Why EM bonds are a bridge too far
Investors are flocking to emerging market bonds amidst the current risk-on-rally, but elevated yields do not always compensate for the true risks involved.
Fixed Income Specialist
Instrument: Casino 4.87% Perpetual EUR bonds (FR0011606169)
Price Target: n/a
Market Price: 79.50
Casino is the fourth-largest retailer in France with 11.6% market share after Auchan, Carrefour, and Intermarche. The company is also one of the largest retailers in Latin America. Although the troubled Rallye is the company’s largest shareholder, Casino is operationally strong and it has grown operating profits faster than French competitors such as Carrefour in 2017.
The leverage of the company is expected to improve as the company is planning to sell €1.5 billion worth of assets between this year and 2019 and at the same time, restructuring costs are expected to decline. A gradual decrease in leverage could potentially lead to a ratings upgrade in the future.
After this sale, the company will still have a sizable portfolio of domestic assets which could be disposed of in the event of a deterioration in credit conditions and a consequent incapability to refinance debt. We believe that the selloff that we have seen in the market after the firm’s H1 2018 earing results was caused by investor disappointment given that guidance for FY 2018 was not revised upward and that the company has not been deleveraging as expected. The overall restructuring story, however, is still compelling.
We believe that Casino 4.87% fixed-to-floater Perpetual Hybrid Junior Subordinated Notes offer an attractive yield (approximately 9.21% yield to 2024 call), compared to peers. This bond is a hybrid, meaning that it has equity-like features such as being a perpetual and the coupon can be deferred at the option of the issuer. The coupon is fixed until January 31, 2019, from then it will pay five-year swap rates +3.819% until January 31, 2039, and then it will pay five-year swap rates +6.569%.
Although the first call date of the bond is in approximately five months, we believe that Casino doesn’t have the economic incentive to call it back. We feel that a call in 2024 is most probable as the instruments will lose its equity credit with S&P. We believe that the bond is most likely to be called back in January 2024 because of this reason and at an indicative current price of 79.50, the indicative yield to 2024 is 9.21%
Minimum piece is 100,000 nominal EUR with 100,000 nominal EUR increments. Return objective is primarily repayment and coupon payment.
You have to be aware that Rallye owns 51% of Casino, which is highly leveraged and may not be able to refinance existing debt before the end of the year. The company is high-yield (Ba3/B+) and it has a high debt-to-capital ratio and could suffer from increasing interest rates, increasing competition, and new tariffs. Default is always a possibility for low rated, highly leverage bonds.
Time Horizon: Strategic Trade.
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