova

Bob Buhr

(44) 20 7676 7152 (44) 20 7676 7023 (44) 20 7676 6454 [email protected] [email protected] [email protected]

Telecom & Media

Juliano Hiroshi Torii, CFA

Alejandro Núñez

(44) 20 7676 7158 (44) 20 7676 7136 [email protected] [email protected]

Utilities

Hervé Gay

(33) 1 42 13 87 50 [email protected]

CROSS ASSET RESEARCH – CREDIT STRATEGY GROUP Global Head of Research

Patrick Legland

(33) 1 42 13 97 79

[email protected]

Strategy

Suki Mann (Head)

Juan Esteban Valencia

(44) 20 7676 7063 (33) 1 56 37 36 83 [email protected] [email protected]

ABS

Jean-David Cirotteau

(33) 1 42 13 72 52 [email protected]


SG HY Compass - Storm and Stress 20111205

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Transcript of SG HY Compass - Storm and Stress 20111205