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Sector Report High Yield Nordic 15 September 2015 Please note: the statement at the rear of this report contains details of investment banking services recently provided by SEB which could be considered relevant To the subject matter of this report. Nordic High Yield Update Where to be in a challenging market Analysts Michael Andersson (46) 8 506 234 82 [email protected] ● Cautious on the Norwegian HY market With an oil price forecast to remain in the area of USD 50/b, the difficulties relating to Norwegian high yield remain. Challenges continue in the E&P and oil services segments and Norwegian HY spreads have started to widen again. In a difficult market, Norwegian HY primary activity in H1 2015 was limited and mostly skewed towards the BB segment. With a continued low oil price, expectations of rising default rates and the risk of more negative fund outflows, we are cautious towards the Norwegian HY market. We argue that it will get worse before it gets better for the majority of oil related bonds. Henrik Blymke (47) 2282 7191 [email protected] Øystein Bogfjellmo (47) 2282 7128 [email protected] Thomas Eitzen (47) 2282 7201 [email protected] ● Swedish HY market stable – attractive opportunities in USD Swedish new issuance in H1 2015, very much driven by the real estate sector, was weak. However, low issuance levels have mitigated the spread widening and the Swedish HY market has actually tightened somewhat of late. We argue that the Swedish market will be more stable than the Norwegian market and, unless there are significant fund outflows, we expect spread levels to be largely unchanged. We currently recommend the Swedish HY market over the Norwegian HY market. Moreover, we highlight that the US HY market is trading wider than the Swedish HY market and euro HY market and we expect the euro and USD markets to converge due to US companies issuing in the cheaper euros. Hence, we argue there are selected opportunities in USD. Fredrik Hössjer (46) 8 506 23259 [email protected] Alexander Jost (47) 2282 6712 [email protected] Ebba Lindahl (46) 8 506 23208 [email protected] Mats Nyström (46) 8 506 23311 [email protected] Jonas Ranneby (46) 8 506 23 201 [email protected] ● Most and least preferred bonds In terms of recommendations we highlight the Millicom 2020 USD bond and the Nokia USD 2019 bond. Both look attractive versus their SEK and EUR equivalents. In EUR we find SSAB 2019 interesting, offering a significant pick-up compared with its SEK equivalents. In the SEK BB space we highlight Swedish Orphan Biovitrum and in the SEK B-rating category NSP. As an alternative to corporate high yield we favour the Volvo and Dong hybrids and Danske Bank AT1. Of our least preferred bonds we flag Aker Solutions (NOK bonds), StoraEnso (EUR bonds) and Meda (SEK bonds). Lasse Rimpi (358) 9 616 28716 [email protected] David Rostedt (46) 8 506 23130 [email protected] Norwegian BB and B/CCC rating category spreads No. of defaulted issuers in the Nordics 40 1,200 35 1,000 30 # of defaulted issuers 45 1,400 Spread 1,600 800 600 400 25 20 15 10 200 5 0 0 2007 BB 5Y Source: SEB www.seb.se 2008 2009 2010 Stamdata reported defaults B/CCC 5Y 2011 2012 2013 2014 SEB estimated defaults Source: SEB, Stamdata Important. All disclosure information can be found on pages 115 – 116 of this document 2015 YTD Sector Report Nordic High Yield Update Contents Page Key financial data overview ................................................................................................................ 3 Low oil price, weak E&P spending..................................................................................................... 4 Expectations for selected industries ................................................................................................. 5 Challenging market – where to go? ................................................................................................. 10 Alternatives to corporate high yield ................................................................................................. 15 Hybrid bonds - still attractive ........................................................................................................... 15 Subordinated financials................................................................................................................... 17 Primary market update, H1 2015 .................................................................................................... 21 Most and least preferred bonds ....................................................................................................... 22 Most preferred bonds ...................................................................................................................... 23 Least preferred bonds ..................................................................................................................... 24 Recommendation changes ............................................................................................................. 25 Recommendation summary .............................................................................................................. 26 Company details ................................................................................................................................ 28 Ahlstrom (B+/Stable) ....................................................................................................................... 29 Aker ASA (BB+/Stable) ................................................................................................................... 31 Aker Solutions (BB+/Negative) ....................................................................................................... 33 BW Offshore (BB+/Stable) .............................................................................................................. 35 Cramo (BB/Stable) .......................................................................................................................... 37 Det Norske Oljeselskap (BB/Negative) ........................................................................................... 39 DFDS (BB+/Positive) ...................................................................................................................... 41 Dolphin Group (CCC+/Negative) .................................................................................................... 43 EG Gruppen (AX IV EG Holding III.) (B+/Stable) ........................................................................... 45 Fred Olsen Energy (BB/Negative) .................................................................................................. 47 GasLog (BB-/Stable) ....................................................................................................................... 49 Getinge (BB+/Negative) .................................................................................................................. 51 Golden Heights (B+/Stable) ............................................................................................................ 53 Heimstaden (BB/Stable) ................................................................................................................. 55 Hemfosa (BB/Stable) ...................................................................................................................... 57 Höegh LNG (B+/Positive) ............................................................................................................... 59 Hoist Finance (BB/Stable)............................................................................................................... 61 IM Skaugen (CCC/Negative) .......................................................................................................... 63 J. Lauritzen (B/Negative) ................................................................................................................ 65 Meda (BB-/Stable) .......................................................................................................................... 67 Metsä Board (BB/Stable) ................................................................................................................ 69 Millicom (BB+/Stable)...................................................................................................................... 71 Navigator Gas (B+/Positive) ........................................................................................................... 73 Nokia (BB/Stable) ........................................................................................................................... 75 North Atlantic Drilling (B-/Negative) ................................................................................................ 77 NSP (B+/Negative).......................................................................................................................... 79 Nynas (B+/Stable) ........................................................................................................................... 81 Ocean Yield (BB/Stable) ................................................................................................................. 83 Orc Group Holding (B/Negative) ..................................................................................................... 85 Outokumpu (B/Stable) .................................................................................................................... 87 Outotec (BB+/Stable) ...................................................................................................................... 89 Polarcus (CCC+/Negative) ............................................................................................................. 91 Prosafe (BB+/Negative) .................................................................................................................. 93 Ramirent (BB+/Stable) .................................................................................................................... 95 REC Silicon (B/Stable) .................................................................................................................... 97 SAS (B-/Stable) ............................................................................................................................... 99 Seadrill (BB-/Negative) ................................................................................................................. 101 Songa Offshore (B-/Negative)....................................................................................................... 103 SSAB (BB-/Stable) ........................................................................................................................ 105 Stena Metall (BB+/positive) .......................................................................................................... 107 Stora Enso (BB/Stable) ................................................................................................................. 109 Swedish Orphan Biovitrum (BB-/Stable) ....................................................................................... 111 Tallink (BB/Stable) ........................................................................................................................ 113 SEB Credit Research 15 September 2015 2 Sector Report Nordic High Yield Update Key financial data overview In the table below, we have listed selected credit metrics for the companies covered in this report. All 43 high yield (HY) companies listed in this report are covered by SEB Credit Research. For further details on the selected companies, please refer to the recommendation summary and company details sections of this report. Key financial figures for 2015, as of 8 September 2015 SEB Rating Ahlstrom Aker ASA Aker Solutions BW Offshore Cramo Det norske oljeselskap DFDS Dolphin Group EG Gruppen Fred Olsen Energy GasLog Getinge Golden Heights Heimstaden Hemfosa Hoist Finance Höegh LNG IM Skaugen J. Lauritzen Meda Metsä Board Millicom Navigator Holdings LTD Nokia North Atlantic Drilling NSP Nynas Ocean Yield ASA Orc Group Holding Outokumpu Outotec Polarcus Prosafe Ramirent REC Silicon SAS Seadrill Songa Offshore SSAB Stena Metall Ab Stora Enso Swedish Orphan Biovitrum Tallink Grupp B+ BB+ BB+ BB+ BB BB BB+ CCC+ B+ BB BBBB+ B+ BB BB BB B+ CCC B BBBB BB+ B+ BB BB+ B+ BB B B BB+ CCC+ BB+ BB+ B BBBBBBBB+ BB BBBB Rating Adjusted Net debt Outlook / EBITDA (x) Stable Stable Negative Stable Stable Negative Positive Negative Stable Negative Stable Negative Stable Stable Stable Stable Positive Negative Negative Stable Stable Stable Positive Stable Negative Negative Stable Stable Negative Stable Stable Negative Negative Stable Stable Stable Negative Negative Stable Positive Stable Stable Stable 4.0 n/m 2.9 5.2 2.1 2.7 2.1 2.8 5.2 3.6 7.3 4.1 5.2 19.2 11.9 0.0 8.3 neg. 6.3 4.8 1.3 2.3 3.3 neg. 7.7 5.2 3.8 4.3 3.9 8.9 2.9 4.2 5.6 1.6 2.3 3.2 4.2 12.7 5.6 1.9 3.2 1.0 2.9 Adjusted FFO / Net debt (%) EBITDA margin (%) 18.7 n/m 24.2 13.5 40.5 34.8 38.9 27.6 12.4 25.7 8.9 18.3 13.7 2.9 5.5 0.0 5.3 neg. 6.3 12.3 64.2 32.1 24.1 neg. 8.1 12.6 16.3 19.7 24.3 1.5 25.8 14.1 12.7 55.6 33.5 20.2 20.0 4.3 14.1 39.7 22.4 44.7 34.7 9.2 n/m 7.4 41.6 28.7 72.2 11.5 23.8 11.4 47.9 64.3 18.5 8.2 51.2 63.4 43.8 neg. -9.1 31.7 14.8 32.2 60.3 15.0 42.6 7.7 4.5 88.5 26.3 4.9 7.1 42.4 52.1 27.6 14.7 6.0 63.1 48.6 8.1 4.7 13.6 20.0 20.3 Equity EBITDA interest ratio (%) cover (x) 36.2 n/m 24.4 23.2 46.4 12.2 53.9 40.3 14.1 32.9 38.2 37.0 20.0 31.3 33.1 12.7 29.6 16.1 35.5 33.1 47.7 26.2 56.1 44.3 15.7 25.9 31.5 39.6 61.2 35.2 34.1 32.5 30.2 44.7 73.3 16.6 44.4 25.5 48.7 37.7 41.8 57.1 50.4 6.4 n/m 6.5 5.1 14.0 8.3 5.9 3.7 2.8 8.9 3.2 7.0 2.2 1.9 3.6 0.0 2.2 neg. 1.7 5.2 10.1 5.5 4.9 12.5 4.4 3.4 3.1 12.5 2.7 2.7 8.7 2.6 5.0 16.4 4.2 3.0 6.5 2.6 5.6 5.4 6.2 11.9 5.0 Source: SEB SEB Credit Research 15 September 2015 3 Sector Report Nordic High Yield Update Low oil price, weak E&P spending Since our previous Nordic High Yield report in January (Pouring oil, but still troubled waters) the Norwegian HY market has continued to face challenges. Default rates are still on the rise and Norwegian HY spreads have widened once again. The key explaining factor behind this continues to be the oil price. Oil price forecast revision on increased oil surplus From January, the oil price partially recovered, only to decline again. Our oil market analysts have since then increased the calculated oil surplus in 2015 and 2016. This is mostly due to higher actual crude oil production from Opec so far in 2015, as well as adding supply from Iran on the balance for 2016 and 2017 (as a result of the Iranian nuclear deal in July). Previously, we expected the oil market to be close to balance in 2016, while we now expect this to occur first in 2017. Oil price (USD/b) Oil price forward curve (USD/b) 160 100 140 90 120 80 100 70 80 60 60 50 40 40 20 0 Jun-08 2015 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Source: SEB, Bloomberg 2016 6 months ago 2017 2018 Aug'15 2019 2020 12 months ago Source: SEB, Bloomberg The net effect is that we have cut our oil price forecast in August from USD 62/b to USD 54/b for 2015 and from USD 70/b to USD 55/b for 2016 and USD 60/b for 2017. Overall, we argue for a slightly tighter supply-demand balance next year (from 1.8m b/d to 0.9m b/d) and we expect the market to almost balance in 2017, driven by strong demand growth (non-OECD), coupled with falling and slower growth from US production. Actual change in organic upstream spending and 2015-16 estimates by SEB Source: SEB SEB Credit Research 15 September 2015 4 Sector Report Nordic High Yield Update Expectations for selected industries In our previous Nordic High Yield Update in January, we concluded that the effect of a low oil price would be more rapid for those industries that are negatively impacted than for those that benefit. This has proven true and looking ahead oil related sectors have faced and will continue to face significant challenges. Steep decline in E&P spending In our latest E&P Spending Survey, we estimate that global upstream E&P spending budgets will continue the steep decline in 2016, i.e. declining 15% (the oil companies predict an 8% decline). The combination of weak cash flows, depressed oil prices, dividend priorities and an organic replacement ratio of 114% is negative for the oil services industry. Despite deflation in service prices and internal cost measures within the E&P companies, we have no doubt that activity has declined and will continue to decline next year. So far, around 30 oil and gas projects carrying total reserves of around 20bn barrels have been put on hold or cancelled. However, 2016 is not the turning point and we expect another negative year for offshore oil service fundamentals and bond prices, as we believe 2016 will be characterised by equity issues and restructuring within the oil services industry, as debt levels are too high. Negative sentiment in Norwegian HY On balance, the above has weighed and will continue to weigh negatively on the Norwegian HY market and on spreads. We discuss the challenges in oil services below. There are some positives. Other non-Norwegian sectors such as industrials and consumer goods remain relatively less impacted. Moreover, in line with our argument that industries that benefit from the oil price decline lag those that do not, we continue to have a positive view on the transportation industry. We also highlight the real estate sector as an industry that will be relatively unaffected by the oil slump. We discuss this more below. Summary of oil price decline on sectors Sector Lower oil price effects Industrial, others Consumer Utilities Transportation Mixed and minimal, depending on sub-industry. Limited effects, as transportation cost is a small part. Neutral for Nordic power utilities as there are no oil-fired power plants, but price pressure. Increasingly positive, as old hedges come off (airlines) and less sulphur content fuel (ferries). Negative for some Norwegian banks. Impairments may increase, but still very uncertain. Clearly negative, but costs and capex are declining. Negative, especially for companies with small backlogs. Mixed, depending on sub-segment. Minimal effect. Banks E&P Oil Service Shipping Real Estate Source: SEB Stable view on Nordic property companies Continued stable outlook for Nordic property We continue to have an overall stable outlook for the Nordic property companies in SEB’s coverage universe. The Swedish property sector is doing very well, and the slowdown in Norway and relative sluggishness of the Finnish economy have not affected the companies in any material way yet; also, many companies are seeking to diversify their portfolios geographically. Focusing on Sweden in particular, we see an accelerating momentum in the Swedish rental market, especially in Stockholm, but the trend is similar in the metropolitan areas. Employment trends in Sweden are strong and we feel confident of annual rent increases of at least 5% over the next two years, which will be a positive driver. SEB Credit Research 15 September 2015 5 Sector Report Nordic High Yield Update Swedish property transaction market turnover Stockholm Göteborg Malmö (%) 10 Foreign 2014 2013 2012 2011 2010 0 Swedish Västerås Source: SEB and FMI 20 2003 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 30 2009 1,000 40 2008 2,000 50 2007 3,000 60 2006 (SEK bn) (SEK/sqm/Y) 4,000 200 180 160 140 120 100 80 60 40 20 0 2005 5,000 2004 Rental levels - offices in selected cities Share of foreign investors (RHS) Source: SEB and DTZ Our two top picks in the sector from a credit point of view are the Swedish companies Heimstaden and Hemfosa, both rated BB. Heimstaden is focused on very stable residential properties in central city areas, and Hemfosa on very stable community service properties, meaning that the operating and cash flow risk is very low, in our view. We note that Heimstaden SEK September 2019 and Hemfosa SEK April 2017 are among the best yielding property bonds around. Lower fuel costs should benefit transportation companies more, as old hedging contracts are coming off Transportation – will benefit more We argued in January this year that several companies in the transportation industry would experience a lag effect in terms of cost reduction as hedging delays the positive effect from lower fuel cost. Going into the late part of 2015 with a significantly lower oil price environment, we believe the sector will benefit more, as new hedge contracts are at lower levels and the fact that we believe the low oil price environment will prevail for longer. Although the impact on the industry is positive, we note that the bonds are relatively tightly priced now, after a notable spread tightening during the year. Gas oil vs. fuel oil (EUR/mt) Jet fuel (USD/mt) 1200 1000 800 600 400 200 0 Mar-09 Source: SEB, Bloomberg Apr-10 Apr-11 May-12 Jun-13 Jul-14 Aug-15 Source: SEB, Bloomberg Looking at a couple of our coverage companies within the transportation industry, DFDS and Tallink, the effect is slightly different. Tallink has not installed the scrubbers needed to use less expensive fuel oil, unlike DFDS. However, DFDS is currently on hold on investing in scrubbers following the narrowing between the prices of high and low sulphur content bunker fuel. The narrowing means payback time for new scrubber investment will take longer. Tallink on the other hand, had to switch its fuel to more expensive low sulphur gas oil from the beginning of 2015. With oil prices having fallen once again, Tallink can cut some EUR 20m in fuel costs for full year 2015, a drop of around 20% year-on-year. Although clearly benefiting from a lower oil price, we believe it is mainly reflected in the pricing of the bond. Thus in July, we moved to Marketweight from Overweight on the bond, noting that it is still good to hold in this environment. SEB Credit Research 15 September 2015 6 Sector Report Nordic High Yield Update Looking briefly at the airline industry, SAS has so far not benefitted much from lower jet fuel prices due to fuel hedging and the strengthening of the US dollar. Still, the November 2017 SAS bond has seen its spreads come down recently, driven partly by the positive effect lower fuel prices have on the airline industry. We acknowledge this as well and the fact that the company is in a better financial position than it was a few quarters ago. Still, at current mid-spread levels (+550bp), we think there is limited excess tightening potential at the moment and note that the spread difference to Norwegian Air (NAS04) has become very small. With more comfort around the SAS credit, we note that current yield on the 2019 convertible and the estimated yield on the preference shares are notably higher. Finally, we note that the industry will benefit of the lower fuel price, but the lower costs could ultimately be reflected in ticket prices as European airlines’ hedge positions expire. Oil service Moving over to the oil service sectors, the effect of the now projected total drop of 15% in demand in 2016 will have hit the various subsectors hard. However, we stress that the differences within the value chain will have large differences in impact. We are most bearish on the seismic, drilling and supply sectors as these asset heavy sectors have less flexibility to cut costs and capacity in the short run. On a relative basis, we expect companies positioned in the production (and maintenance) segments to have a relatively less tough time, as maintaining production (i.e. earnings and cash flow) will remain very important. On aggregate we are 40% below the Bloomberg consensus estimates on oil service earnings for the next year. Oil service value chain Source: SEB Default risk estimated by Moody´s Creditedge has increased SEB Credit Research Quantitatively speaking, the default risk as measured by Moody’s Creditedge has increased significantly over the past year. The seismic sector is currently tracing around 17% annualized default rate, up from 6% a year ago, while we estimate drillers to have a one-year EDF default frequency of around 8%, up from 2% last year. 15 September 2015 7 Sector Report Nordic High Yield Update Five-year annualized estimated default frequencies – average for group 20.0000 18.0000 16.0000 14.0000 12.0000 10.0000 8.0000 6.0000 4.0000 2.0000 0.0000 Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 oilservices [5-Yr EDF9 Average] (%) Offshore Drillers [5-Yr EDF9 Average] (%) Aug.15 Supply [5-Yr EDF9 Average] (%) Seismic [5-Yr EDF9 Average] (%) Source: SEB, Moody’s Credit Edge Production For field development and the first part of the production phase demand for new projects is down significantly and we expect a book-to-bill of below 1.0x. We believe bond prices do not reflect our expectations of lower order intake and margins. Thus, we are negative to Aker Solutions and have an Underweight recommendation on AKSO01 and AKSO02. Moreover, for pure production related companies we see lower demand for new projects, but extremely low oil price hurdle implies its “safe for now”. We believe bond prices to some extent have overreacted and we therefore have an Overweight recommendation on BWO’s bonds. Drilling market oversupplied Exploration: Drilling market The drilling market can be summarized in two words: vastly oversupplied. In short, the drop in E&P spending does not coincide well with an offshore drilling industry that in recent years has been anticipating continued strong demand growth, with an increase in the floating rig fleet of more than 46% over the past five years and more rigs still on order. We estimate a third of the current fleet of floaters would need to leave the market if dayrates and utilization were to stabilize. Moreover, we expect continued pressure on dayrates and utilization as a third of the UDW fleet is coming off between today and 2016. As there is no spot market for drilling rigs (i.e. unlike shipping you go from poor earnings in a depressed market to no earnings) combined with substantial costs of having a rig idle, the effect on debt service is likely to be dramatic. In sum we remain Underweight on most of the names within the sector, as our estimates are some 20% above consensus for 2016 and we expect rig valuations to continue to fall – this is likely to hamper the performance of bonds. However, from a hold-to-maturity perspective, we are becoming increasingly positive. There are several bonds that stand out as having very attractive coupons against cash prices in companies that either should survive due to their strong access to capital (Seadrill) or strong backlog going into the crisis such as Ocean Rig. Exploration: Seismic market – market weakness unlikely to end any time soon The seismic industry is highly cyclical, being directly related to E&P spending. As oil companies are slashing E&P budgets to adjust costs to the current low oil price environment, exploration activities that include seismic spending are the first thing to be cut, as potential prospects become less or not economically recoverable. Therefore, exploration spending and seismic demand are highly correlated, and we expect this high correlation to continue in 2016. As we estimate a decline in E&P spending of 25% for 2015 and 15% for 2016 it will put more pressure on contract pricing and utilisation in current seismic market conditions. On the other hand, we expect the supply side represented by the number of streamers to be relatively flat for the total 3D vessel fleet in 2016 and 2017. SEB Credit Research 15 September 2015 8 Sector Report Nordic High Yield Update As a result, there is an imbalance between the supply and demand side, which has led to plunging backlog for the sector and less cash flow visibility. As there is no news on additional capacity retirements that could rebalance the market, we have no doubt that 2016 will be one of the toughest years the seismic industry has ever witnessed. Bearish on fundamentals for the seismic sector SEB Credit Research We are bearish on the fundamentals for the seismic sector and especially companies with low financial flexibility in terms of liquidity such as Polarcus and Dolphin. However, on a relative basis and from a hold to maturity perspective we argue that PGS as stands out as the strongest player with relatively low leverage and a solid liquidity situation. 15 September 2015 9 Sector Report Nordic High Yield Update Challenging market – where to go? NOK spread widening has continued As concluded above, the Norwegian HY market, with its significant exposure towards E&P and oil services, has been and continues to be challenging. Although the significant Norwegian HY spread widening in 2014, driven by faltering E&P spending and record low oil prices, was halted during part of H1 2015 (we actually even saw some tightening after a premature bull rally in bonds (and equities) driven by the oil price climbing to USD 60/b), it has continued to widen again as depicted below. . Norwegian BB and B/CCC rating category spreads 1,600 1,400 1,200 Spread 1,000 800 600 400 200 0 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 BB 5Y B/CCC 5Y Source: SEB We believe we will see more fund outflows The spread movements in late 2014 were also largely an effect of the fund outflows. After being positive during the greater part of H1 2015, we have started to see outflows again, which we believe will continue into Q4 2015, as default concerns hit investors even more. Norwegian HY fund flows Swedish HY fund flows 1.5 1 1 0.5 0.5 0 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 0 Jul-15 SEKbn NOKbn -0.5 -1 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 -0.5 -1.5 -1 -2 -2.5 -1.5 -3 -3.5 -2 Source: SEB, Verdipapirfondenes forening Expect to see an increasing number of defaults SEB Credit Research Source: SEB, Bloomberg. Consists of four major Swedish HY funds. Does not entail pure out and inflows but also dividends for some funds. Nordic defaults to increase notably In our January HY report we predicted that defaults in the Nordic region would increase sharply in 2015, largely driven by the Norwegian market. Although we do not have an official default rate in 2015 yet, it is clear that credit events have increased sharply. Based on our data, the number of credit events (hard defaults as well as technical defaults) in the Nordic region has increased significantly and after only eight months there have already been more events than for the full year 2014. Given the low oil price, and the likelihood that it will remain low for a long time, and certainly for the remainder of the year, we expect to see a continued flow of defaults and we would expect to see at least twice the number of defaults in 2015 compared with 2014. 15 September 2015 10 Sector Report Nordic High Yield Update No. of defaulted issuers in the Nordics 45 40 # of defaulted issuers 35 30 25 20 15 10 5 0 2007 2008 2009 2010 Stamdata reported defaults 2011 2012 2013 2014 2015 YTD SEB estimated defaults Source: SEB, Stamdata. Reflecting the same fundamentals behind the increasing default rates in the Norwegian market, we forecast that US default rates will go up to 3.2%, largely driven by the fact that about 15-20% of the US HY market is exposed to the energy/oil sector. We expect that European default rates will be more or less unchanged at 2.5%. US HY default rates and SEB forecast European HY default rates and SEB forecast Source: SEB, S&P Source: SEB, S&P While spreads in the Norwegian market might seem wide from a pure default perspective (i.e. the current spread is wider than breakeven spreads), we think the negative market sentiment and fund flows will likely push spreads wider in the near term, especially for the lowest rated credits. Although we have a negative stance towards the oil related Norwegian HY market in general, we conclude that there are single credits that could still look attractive. Norwegian issuance volumes down in H1 2015 SEB Credit Research Norwegian issuance volumes were down significantly in H1 2015. For the rest of the year we expect no improvement due to the above. 15 September 2015 11 Sector Report Nordic High Yield Update Norwegian issuance and fund flows HY Fundflow, rhs Norwegian issuance, rhs 110 5.0 100 4.0 90 3.0 80 2.0 70 1.0 60 0.0 50 -1.0 40 -2.0 30 -3.0 20 -4.0 Oil price, USD/barrel 6.0 Issuance and fund flows, NOKbn Brent oil 120 Source: SEB, Bloomberg Swedish issuance volumes were down in H1 2015 but spreads relatively stable SEK HY spreads to stay unchanged If the Norwegian market in H1 2015 saw limited new issuance given the oil price, the situation in the Swedish primary market, as discussed later in this report, was no better. However, the low new issuance volumes have mitigated the spread widening and the Swedish HY market has actually tightened modestly lately. We expect that SEK HY spreads will continue to be more stable and unless the fund flow situation deteriorates significantly, spreads should be more or less unchanged in the short term. To that end we argue that, although it is rather tight, the Swedish HY market should be more attractive to enter than the Norwegian equivalent. Spread movements SEK HY market 530 520 510 500 Spreads 490 480 470 460 450 440 430 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Avg SEK HY spread Source: SEB, Bloomberg Expect limited Swedish primary activity SEB Credit Research However, regardless of the rather limited spread movements in the SEK space, we expect Swedish primary issuance to continue to be challenging. During the first six months, real estate issuance, corresponding to 65% of total issuance in H1 2015, largely saved the day. Looking ahead, however, we expect falling real estate volumes, mainly due to more aggressive bank financing (on price as well as terms) and investors being pickier. We have seen falling asset qualities, which should be more difficult to bring to the market. Nevertheless, we argue that we will see continued high M&A and ECM activity in the Swedish real estate sector. 15 September 2015 12 Sector Report Nordic High Yield Update Swedish sector breakdown H1 SEK real estate (including IG) Total issuance (SEK bn) 45 40 40 Mining 2% Media 11% # of issuers Retail&Consumer 3% 35 38.6 33 35 30 29.4 25 25 25 20 23.8 20 Number of issuers Issuance volume (SEK bn) Industrials 10% 30 34.7 30 Health 0% Financials 9% 15 15 16.0 10 14 7 Energy 1% 10 12.0 Real Estate 64% 9 5 6.0 1 2.0 0 2004 2 2005 6.0 5 4.0 3 2006 2007 6.0 5.0 2 2008 5 2 2009 0 2010 2011 2012 2013 2014 2015 YTD Source: SEB, Bloomberg BB rating category has grown as a share of total issues Source: SEB, Stamdata, Bloomberg. Following the above discussion, we have seen falling issuance levels in the historically most common B rating category segment (rising spreads). The oil segment in particular retracted with falling oil prices. Instead the BB rating category segment has grown as a share of total issues. We expect more of the same; primarily BB companies tapping to the market. We expect this, however, to come at increasingly rising costs for the issuers. Norwegian rating breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 BB 2008 B 2009 2010 2011 2012 2013 2014 2015 H1 CCC & Other Source: SEB, Stamdata Opportunities in USD and EUR Looking beyond Scandinavian currencies, as opposed to the SEK HY market, the US credit market has recently widened sharply due to fears concerning the Chinese economy and the impact that will continue to have on commodities prices. The looming Fed rate hike is probably also adding to the negative sentiment surrounding the US credit market. SEB Credit Research 15 September 2015 13 Sector Report Nordic High Yield Update Spread movements in SEK and US HY markets Spread movements in SEK and EUR HY markets 530 460 530 520 440 520 510 420 510 500 400 500 490 380 480 360 480 470 340 470 460 320 460 300 450 Jan-15 650 550 Spread Spread Spread Spread 600 490 500 450 450 Jan-15 Feb-15 Mar-15 Apr-15 Avg SEK HY spread (LHS) May-15 Jun-15 Jul-15 Aug-15 Sep-15 iBoxx EUR HY swapped to SEK (RHS) Source: SEB, Bloomberg US HY spreads trading wider than SEK HY 400 Feb-15 Mar-15 Apr-15 Avg SEK HY spread (LHS) May-15 Jun-15 Jul-15 Aug-15 Sep-15 Merrill Lynch HY index swapped to SEK (RHS) Source: SEB, Bloomberg, FRED As a consequence, as seen above, US HY spreads are now trading notably wider than SEK spreads. Moreover, part of a significant EUR new issuance supply has been, and will continue to be, driven by US companies issuing in the European market, as it is cheaper for them to issue there. This should mean that we will start seeing a convergence of EUR/USD spreads in the medium term. Consequently, we highlight two USD denominated bonds where we think the spread difference is significant enough to warrant buying the USD bond over the SEK or EUR bond: Millicom and Nokia. The expected EUR/USD convergence discussed above should have a relative widening impact on EUR spreads. Regardless, we would consider EUR before SEK in certain cases and when the spread difference is big enough. Thus we highlight the SSAB 2017 EUR bond. SEB Credit Research 15 September 2015 14 Sector Report Nordic High Yield Update Alternatives to corporate high yield In a difficult market with widening risk due to the above discussed default challenges, we argue that alternatives to corporate high yield should be considered as well. Hybrid bonds - still attractive We find corporate hybrids attractive We continue to find corporate hybrids attractive in the current turbulent, low interest rate, market environment, as they offer high yield returns, but carry low investment grade risk. Hybrid bonds are usually rated two to four notches below the corporate rating as they are senior only to equity, and as coupons are deferrable. This means that a “high yield” instrument in the BB-category is issued by an investment grade issuer (BBB- or higher). As coupons are cumulative and the risk of an investment grade company defaulting is very low, the risk of investors not getting their money back is limited. We also argue that investors are paid an extra “hybrid compensation” which could make up as much as 3050% of the total credit spread. Investor are thus compensated for more than just the main risk factors (subordination risk compared to senior debt, coupon deferral risk, extension risk, and to some extent special call event risk). Applying our model we find that most European hybrids are attractively priced in general, and in the Nordics we favour Volvo’s 2075 and 2078 hybrids and Dong’s 3013 hybrid in particular. Relative value, Nordic corporate hybrids bonds (EUR) Hybrid spread vs. Model spread 450 Dong Energy (Baa3/BB+) 400 Spread (bps) 350 Vattenfall (Baa2/BBB‐) 300 250 Volvo (Ba1/‐) 200 TDC (Ba2/BB+) 150 100 Vattenfall SEK (Baa2/BBB‐) 50 0 0 2 4 6 8 10 Years to maturity 12 14 Source: SEB, Bloomberg We favour the Volvo and Dong hybrids Source: SEB, Bloomberg The spreads of Volvo’s EUR bonds have widened somewhat less than peers over the past few months but still appear largely correctly priced versus similarly rated bonds. However, Volvo’s two hybrids 4.2% 06/10/2075 (Ba1/BB+) and 4.85% 03/10/2078 (Ba1/BB+) stand out positively both versus Volvo’s senior notes and other hybrids and we retain our Overweight recommendations here. If Volvo’s corporate rating were to be upped to BBB+, the ratings of the hybrid instruments would be lifted to BBB- i.e. an investment grade rating that would have a significant impact on the credit spreads. Dong Energy’s strong balance sheet means the company is solidly positioned within its rating category despite increasing earnings pressure from low oil and electricity prices. The company is preparing for an IPO no later than H1 2018 and a strategic review ahead of this is evaluating, among other things, a spin-off or sale of the E&P unit. This means there is some uncertainty regarding the company’s future risk profile, but we also note that there is an all-party political support for the government to maintain at least 50% of Dong, even after an IPO. This means the one-notch rating uplift for government ownership should remain. We continue to regard Dong’s 6.25 06/26/13 (Baa3/BB+) hybrid as attractively priced. SEB Credit Research 15 September 2015 15 Sector Report Nordic High Yield Update As there is risk of for further rating pressure and potentially weak sentiment in regards to both Vattenfall and TDC’s corporate ratings, we see other hybrid bonds as more attractive at the moment. Hybrid market growth set to continue We believe that the European hybrid bond market will remain strong in the coming years as all the factors that have boosted the market since 2013 remain very much in place. Investors get good risk adjusted returns in a low yield market, the companies get flexible, equity-like funding at a very reasonable cost, and the hybrid product is nowadays very standardized. Since the start of 2013, when EDF issued its EUR 6bn hybrid, the standard “corporate hybrid product” has been refined and “agreed” upon between all market participants; investors, banks, issuers and rating agencies. As hybrids represent flexible funding, both from an accounting and balance sheet point of view, as well as from a rating perspective, we see them continuing to find new target companies and sectors that need funding for operational, M&A, pension and rating purposes. Having been very much a product mainly used by utilities only a few years ago, hybrids are today finding their way into more and more sectors (see below), a trend we see continuing. Expect the European hybrid market to remain strong European corporate hybrids issuance (EURbn) European corporate hybrid issuance 2014 and 2015 ytd by sector 50 Transport 7% 45 Other 5% 40 Pharma 11% 35 Utilities & Power 36% 30 25 20 Autos 10% 15 10 5 Oil & Gas 14% 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015- end July Source: SEB, Bloomberg, S&P European corporate hybrids relatively standardized Telcos 17% Source: SEB, S&P Debt with equity-like features A corporate hybrid is debt that is viewed to have equity-like features which may provide some credit enhancement for senior creditors in times of credit stress. A strong contributing factor for the recent year’s market growth is that the European corporate hybrids today are relatively standardized. Sources of capital and simplified capital structure Bank loans Secured bonds Unsecured bonds Subordinated loans Hybrid capital/ Preferred stock Common stock Expected risk Low Required return Low High High Source: SEB S&P assigns three different equity credit weights to hybrid capital; High (100%), Intermediate (50%) and Minimal (0%), while Moody’s has five different categories; A (0%), B (25%), C (50%), D (75%), E (100%). Although the methodologies differ somewhat the three main aspects to assess the equity content of the capital are: SEB Credit Research ● Subordination: The instrument should be subordinated to all other debt and able to absorb losses in a bankruptcy or reconstruction procedure. ● Deferability: Coupons should deferrable without triggering a default. ● Permanence: The instrument should be permanent part of the capital structure, i.e. it should not have a fixed maturity or have a very long tenor (60 years more). 15 September 2015 16 Sector Report Nordic High Yield Update The hybrid is designed to give a company 50/50 debt/equity treatment by the rating agencies The standard corporate hybrid today is designed to give the company a 50/50 debt/equity treatment by the rating agencies. This means that if company issues new debt at a value of 100, the rating agencies only accounts for 50 in their calculation of e.g. leverage. However the hybrid can be accounted for as either debt or equity by the company (depending on country specific rules, IFRS etc.). The hybrid ratings are usually rated two to four notches below the corporate rating due to subordination and deferral risk (in a stress/default situation). Below we have outlined the main terms and try to visualize the life/tenor of the Vattenfall 2077 bond which very much follows the standard corporate hybrid design and terms. The hybrid is designed to receive 50% equity treatment from both S&P and Moody’s until the first call date in 2022 (for the SEK hybrid), when equity credit its lost due to double coupon step-ups, and the bond is expected to be called. Main terms: ● Tenor: 62 years (2077 maturity) – Needs to be at least 60 years. ● First call date 2022 – Regulated by the step-up dates (see below). ● Deeply subordinated - Rank senior only to equity. ● Floating/fixed rate until first call date, reset on 5-year midswap + initial spread + stepup thereafter. ● Step-up 25bps in 2027, 75bps in 2042 (total 100bps triggering the synthetic/effective maturity date in 2022, which is 20 years earlier according to S&P criteria). ● Optional cumulative, compounding coupon deferability. Special event redemption due to changes in rating, rating methodology, tax legislation, accounting rules Vattenfall 2077 non-call seven years hybrid bond illustration Source: SEB, Vattenfall Subordinated financials We like the Nordic banking sector As has been the case for a long time, we like the Nordic banking sector. In our view, Nordic banks are well managed, well capitalised, have come far in their legislation adjustments (CRR/CRD IV) and enjoy solid interest rate margins on most products (we expect ample margins to remain). Regarding higher yielding assets, we like AT1s (Additional Tier 1 notes – the most subordinated bank bonds). We still think, for investors able to withstand probably significant volatility, AT1s generally offer an attractive spread from a fundamental perspective – especially since we find the Nordic macro situation to be resilient relative to other regions. AT1s are complex products and it is not within the scope of this report to explain them in detail; we advise studying the documentation thoroughly before investing in these products. When comparing AT1s it is important to take into the equation the risks of one or several coupons to be skipped, and the distance to triggering a write-down or conversion to equity. In other words, how large the buffer is before the AT1s have to take losses. ● SEB Credit Research Under new regulation, coupons can be skipped at the discretion of the relevant financial services regulator or the bank. In addition, coupons have to be skipped if the distributable profit is not enough to cover coupons or if the bank is not capitalised adequately. 15 September 2015 17 Sector Report Nordic High Yield Update ● AT1s can be converted to equity or written-down (write-up is subject to a positive net profit being recorded if the note is written down temporarily) either when the banks’ capital ratios hit a predefined target or at the discretion of the relevant financial services regulator if the bank is at the so-called Point of Non-Viability (PONV). Thus, the capitalisation of a bank is a measure of this distance to trigger action. ● AT1s have a minimum non-call period of five years, and the call could either be at the original principal amount (write-up required before call, exposing the investor to extension risk) or at the prevailing principal amount (risk of notes being called before write-up). ● For Swedish banks, although the Swedish FSA has decided that Pillar 1 capital requirements act as the formal threshold for coupon payment deferral (coupon risk), if a bank breaches its Pillar 2 capital requirements without adequate measures being taken (arrangements such as sale of assets, dividend reduction or issuing equity), the authority could make a formal decision on the bank, thereby pushing up the trigger level for coupon risk. Nordic banks have been active issuers of AT1 notes Nordic banks have been active issuers of AT1 notes in the first half of 2015. For the major banks, most issues are USD denominated (Danske Bank’s issues are EUR denominated). We therefore see limited supply of new issues near-term. In the SEK market, Nordea together with the domestic banks SBAB and Länsförsäkringar Bank have also issued notes. We expect other domestic banks to follow, but given their smaller size we do not expect any supply of significant volume. Volvofinans has communicated that it intends to issue an AT1 note sometime down the road, but no decision has yet been announced. As for Skandiabanken (AB), we do not expect any issue until after the planned IPO of the Norwegian operations in Q4 2015. Skandiabanken Norge, on the other hand, intends to issue AT1 and T2 notes in conjunction with the IPO. We view the Danske Bank At1 as attractive For Danske Bank, comparing yield to call (5.4%) and consensus dividend yield (3.8%) for equities, we view its AT1 with first call in 2020 as very attractive. DNB also has an attractive yield to call (6.3%) compared to consensus dividend yield (4.1%), but we believe that one should also take into consideration the risks related to bank’s larger share of exposure to the oil industry. Additionally, although DNB’s loss absorption trigger is 5.125% instead of – as for the other banks – 7%, we find it very likely that DNB’s PONV (from the Norwegian FSA’s perspective) is higher, which also is reflected in the bank’s lower-thanpeers buffer to coupon cancellation (taking capital requirements to come into consideration). Further, it is important to note that dividend yield and yield to call are in different currencies, as Danske Bank’s notes are in EUR and DNB’s note is in USD. The difference in yield to call and consensus dividend yield for Swedish banks is negative considering currency swaps (notes in USD). However, given Swedish banks’ strong capitalisation and profitability measured to REA – Swedbank in particular – we regard their (again, Swedbank in particular) AT1 notes as quite attractive as well. Moreover, we find it highly probable that dividends are skipped before coupon payments, even though we do not see any need for it near term. Yield to call versus consensus dividend yield, as of 10/09/2015 AT1 - YTC DivYield - Cons 2015 DivYield - Cons 2016 DivYield - Cons 2017 Source: SEB and Bloomberg Note: Yield to call and dividend yield in different currencies for all banks, except for Danske Bank. SEB Credit Research 15 September 2015 Spread (bps) SEB_NC20_USD SHBASS_NC21_USD NDASS_NC19_USD SWEDA_NC20_USD DNBNO_NC20_USD DANBNK_NC22_EUR 550 DANBNK_NC20_EUR 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Nordic Majors’ AT1s (spreads in EUR), as of 10/09/2015 DANBNK 500 450 DANBNK DNBNO 400 SEB NDASS 350 SWEDA 300 3.0 3.5 4.0 SHBASS 4.5 5.0 5.5 Years to call USD denominated 6.0 6.5 7.0 EUR denominated Source: SEB and Bloomberg 18 Sector Report Nordic High Yield Update In the SEK market, we note that all issues are floaters offering structurally lower yields than the issues with fixed coupons in the prevailing low interest rate environment. However, comparing Nordea, SBAB and Länsförsäkringar with each other, we prefer Nordea as it offers lower risk to a discount of only some 15bp. While oil and oil-related industries are having a hard time in Norway, we are not overly concerned (in the short to medium term) with meaningful related loan losses for local banks. Norwegian banks are well capitalised and producing stable returns, which fundamentally bodes well for capital instruments. However, the oil service crash has potential second order effects on capital instruments pricing. With prices for traditional HY bonds falling in an illiquid market, the predominantly domestic AT1/T2 investor base has less appetite for overall risk and could start selling more liquid bonds (i.e. hybrids) to free up liquidity. As depicted below, screen prices are generally lower in the last report, but the real bid for size probably is even lower. Consequently, we hold a cautious stance towards the Norwegian banks’ hybrid instruments, even though our fundamental view on the banks is positive. Floating SEK AT1s , spread relative to Stibor3m, as of 10/09/2015 Norwegian AT1s, spread relative to Nibor3m, as of 10/09/2015 330 SBAB LANSBK Spread (bps) Spread (bps) 325 320 315 310 NDASS 400 375 350 325 300 275 250 NONG66 1.0 305 4.0 4.3 4.5 Years to call 4.8 MING65 SVEG75 2.0 3.0 4.0 Years to call 5.0 Indicative Prices Source: SEB and Bloomberg ROGG57 5.0 6.0 Last Report Source: SEB and Bloomberg Major Nordic and Swedish domestic banks: Terms and conditions summary DANBNK ISIN code Coupon (%) Amount issued First call date Trigger level (%) Loss absorption mechanism Additional early redemption DANBNK DNBNO SWEDA NDASS SHBASS SEB NDASS SBAB LANSBK XS1044578273 XS1190987427 XS1207306652 XS1190655776 US65557DAM39 XS1194054166 XS1136391643 XS1202091325 XS1202987985 XS1243897987 5.75 5.88 5.75 5.50 5.50 5.25 5.75 3mS+310bp 3mS+325bp 3mS+325bp EUR 750m EUR 750m USD 750m USD 750m USD 1,000m USD 1,200m USD 1,100m SEK 2,250m SEK 1,100m SEK 1,200m 06/04/2020 06/04/2022 26/03/2020 17/03/2020 23/09/2019 01/03/2021 13/05/2020 12/03/2020 16/03/2020 09/06/2020 7.0 7.0 5.125 8.0 8.0 8.0 8.0 8.0 7.0 7.0 Temporary Temporary Temporary Share Temporary Temporary Temporary Temporary Temporary Temporary write-down write-down write-down conversion write-down write-down write-down write-down write-down write-down Prevailing Prevailing Prevailing Prevailing Original Prevailing Prevailing Prevailing Prevailing Prevailing principal amount principal amount principal amount principal amount principal amount principal amount principal amount principal amount principal amount principal amount Source: SEB, Bloomberg, prospectuses and Company financial reports SEB Credit Research 15 September 2015 19 Sector Report Nordic High Yield Update Risk weighting, Jun ‘15 Earnings capacity, Jun 15 Earnings capacity: Net profit / REA (rolling 1Y) SBAB SHB Swedbank LF Bank Nordea SEB Danske Bank DNB LF Bank Danske Bank DNB Nordea SEB SBAB SHB 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Swedbank 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% REA / total assets DNB LF Bank Danske Bank DNB Danske Bank Nordea SEB SHB Swedbank 6.0% 4.0% 2.0% 0.0% SEB 20.0% 15.0% 10.0% 5.0% 0.0% Nordea Net credit loss level equalling coupon risk, Jun ‘15 SHB Coupon risk, Jun ‘15 Swedbank Source: SEB, prospectuses and Company financial reports SBAB Swedbank's net credit loss level in 2009 Source: SEB, prospectuses and Company financial reports LF Bank SBAB Credit loss level ~ loss absorption trigger Loss absorption trigger: CET1 buffer (P1) SBAB LF Bank SHB Nordea Danske Bank DNB Nordea SEB LF Bank SHB Swedbank SBAB 10.0% 7.5% 5.0% 2.5% 0.0% SEB 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Danske Bank Net credit loss level equalling loss absorption trigger, Jun ‘15 Swedbank Source: SEB and Company financial reports Loss absorption trigger, Jun ‘15 DNB Source: SEB, prospectuses and Company financial reports Credit loss level ~ coupon risk (P1) Coupon risk: CET1 buffer (P1) Swedbank's net credit loss level in 2009 SBAB SEB Nordea SHB Swedbank SBAB LF Bank SHB 3.0% 2.0% 1.0% 0.0% 8.0% 6.0% 4.0% 2.0% 0.0% Nordea Net credit loss level equalling coupon risk (worst case), Jun ‘15 LF Bank Coupon risk (worst case, formal P2 decision made), Jun ‘15 Swedbank Source: SEB, prospectuses and Company financial reports SEB Source: SEB, prospectuses and Company financial reports Credit loss level ~ coupon risk (P1 & P2) Coupon risk (worst case): CET1 buffer (P1 & P2) Source: SEB, prospectuses and Company financial reports Swedbank's net credit loss level in 2009 Source: SEB, prospectuses and Company financial reports Note that credit loss levels are rather insensitive to average risk weights applied. SEB Credit Research 15 September 2015 20 Sector Report Nordic High Yield Update Primary market update, H1 2015 The first six months in 2015 were significantly behind the same period last year in terms of volumes. Although H1 2014 was particularly strong (corresponding to close to 70% of full year 2014 issuance) 2015 is so far clearly a weaker year. Similar volumes in H2 would equal full year issuance down by close to 30%. Norway, hampered by the low oil price, experienced a significant slowdown. As a result, Swedish issuance was for the first time close to in line with Norway. Moreover, Finland was the one Nordic country showing increasing volumes. H1 2015 issuance volumes down compared to the same period last year Nordic issuance volumes by country (domestic docs) Share of total Nordic issuance volumes (domestic docs) 100% 12.0 90% 10.0 80% 70% 8.0 EURbn 60% 50% 6.0 40% 4.0 30% 20% 2.0 10% 0.0 0% 2010 2011 Norway 2012 Sweden 2013 Finland 2014 Denmark H1 2014 2010 H1 2015 2011 Iceland Norway Source: SEB, Stamdata 2012 Sweden 2013 Finland 2014 Denmark H1 2014 H1 2015 Iceland Source: : SEB, Stamdata The relative uptick in Swedish issuance as a share of total volumes was evident in the industry breakdown as well, where Real Estate issuance corresponded to some 20% of total issuance. Oil/Oil Services continues to be the single biggest segment although as a share of the total it has retracted considerably. PE issuance corresponded to some 8% of total Nordic issuance with six issues. This was not chiefly due to Sweden (below 4% of total Swedish issuance volumes came from private equity owned companies), which has been the case historically. Instead Finland stood out (some 15% of Finnish new issues were PE related). Nordic HY market by sector – H1 2015 Media 3% Other 8% Oil/Oil service 28% Transportation 22% Mining 1% Retail&Consumer 5% Industrials Financials Energy 8% 2% 3% Real Estate 20% Source: SEB, Stamdata. Oil&Gas includes oil service. SEB Credit Research 15 September 2015 21 Sector Report Nordic High Yield Update Most and least preferred bonds Based on the discussion and findings in this report and the relative value framework, we list the bonds that we currently find particularly attractive or unattractive. Note that the below text does not include all the bonds on which we have Overweight or Underweight recommendations. Bonds encircled in green are highlighted top picks. Bonds encircled in red are the Underweights that we favour. Selected SEK bonds 800 SSAB 700 Meda Millicom 600 Stora Enso Cloetta Spread (bps) 500 Getinge 400 Stena Metall SOBI USD 300 NSP Nynas 200 Golden Heights SAS 100 Consilium 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Years to maturity 3.5 4.0 4.5 5.0 West Atlantic Source: SEB, Bloomberg. Milllicom USD bond is swapped to reflect the equivalent in SEK spread. Selected EUR bonds Spread (bps) 500 450 Metsa Board 400 Cramo 350 Nokia 300 Ramirent 250 Outotec Stora Enso 200 USD 150 SSAB 100 Stena Finnair 50 Hoist 0 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 6.0 Source: SEB, Bloomberg. Nokia USD bond is swapped to reflect the equivalent in EUR spread. SEB Credit Research 15 September 2015 22 Sector Report Nordic High Yield Update Selected NOK bonds 700 Aker 600 Spread (bps) 500 Aker Solutions 400 BW Offshore 300 200 Prosafe 100 0 0.0 1.0 2.0 3.0 4.0 5.0 Years to maturity 6.0 7.0 8.0 Source: SEB, Bloomberg. Most preferred bonds Summary of a selection of most preferred bonds, based on relative selected value criteria ISIN Company name Corp Bond Industry rating rating Rank Rec. Maturity Date Coupon Amount Ccy Outst. (m) Ind. Price Spread (bp) YTM (yrs) YTM (%) XS0921332069 Millicom Telecom BB+ BB Unsecured Overweight 22/05/2020 4.75 USD 500m 97.1 398 4.7 5.6 US654902AB18 Nokia Telecom BB BB Unsecured Overweight 15/05/2019 5.375 USD 1,000m 106.7 215 3.7 3.5 XS1055515412 SSAB Metals/Mining BB- BB- Unsecured Overweight 10/04/2019 3.875 EUR 350m 100.4 368 3.6 4.0 SE0004649747 SOBI BB- BB- Unsecured Overweight 26/06/2017 4.77 SEK 800m 103.0 244 1.8 2.1 Healthcare Source: SEB / Bloomberg Opportunities in USD As concluded above we find the USD space attractive. On that note we argue that Millicom USD 2020 and Nokia USD 2019 look interesting: neither of the companies has any energy exposure and we have a positive and stable view of the credits. Millicom USD 2020, offering roughly 390 bps converted to SEK, stands out positively when comparing the bond to its SEK 2017 alternative that offers some 170bps. We argue that the company continues to perform well and expect improving margins and falling leverage. The Nokia USD bond offers an attractive pick-up compared with its EUR alternative. We expect the Nokia bond to tighten onwards. We argue we will see a positive sentiment driven by continued positive cash flow generation from Alcatel-Lucent (i.e. in line with the last interim report) as well as stable reports from Nokia over the coming quarters. Opportunities in EUR In EUR we highlight SSAB. Despite the challenges in steel markets, further cost savings and synergy potential relating to the Ruukki deal should improve operational efficiency in European divisions going into 2016. We argue that the bond looks relatively attractive following its weak performance recently. Moreover, we still find Hoist’s 2017 EUR bond interesting. The company is performing well, does not have any energy exposure and compared to other Swedish names it offers an attractive pick-up. SEB Credit Research 15 September 2015 23 Sector Report Nordic High Yield Update Other market picks As argued above, we expect limited spread moves in the SEK space onwards as long as fund flows remain relatively stable. In the BB space we argue that Swedish Orphan Biovitrum looks relatively attractive compared to other alternatives in the same rating category. The credit is performing well in our view. We also highlight Stena Metall SEK bonds. We have the BB+ rating on Overweight and thus see a tightening potential would the company be investment grade rated. In the B-rating category we find NSP attractive. The credit has widened since the public offer did not go through. The underlying performance, however, is stable. In the real estate sector we highlight Hemfosa and Heimstaden. Both are stable credits, stand out positively compared to the real estate peer universe and will remain relatively unaffected by the negative oil sentiment. As discussed above we argue there will be a continued widening pressure on energy related bonds (in the weaker rating segment). We conclude that it is difficult to find attractive switching opportunities in the +10% yield category. We argue all such relevant bonds are subject to widening risks. The highest yielding alternative that we would suggest, except for NSP (6.7% YTM) highlighted above, is Orc 2017 EUR bond (9.5% YTM). Orc should be relatively unaffected by the low oil prices. Other alternatives include SAS 2017 SEK bond (6.3%YTM, 5.5% YTC) that will benefit from a lower fuel price. Attractive alternatives to corporate HY As discussed above in the report we highlight corporate hybrids and AT1s as good alternatives to corporate high yields. We argue that Volvo and Dong look attractive in the hybrid space and that Danske Bank is the most attractive among AT1s. Least preferred bonds Summary of a selection of least preferred bonds, based on relative selected value criteria Company name Industry Corp rating NO0010661051 Aker Solutions Oil Services BB+ BB+ Unsecured Underweight 09/10/2019 N+420 NOK XS0830688411 Stora Enso Oyj Paper BB BB Unsecured Underweight 19/03/2018 5.00 EUR SE0005991635 Meda Healthcare BB- BB- Unsecured Underweight 21/05/2019 C+163 SEK ISIN Bond rating Rank Rec. Maturity Coupon Ccy Amount Ind. Sprea Date Outst. (m) Price d (bp) 1,000 YTM (yrs) YTM (%) 98.9 436 4.1 5.9 500 108.4 136 2.5 1.7 750 265 2.5 1.8 96.4 Source: SEB / Bloomberg Although we argue there are starting to be some buy and hold opportunities, we are generally bearish towards the Norwegian HY space and there are plenty of bottom picks in the energy related sector (e.g. Songa, North Atlantic Drilling, Fred Olsen and Pacific Drilling). In addition, we highlight Aker Solutions. Given the increased risk and weaker outlook for Aker Solutions we believe the 2017 and 2019 bonds should widen further and be priced closer to the BWO credit curve. This is based on our view that there is currently more downside risk (mark-to-market) in the oil service segments Subsea, MMO and Engineering relative to the FPSO segment. We believe the current prices for the Aker Solutions bonds do not reflect the increased risk. Also, in the EUR space, we find Stora Enso still to be expensive although the underlying credit continues to perform. In the SEK market we would be cautious towards Meda. We see some potential downward pressure on the rating onwards as the company continues to acquire and keep leverage high. SEB Credit Research 15 September 2015 24 Sector Report Nordic High Yield Update Recommendation changes Bond recommendation changes Company Swedish Orphan Biovitrum NSP Getinge Prosafe Prosafe Prosafe Prosafe Prosafe Bond Old Rec New Rec SOBI Jun 2017 S+500 NSP Jun 2019 S+525 Getinge May 2018 S+180 PRS07 RPS08 PRS09 PRS10 PRS11 Marketweight Suspended Underweight Overweight Overweight Underweight Underweight Underweight Overweight Overweight Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Source: SEB Credit Research SEB Credit Research 15 September 2015 25 Sector Report Nordic High Yield Update Recommendation summary SEB Credit Research HY bond recommendations ISIN Bond name Issue Date Bond cpn Ccy Amount Rating Recommendation Rec Revised FI4000108501 NO0010591977 NO0010635212 NO0010637952 NO0010657398 NO0010680309 NO0010680317 NO0010701105 NO0010647431 NO0010661051 NO0010638075 NO0010673841 NO0010705361 NO0010740111 FI4000051065 NO0010684145 NO0010736382 DK0030342910 NO0010643281 NO0010673528 NO0010662901 NO0010697220 DK0030329495 NO0010609829 NO0010704125 NO0010683840 SE0005217684 SE0005217734 SE0006027181 SE0006259669 SE0005933207 SE0005933215 SE0006287827 NO0010660954 NO0010636632 NO0010641673 NO0010661846 SE0005132172 SE0005132180 SE0005991635 FI4000085550 SE0004809655 SE0004809663 US600814AK33 NO0010665508 XS0411735482 US654902AB18 NO0010589492 US811727AB25 SE0005994217 SE0005994167 NO0010654379 SE0004872851 FI4000013354 FI4000043856 FI4000109624 FI4000068556 NO0010680150 NO0010714389 NO0010600299 NO0010635725 Ahlstrom EUR 100m 4.125 4-Sep-2014 Aker 23 Nov 2015 N3M+500 Aker 30 Jan 2019 N3M+500 Aker 16 Mar 2017 N3M+400 Aker 7 Sep 2022 N3M+500 Aker 6 Jun 2018 N3M+350 Aker 6 Jun 2020 N3M+400 Aker 24 Jul 2019 S3M+325 AKSO 6 June 2017 N3M+425 AKSO 9 Oct 2019 N3M+420 BW Offshore 15 Mar 2017 N3M+425 BW Offshore 21 Mar 2018 N3M+415 BW Offshore 11 Mar 2019 N3M+350 BW Offshore 16 Jun 2020 N3M+425 Cramo 23-Feb-2018 4.5 DetNor 02 July 2020 N3M+500 DetNor 03 May 2015 DFDS 13 Jun 2019 C+163 DFDS 2 May 2016 N+350 DFDS 21 Mar 2018 N+290 Dolphin 14 Feb 2018 N3M+775 Dolphin 5 Mar 2019 N3M +750 EG (Holding III ApS) Cm3 +650 2 Dec 202 Fred Olsen Energy 12 May 2016 N3M+425 Fred Olsen Energy 28th Feb 2019 N3M+300 GLOGUS June 2018 N3M+550 Getinge 21 May 2018 3mS +188 Getinge 21 May 2018 3.5 Golden Heights 18 jun 2019 3mS+475 Heimstaden 16 Sept 2019 3mS+300 Hemfosa 4 April 2017 3mS+225 Hemfosa 4 April 2017 3.375% Hoist 2 Oct 2017 3mS+375 HLNG 3 October 2017 N3M+600 I.M. Skaugen 27 Feb 2015 N3M+825 I.M. Skaugen 11 Apr 2017 N3M+900 J Lauritzen 24 Oc 2017 N3M+825 Meda 5 Apr 2016 3mS +220 Meda 5 Apr 2018 3mS +285 Meda 21 May 2019 3mS +165 Metsä Board 13-Mar-2019 4.000 Millicom 30 Oct 2017 5.125 Millicom 30 Oct 2017 3mS +350 Millicom 22 May 2020 4.75% NVGS 9 12/18/17 Nokia 4 Feb 2019 6.75 Nokia 15 May 2019 5.375 NADL01 NADL Feb 2019 NSP Jun 2019 Nynas 26 Jun 2018 3mS+750 Ocean Yield JUL 17 N3M+650 Orc Cidron Delfi Intressenter 27 Nov 17 8.5 Outokumpu 24-Jun-15 5.125 Outokumpu 7-Jun-16 5.875 Outokumpu 30-Sep-19 6.625 Outotec 16-Sep- 2020 3.75 Polarcus 7 June 2018 8% Polarcus June 2019 N3M+725% PRS Feb 2016 N3M + 350 PRS Feb 2017 N3M + 375 2014-09-04 2010-11-23 2012-01-30 2012-03-16 2012-09-07 2013-06-06 2013-06-06 2014-01-24 2012-06-06 2012-10-09 2012-03-15 2013-03-21 2014-03-11 2015-06-03 2012-11-16 2013-07-02 2015-05-13 2014-06-13 2012-05-02 2013-03-21 2012-11-14 2013-12-05 2013-11-25 2011-05-12 2014-02-28 2013-06-27 2013-05-14 2013-05-14 2014-06-18 2014-09-16 2014-05-08 2014-05-08 2014-10-02 2012-10-03 2012-02-27 2012-04-11 2012-10-24 2013-04-05 2013-04-05 2014-05-21 2014-03-13 2012-10-23 2012-10-22 2013-05-17 2012-12-18 2009-02-04 2009-04-30 2013-10-30 2014-01-31 2014-06-18 2014-06-26 2012-07-06 2012-11-27 2010-06-17 2012-05-31 2014-09-18 2013-09-05 2013-06-07 2014-07-08 2011-02-25 2012-02-08 4.125 Nibor + 500 Nibor + 500 Nibor + 400 Nibor + 500 Nibor + 350 Nibor + 400 Stibor + 325 Nibor + 425 Nibor + 420 Nibor + 425 Nibor + 415 Nibor + 350 Nibor + 425 4.5 Nibor + 500 10.25 Cibor + 163 Nibor + 350 Nibor + 290 Nibor+775 Nibor+750 3mS +650 Nibor + 425 Nibor + 300 Nibor + 550 3mS +188 3.5 3mS+475 3mS+300 3mS+225 3.375 3mS+375 Nibor + 600 Nibor + 825 Nibor + 900 Nibor + 825 3mS +220 3mS +285 3mS +165 4.0 5.125 3mS +350 4.75 9.0 6.75 5.375 Nibor + 440 6.25 5.25% 3mS+750 Nibor + 650 8.5 5.125 5.875 6.625 3.75 8.0 Nibor + 725 Nibor + 350 Nibor + 375 EUR NOK NOK NOK NOK NOK NOK SEK NOK NOK NOK NOK NOK NOK EUR NOK USD DKK NOK NOK NOK NOK DKK NOK NOK NOK SEK SEK SEK SEK SEK SEK EUR NOK NOK NOK NOK SEK SEK SEK EUR SEK SEK USD USD EUR USD NOK USD SEK SEK NOK EUR EUR EUR EUR EUR USD NOK NOK NOK 100 850 500 500 1,000 1,300 700 1,500 1,500 1,000 500 500 750 900 100 1,900 300 500 500 700 400 500 1,100 1,400 1,100 500 1,500 500 400 1,000 1,100 100 100 750 400 350 500 400 600 750 225 250 1,750 500 125 500 1,000 1,500 600 200 650 600 60 250 150 250 150 95 350 500 500 B+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB BB B BB+ BB+ BB+ CCCCCCB+ BB BB B+ BB+ BB+ B+ BB BBBBBB B CCC CCC BBBBBBBBB BB BB BB B+ BB BB B CCC+ B+ B+ B+ B B B B BB+ CCC CCC BB BB Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Underweight Underweight Overweight Overweight Overweight Overweight Overweight Underweight Underweight Marketweight Marketweight Marketweight Underweight Underweight Marketweight Overweight Underweight Marketweight Marketweight Marketweight Marketweight Overweight Overweight Overweight Marketweight Overweight Underweight Underweight Underweight Underweight Underweight Underweight Marketweight Marketweight Marketweight Overweight Marketweight Overweight Overweight Underweight Underweight Overweight Overweight Overweight Overweight Marketweight Marketweight Marketweight Marketweight Underweight Underweight Marketweight Marketweight 2014-10-24 2014-05-16 2014-05-16 2014-05-16 2014-05-16 2014-05-16 2014-05-16 2014-05-16 2015-07-16 2015-07-16 2015-09-01 2015-09-01 2015-09-01 2015-09-01 2014-10-29 2015-09-11 2015-09-11 2015-05-21 2014-05-23 2014-01-23 2015-08-13 2015-08-13 2014-05-09 2015-02-12 2014-08-04 2013-08-20 2015-09-15 2015-09-15 2015-08-28 2015-08-03 2015-07-21 2015-07-21 2015-07-31 2015-01-27 2012-10-17 2012-10-17 2015-05-13 2015-07-23 2015-07-23 2015-07-23 2014-11-06 2012-09-07 2012-09-07 2015-09-14 2013-11-05 2015-07-30 2015-09-14 2014-11-27 2014-11-27 2015-09-15 2015-08-28 2015-04-07 2015-02-19 2014-07-24 2015-04-30 2014-11-06 2013-10-31 2014-08-08 2014-08-08 2015-09-15 2015-09-15 Source: SEB Credit Research SEB Credit Research 15 September 2015 26 Sector Report Nordic High Yield Update SEB Credit Research HY bond recommendations (continued) ISIN Bond name Issue Date Bond cpn Ccy Amount Rating Recommendation Rec Revised NO0010691892 NO0010717473 NO0010669633 FI4000051040 NO0010607476 NO0010607484 SE0005423597 NO0010589492 NO0010673148 NO0010705791 US811727AB25 USG7945EAJ40 NO0010628753 NO0010649403 SE0004950517 SE0004950525 SE0005757515 SE0005757523 XS1055515412 NO0010612203 NO0010682370 NO0010736895 SE0003918127 SE0003950443 XS0754290459 XS0794786284 XS0794786441 XS0830688411 SE0004649747 NO0010682255 XS1195581159 XS1150673892 XS1150695192 PRS Oct 2018 N3M +295 PRS Sep 2019 N3M+310 PRS Jan 2020 N3M+ 375 Ramirent 21-Mar-2019 4.375 REC 3 May 2018 9.75 REC 3 May 2016 N3M+435 SAS 15 Nov 2017 9% Seadrill Oct 2015 Seadrill Mar 2018 Seadrill Mar 2019 Seadrill Sep 2020 Seadrill Sep 2017 Songa Offshore 17th May 2018 8.4% Songa Offshore 11th December 2018 7.5% SSAB 3mS +340 13 Dec 2017 SSAB 4.875 13 Dec 2017 SSAB 4.625 25 Feb 2019 SSAB 3mS+2.8 25 Feb 2019 SSAB 3.875 10 Apr 2019 STENAM 8 Jun 2016 N+300 STENAM 12 Jun 2018 N+350 STENAM 29 Oct 2019 S+285 STENAM 18 Apr 2017 S+320 STENAM 9 May 2017 S+320 Stora Enso 7-Mar-2019 5.500 Stora Enso 26-Jun-2017 5.750 Stora Enso 26-Jun-2017 Float Stora Enso 19-Mar-2018 5.000 Sobi 26 Jun 2017 3mS +500 Tallink 18 Oct 2018 N3M+500 TDC 26 Feb 3015 3.5 Volvo 10 June 2075 Volvo 10 Mar 2078 2013-10-22 2014-09-09 2013-01-17 2013-03-14 2011-05-03 2011-05-03 2013-09-26 2010-10-05 2013-03-12 2014-03-18 2013-09-25 2012-09-14 2011-11-17 2012-06-11 2012-12-13 2012-12-13 2014-02-18 2014-02-18 2014-04-04 2011-06-08 2013-06-12 2015-05-29 2011-04-18 2011-05-09 2012-03-07 2012-06-26 2012-06-26 2012-09-19 2015-06-15 2013-06-18 2015-02-19 2012-12-03 2012-12-03 Nibor + 295 Nibor + 310 Nibor + 375 4.375 9.75 Nibor + 435 9.0 6.5 Nibor + 375 Stibor + 325 6.625 6.125 8.4 7.5 3mS +340 4.875 4.625 3mS+280 3.875 Nibor + 300 Nibor + 350 Stibor + 285 Stibor + 320 Stibor + 320 5.5 5.75 Stibor+3.90 5.0 3mS +500 Nibor + 500 3.5 4.2 4.85 NOK NOK NOK EUR NOK NOK SEK USD NOK SEK USD USD NOK NOK SEK SEK SEK SEK EUR NOK NOK SEK SEK SEK EUR SEK SEK EUR SEK NOK EUR EUR EUR 700 700 500 100 301 235 1,500 350 1,800 1,500 500 1,000 1,400 750 475 525 500 1,000 350 690 300 500 300 200 500 500 2,200 500 800 900 750 900 600 BB BB BB BB+ B B CCC+ BB+ BB+ BB+ BB+ BB+ CCC+ CCC+ BBBBBBBBBBBB+ BB+ BB+ BB+ BB+ BB BB BB BB BBBBBa2 BB+ BB+ Marketweight Marketweight Marketweight Overweight Marketweight Marketweight Marketweight Overweight Underweight Underweight Underweight Marketweight Underweight Underweight Marketweight Marketweight Marketweight Marketweight Overweight Overweight Overweight Overweight Overweight Overweight Marketweight Marketweight Marketweight Marketweight Overweight Marketweight Underweight Overweight Overweight 2015-09-15 2015-09-15 2015-09-15 2014-02-18 2011-05-04 2014-11-04 2014-08-10 2014-11-28 2014-11-30 2014-12-02 2014-11-29 2014-12-01 2015-02-23 2015-02-23 2014-10-28 2014-10-28 2015-07-23 2015-07-23 2015-07-23 2014-10-24 2015-06-22 2015-06-22 2015-06-22 2015-06-22 2015-07-22 2015-07-22 2015-07-22 2015-07-22 2015-09-15 2015-07-14 2015-05-07 2015-04-22 2015-04-22 Source: SEB Credit Research SEB Credit Research 15 September 2015 27 Sector Report Nordic High Yield Update Company details SEB Credit Research 15 September 2015 28 Sector Report Nordic High Yield Update Ahlstrom (B+/Stable) ● Credit rating Slow economic growth in recent years, especially in Europe together with high input costs have resulted in slow growth and low profitability that is below the company’s own targets. That said, following a long period of significant restructuring measures, Ahlstrom’s operating profit margin has now improved seven quarters in a row in a yearon-year comparison. Financial leverage remains high, but thanks to profitability improvement, the situation is improving. Ahlstrom has leading market positions in certain high performance fibres and wide geographical diversification through its global manufacturing footprint and customer reach. Exposure to multiple end-customer sectors with different business drivers and cycles also helps to limit revenue volatility. Key bond covenants and terms: Ahlstrom Sr. Unsecured bonds: Negative pledge Cross default Change of control Net debt to equity 100% incurrence test Mergers and demergers restricted Overview chart Bond ● Bond recommendations The spread of Ahlstrom’s 2019 maturing bond has narrowed since the start of the year, which to us seems justified given the improvement in profitability and cash generation. However, leverage remains high. We think the risk is balanced at current levels so we reiterate our Marketweight recommendation for the bonds. Ahlstrom Oyj Subsidiaries ● Recent financial update Q2 EBIT excluding NRI was EUR 16.8m, showing improvement from EUR 13.4m in Q2 2014. Net sales of EUR 281m were up 11 y-o-y on the back of FX translation, and flat in constant currencies. The EBIT margin improved to 6.0% from 5.3% a year ago, reflecting improvements in mix and pricing, as well as FX. Operating cash flow was flat year-on-year due to increases in working capital, but cash flow after investments was strong at EUR 29m. Adjusted net debt to EBITDA came down to 4.6x from 5.2x in Q1 and 6.6x in Q2 2014. The company narrowed its 2015 EBIT guidance range from EUR 35-55m to EUR 40-51m (the mid-point remains EUR 45m). Credit strengths Credit concerns ● High market shares in key countries. ● ● Barriers to entry due to wide outlet coverage, sizeable equipment fleet. Capital intensive business with cyclical demand and pricing power highly dependent on demand supply balance. ● Adjustable capital expenditure, operating expenses and transportable equipment fleet. ● High dependency on construction industry clients. ● Relatively narrow geographical diversification. ● Long-term contracts within module business to public sector clients Selected outstanding bonds Issuer Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation Ahlstrom N.R./N.R. B+ 15/09/2014 15/09/2019 Fixed 4.125 EUR 100m 336 Marketweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 250 400 380 200 360 340 150 EURm 320 300 100 280 260 50 240 220 200 Sep-14 0 2015&16 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Source: SEB, Bloomberg SEB Credit Research Undrawn credit facilities Aug-15 2017 Bonds 2018 Long-term loans 2019 ST debt Hybrid Source: SEB 15 September 2015 29 Sector Report Nordic High Yield Update Company description Ahlstrom is a global leader in the development, manufacture and marketing of high performance fibre-based materials used in a range of everyday products such as filters, medical fabrics, life science and diagnostics, wall coverings and food packaging. The company commands strong positions in markets that are growing at a healthy pace. With its headquarters in Helsinki, Ahlstrom has production facilities in Europe, North America, South America and Asia. Credit Research Analyst Lasse Rimpi (358) 9 6162 287 16 [email protected] Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 1,553 -1,352 201 -84 0 117 0 -10 0 -7 2006 1,599 -1,421 178 -82 0 96 0 -9 0 -6 2007 1,761 -1,635 126 -100 0 26 0 -22 0 -3 2008 1,802 -1,676 127 -112 0 15 -1 -35 0 1 2009 1,596 -1,473 123 -138 0 -15 1 -26 0 0 2010 1,894 -1,736 159 -105 0 54 -1 -21 0 -5 2011 1,607 -1,503 105 -85 0 20 0 -27 0 0 2012 1,011 -940 71 -52 0 19 0 -17 0 -7 2013 1,015 -953 62 -51 0 11 0 -20 0 -6 2014 1,001 -946 55 -58 0 -4 0 -6 0 0 2015E 1,096 -995 101 -57 0 45 0 -16 0 12 2016E 1,130 -1,025 105 -57 0 48 0 -14 0 0 2017E 1,164 -1,059 105 -57 0 48 0 -13 0 0 Reported pre-tax profit Minority interests Total taxes Associated companies Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 101 0 -38 0 63 12.9 7.5 37.8 81 0 -24 0 58 11.1 6.0 29.1 0 0 1 0 1 7.1 1.5 (675.7) -21 0 5 0 -16 7.0 0.8 21.8 -40 0 7 0 -33 7.7 (0.9) 18.0 26 0 -8 0 18 8.4 2.8 29.8 -7 0 -6 0 -32 6.5 1.3 (84.8) -6 0 -10 0 -1 7.0 1.8 (178.9) -15 0 -4 0 57 6.1 1.1 (22.7) -9 0 -1 0 -3 5.5 (0.4) (9.6) 41 0 -12 0 29 9.2 4.1 30.0 34 0 -12 0 22 9.3 4.2 35.0 35 0 -12 0 23 9.0 4.1 35.0 (1.0) n.a. 143.2 189.4 3.0 (11.5) (18.0) (19.4) 10.1 (29.3) (73.0) (99.8) 2.4 1.0 (43.6) 0.0 (11.4) (2.9) 0.0 0.0 18.7 28.7 0.0 0.0 (15.2) (34.0) (62.6) 0.0 (37.1) (32.1) (7.5) 0.0 0.4 (12.7) (42.5) 0.0 (1.4) (11.8) 0.0 0.0 9.5 85.0 0.0 0.0 3.0 3.7 7.6 (17.7) 3.0 0.0 0.0 3.1 2005 143 -15 128 -55 72 -63 44 53 -57 0 0 -4 2006 134 -15 120 -117 3 -65 37 -25 -166 195 0 4 2007 78 -34 44 -154 -110 -47 -204 -361 353 9 0 1 2008 56 47 102 -131 -29 -47 -22 -98 136 0 0 39 2009 81 129 210 -70 140 -21 4 122 -243 0 80 -40 2010 98 69 168 -49 119 -26 0 93 0 0 -90 3 2011 94 -11 84 -60 24 -41 117 99 -19 0 -11 70 2012 78 0 79 -88 -9 -60 10 -59 29 0 -8 -37 2013 43 -2 41 -87 -46 -29 -72 -147 12 0 122 -13 2014 41 -6 35 -56 -21 -5 78 52 -8 0 -42 2 2015E 75 0 75 -35 40 -14 0 26 -26 0 0 0 2016E 79 -3 76 -45 31 -14 0 17 -17 0 0 0 2017E 80 -3 77 -45 32 -14 0 18 -18 0 0 0 3.6 7.3 8.7 7.3 4.4 2.6 3.7 8.7 8.6 5.6 3.2 4.0 3.9 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 16 533 52 619 148 1,367 2006 25 551 13 634 134 1,357 2007 27 640 12 795 238 1,711 2008 58 615 12 802 221 1,707 2009 20 500 12 795 203 1,530 2010 25 506 11 796 206 1,543 2011 94 430 89 657 161 1,431 2012 53 271 85 881 98 1,388 2013 38 280 98 463 91 971 2014 41 281 65 451 83 921 2015E 41 305 65 429 83 924 2016E 41 315 65 417 83 922 2017E 41 324 65 405 83 919 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 357 420 1 590 1,367 180 410 1 766 1,357 518 441 36 716 1,711 657 422 0 628 1,707 416 429 0 686 1,530 355 485 0 704 1,543 332 476 0 623 1,431 356 488 0 544 1,388 330 299 9 332 971 295 306 5 315 921 269 321 3 332 924 252 327 -1 344 922 234 334 -5 357 919 341 57.7 43.2 1.7 15.8 155 20.3 56.5 0.9 15.7 491 65.3 44.0 3.9 5.5 599 95.3 36.8 4.7 3.6 396 57.7 44.8 3.2 4.4 330 46.9 45.6 2.1 7.4 238 38.3 43.5 2.3 3.9 303 55.8 39.2 4.3 4.1 292 85.4 35.2 4.7 3.0 254 79.3 34.8 4.6 9.4 227 67.9 36.2 2.2 6.0 210 61.3 37.2 2.0 6.7 192 54.7 38.3 1.8 7.2 (%) Votes 12.0 11.0 3.0 Capital 12.0 11.0 3.0 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Vimpu Intressenter AB Ahlström Capital Varma Mutual Pension Insurance Company Management Title COB CEO CFO Name Panu Routila Marco Levi Sakari Ahdekivi Company information Contact Internet Phone number www.ahlstrom.com +358 10 8880 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 30 Sector Report Nordic High Yield Update Aker ASA (BB+/Stable) ● Credit rating Aker's core performance indicator – NAV – increased by 12.2% from NOK 19.1bn in Q1 to NOK 21.0bn in Q2. Total cash of NOK 3.0bn remains above Aker's policy of holding more cash than outstanding debt due within three years (this debt figure is currently NOK 2.5bn). Due to the increase in NAV, the LTV ratio continued its downward trend from the previous quarter and decreased from 27.1% in Q1 to 26.4% in Q2. In the current oil and gas market downturn, we believe there is value in having a relatively diversified portfolio of investments. The assets related to E&P and oil services now represent 42% of the gross portfolio value. Therefore, the strong portfolio of liquid assets with modest diversification, combined with a low LTV, gives Aker flexibility in facing unforeseen operational challenges in underlying portfolio companies and short-term market fluctuations. In this light, we maintain our BB+/Stable rating. ● Bond recommendations The Aker bond curve is indicated tighter than oil related peers such as Aker Solutions and BW Offshore. However, we believe that is fair given the current tough market conditions for pure oil service companies with no diversification. We therefore maintain our Marketweight recommendation for all of Aker's bonds. Key bond covenants and terms AKER05-13 senior unsecured bonds: Total debt to total equity less than 0.8x. Group loans to net asset value less than 0.5x, or group loans shall be less than NOK 10bn. Call options: AKER05 - @102% (November 2014 - thereafter). AKER07 - @106% (January 2016-January 2017), @104% (January 2017-January 2018), @102% (January 2018-January 2019) AKER08 - @104% (Mar 2015 – Mar 2016), @102% (Mar 2016 – thereafter) AKER09/10/11/12 – Non-call Overview chart ● Recent financial update NAV increased NOK 1.9bn in Q2 to NOK 21bn, primarily driven by an increase of NOK 1.1bn in values for both Ocean Yield and Det norske, respectively. The increase was somewhat offset by the disbursement of NOK 399m in dividend payments to Aker shareholders. Ocean Yield is the largest investment for Aker with a value of NOK 6.0bn, followed by Det Norske with a value of NOK 5.6bn – they represent 21% and 20% of Aker ASA's total gross value, respectively. Net interest bearing debt increased NOK 0.2bn from NOK 3.5bn in Q1 to NOK 3.7bn in Q2. The increase was due to a NOK 1.0bn bond issue, which was partly offset by the repayment of NOK 500m in bank debt and the repurchase of NOK 108m in Aker bonds (AKER05). Credit strengths Credit concerns ● Low net debt at the holding company compared with asset values and equity. ● The average credit quality of main holdings is relatively weak. ● Substantial liquid funds relative to short-term debt. ● Dependent on dividends from portfolio companies. ● Moderate diversification gives buffer from a credit view against the current oil market downturn. ● Further downside risk for the oil and gas sector. Selected outstanding bonds Issue Aker 23 Nov 2015 N3M+500 Aker 16 Mar 2017 N3M+400 Aker 6 Jun 2018 N3M+350 Aker 30 Jan 2019 N3M+500 Aker 24 Jul 2019 S3M+325 Aker 29 May 2020 N3M+350 Aker 6 Jun 2020 N3M+400 Aker 7 Sep 2022 N3M+500 Ticker AKER05 AKER08 AKER11 AKER07 AKER12 AKER13 AKER10 AKER09 Our view BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ Sector Other Other Other Other Other Other Other Other Issue date 23.11.2010 16.03.2012 06.06.2013 30.01.2012 24.01.2014 29.05.2015 06.06.2013 07.09.2012 Maturity date 23.11.2015 16.03.2017 06.06.2018 30.01.2019 24.07.2019 29.05.2020 06.06.2020 07.09.2022 Coupon Nibor + 500 Nibor + 400 Nibor + 350 Nibor + 500 Stibor + 325 Nibor + 350 Nibor + 400 Nibor + 500 Outst. Amount NOK 850m NOK 500m NOK 1300m NOK 500m SEK 1500m NOK 1000m NOK 700m NOK 1000m mid price mid spread 100.42 294 101.08 327 99.44 372 103.97 374 100.11 351 97.88 400 99.50 412 100.92 484 Recommendation Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Marketweight Source: Bloomberg and SEB Relative spread Debt maturity profile bonds Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 31 Sector Report Nordic High Yield Update Company description Aker ASA is an industrial investment company that exercises active ownership. The company is controlled by Kjell Inge Røkke who owns 67.8% of the votes and capital. Aker ASA's main assets are the ownership of publicly listed subsidiaries and associated companies: Aker Solutions (35%), Det norske oljeselskap (50%), Ocean Yield (73%), Akastor (35%), Aker BioMarine (99%), Kværner (29%) and Havfisk (73%). It also holds fund investments through Converto Capital Fund, AAM Absolute Return Fund, and the funds Norron Target and Norron Select. The holding period of an investment can still be relatively long, although the focus today is more on structural processes, executing industrial transactions and streamlining businesses in its core sectors. Credit Research Analyst Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Profit & loss statement (NOKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2007 11,740 -151 11,589 -8 2008 346 -192 154 -18 2009 391 -676 -285 -17 2010 -214 -214 -15 2011 1,191 -225 966 -15 2012 47 -235 -188 -15 2013 0 -236 -236 -14 2014 0 -223 -223 -15 11,581 136 -302 -229 951 -203 -250 -238 Other financial expenses Value changes Dividends receieved 363 -395 1,158 352 -5,586 272 -172 -673 137 470 -2,399 175 -162 55 191 -152 -17 461 -30 252 852 -1 -1,432 354 Reported pre-tax profit 12,707 -4,826 -1,010 -1,983 1,035 89 825 -1,316 Total taxes -29 -269 -63 -421 -22 -22 -13 - 12,678 -5,095 -1,073 -2,404 1,013 67 812 n.a. (NOKm) Cash and liquid assets Other current assets Fixed Assets Long term equity investments Long term Interest bearing assets Intangibles Total assets 2007 12,281 540 328 12,069 1,515 748 27,481 2008 4,704 1,919 920 8,710 3,834 563 20,650 2009 2,694 313 476 9,426 7,051 429 20,389 2010 2,933 138 267 7,972 5,671 34 17,015 2011 3,952 86 269 9,049 4,021 29 17,404 2012 3,106 341 242 12,034 1,321 22 17,066 2013 2,459 74 0 15,762 605 237 19,137 2014 2,857 153 0 14,742 285 262 18,299 Interest bearing debt Other liabilities Shareholders' equity Total liabilities and equity 2,172 1,867 23,442 27,481 1,587 958 18,105 20,650 2,899 1,113 16,377 20,389 2,574 1,184 13,257 17,015 2,728 1,351 13,326 17,404 3,469 1,236 12,361 17,066 5,401 1,320 12,417 19,137 6,701 1,257 10,341 18,299 Net profit Balance sheet Key credit metrics and ratios (NOKm) 2007 2008 2009 2010 2011 2012 2013 2014 Gross Asset Value (NOK m) NAV (NOK m) Equity Ratio Total Debt to GAV Debt/Equity Net debt(cash) including investments Debt/Market Capitalisation Debt/EV 37,348 33,309 85% 6% 9% -22,178 9% 15% 21,012 18,467 88% 8% 9% -11,827 16% 23% 22,943 19,510 80% 13% 18% -9,221 25% 24% 21,400 18,366 78% 12% 19% -8,331 21% 22% 22,714 19,432 77% 12% 20% -10,273 21% 23% 26,771 22,933 72% 13% 28% -11,671 23% 22% 29,784 24,003 65% 18% 43% -12,820 34% 28% 24,914 17,679 57% 27% 65% -10,898 56% 43% Market Capitalization Net Interest bearing debt Enterprise Value 24,535 -10,109 14,426 9,914 -3,117 6,797 11,687 205 11,892 12,050 -359 11,691 13,172 -1,224 11,948 15,343 363 15,706 16,073 2,942 19,015 11,905 3,844 15,749 Main shareholders Name Kjell Inge Røkke Management (%) Votes Capital 67.8 67.8 Company information Title Name Contact COB Kjell Inge Røkke Internet CEO Øyvind Eriksen Phone number CFO Trond Brandsrud www.akerasa.com +47 24 13 00 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 32 Sector Report Nordic High Yield Update Aker Solutions (BB+/Negative) ● Credit rating We still deem the financial risk in Aker Solutions to be moderate with a liquidity buffer of NOK 6.0bn (NOK 4.0bn in undrawn facilities) and relatively conservative leverage – we estimate net debt to EBITDA to be roughly 1.5x excluding operational leases at the end of 2017. However, we argue the business risks are growing significantly. Aker Solutions is in the production part of the oil services value chain, being active in three business segments subsea, MMO and engineering, and is now feeling the pinch already experienced by companies in the exploration part of the chain. In light of our estimate that E&P spending will decline by 25% in 2015 and by 15% in 2016, we expect demand for projects to continue to deteriorate, translating into fewer contract awards, postponed projects and margin pressure. Aker Solutions reported a Q2 book-to-bill of 0.4x, causing the order backlog to drop to NOK 44.0bn from NOK 48.3bn in Q1. As a result, cash flow visibility is deteriorating as lower order intake will put pressure on order backlog in the coming quarters because of fewer contract awards due to the low oil price. From a credit perspective we argue the higher business risks are starting to outweigh the moderate financial risk. We maintain our BB+/Negative rating for Aker Solutions. Key bond covenants and terms: Senior unsecured bonds, AKSO01: Change of control or de-listing - put @101%. Call @105% (June 2015-June 2016), @103% thereafter. TD/EBITDA <4x. Senior unsecured bonds, AKSO02: Change of control or de-listing - put @101. TD/EBITDA <4x. Overview chart TRG (K.I.Røkke) 67% Norwegian 70% 30% Government Aker ASA 6% Bond issuer Aker Solutions Aker Holding 40% 41% Kværner ● Bond recommendations Given the increased risk and weaker outlook for Aker Solutions we believe AKSO01 (+373bp) and AKSO02 (+436bp) should be priced in line with the BWO credit curve where BWO01 (2017) and BWO03 (2019) are indicated at +513bp and +663bp, respectively. This is based on our view that there is currently more risk (mark-tomarket) in the oil service segments subsea, MMO and engineering relative to the FPSO segment. We believe the current prices for AKSO01 and AKSO02 do not reflect the increased risk and we therefore keep our Underweight recommendation on both bonds. ● Recent financial update Aker Solutions reported a strong Q2 balance sheet with net debt of NOK 1.8bn, although we estimate it will increase to above NOK 2.5bn by the end of 2015 as major subsea projects progress. Nevertheless, we see risk to our estimates as current firm backlog only covers 61% of revenues in 2016 and 32% in 2017. Credit strengths Credit concerns ● Market leader in selected industries. ● Declining book-to-bill. ● Good visibility from strong order backlog in the short to medium term. ● Project execution risk and cost overrun risk on contracts. ● Strong technological expertise and history of dealing complex projects in harsh environments. ● Slowdown in the in the MMO market and continued strong disciplined E&P spending. Selected outstanding bonds Ticker AKSO01 AKSO02 Issuer Aker Solutions Asa Aker Solutions Asa Our view BB+ BB+ Issue date 06.06.2012 09.10.2012 Maturity date 06.06.2017 09.10.2019 Coupon Nibor + 425 Nibor + 420 Outst. Amount NOK 1500m NOK 1000m mid price 100.87 99.42 mid spread Recommendation 373 Underweight 436 Underweight Source: Bloomberg and SEB Relative value, bond spreads Debt maturity profile Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 33 Sector Report Nordic High Yield Update Credit Research Analyst Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Company description Aker Solutions is a global provider of products, systems and services to the oil and gas industry. The company has three business segments: Subsea; Engineering and Maintenance; and Modifications and Operations (MMO) services. Aker Solutions is particularly focused on providing equipment and services for deepwater and harsh environments. The company employs approximately 17,000 people in 20 countries. Profit & loss statement (NOKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 41,463 -39,318 2,145 -356 0 1,789 0 -375 0 -396 2006 50,592 -47,720 2,872 -339 0 2,533 0 -253 0 -411 2007 57,957 -54,044 3,913 -431 0 3,482 0 -104 0 160 2008 58,252 -54,870 3,382 -615 0 2,767 0 -224 0 -439 2009 54,077 -49,709 4,368 -910 0 3,458 0 -525 0 275 2010 49,397 -45,252 4,145 -884 0 3,261 0 -450 0 -117 2011 36,671 -33,975 2,696 -876 0 1,820 -73 -344 0 539 2012 44,599 -40,223 4,376 -1,166 0 3,210 5 -368 0 270 2013 45,345 -41,394 3,951 -1,824 0 2,127 -29 -730 0 264 2014 32,909 -30,296 2,613 -665 0 1,948 0 -243 0 50 2015E 31,130 -28,842 2,288 -737 0 1,551 0 -237 0 -1 2016E 27,529 -25,650 1,878 -775 0 1,103 0 -190 0 0 2017E 26,239 -24,561 1,678 -777 0 901 0 -190 0 0 Reported pre-tax profit Minority interests Total taxes 1,018 -16 227 1,869 0 -575 3,538 -63 -1,074 2,104 -75 -591 3,208 -71 -877 2,694 -53 -772 1,942 -36 -451 3,117 -15 -782 1,632 -11 -453 1,755 -18 -517 1,313 -31 -432 914 -15 -297 711 -15 -220 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 1,229 5.2 4.3 (22.3) 3,789 5.7 5.0 30.8 2,401 6.8 6.0 30.4 1,438 5.8 4.8 28.1 2,260 8.1 6.4 27.4 1,957 8.4 6.6 28.7 5,118 7.4 5.0 23.2 2,320 9.8 7.2 25.1 1,256 8.7 4.7 27.8 1,220 7.9 5.9 29.5 850 7.4 5.0 32.9 602 6.8 4.0 32.5 476 6.4 3.4 31.0 16.6 n.a. 130.8 168.2 22.0 33.9 41.6 83.6 14.6 36.2 37.5 89.3 0.5 (13.6) (20.5) (40.5) (7.2) 29.2 25.0 52.5 (8.7) (5.1) (5.7) (16.0) (25.8) (35.0) (44.2) (27.9) 21.6 62.3 76.4 60.5 1.7 (9.7) (33.7) (47.6) (27.4) (33.9) (8.4) 7.5 (5.4) (12.4) (20.4) (25.2) (11.6) (17.9) (28.9) (30.4) (4.7) (10.7) (18.3) (22.2) 2005 1,443 1,890 3,333 -443 2,890 0 0 2,890 -306 0 118 2,702 2006 4,128 -1,180 2,948 -551 2,397 -275 -174 1,948 -824 191 0 1,315 2007 2,895 -407 2,488 -1,777 711 -2,192 469 -1,012 -2,433 -781 0 -4,226 2008 2,128 -2,996 -868 -3,732 -4,600 -809 0 -5,409 4,694 0 1,019 304 2009 3,241 806 4,047 -2,027 2,020 -431 -1,900 -312 800 0 -1,130 -642 2010 2,894 -275 2,619 -2,700 -81 -701 0 -782 1,200 0 0 418 2011 903 1,079 1,982 -200 1,782 -728 924 1,978 -3,000 0 0 -1,022 2012 3,496 -1,619 1,877 -2,003 -126 -1,052 0 -1,177 1,282 0 0 105 2013 3,120 202 3,322 -4,252 -930 -1,079 0 -2,009 3,281 0 0 1,272 2014 1,903 731 2,634 -1,370 1,264 -1,113 413 564 -2,881 0 0 -2,317 2015E 1,618 -2,012 -394 -1,200 -1,594 -394 0 -1,989 0 0 0 -1,989 2016E 1,392 0 1,392 -1,000 392 -298 0 94 0 0 0 94 2017E 1,268 -100 1,168 -1,050 118 -241 0 -123 0 0 0 -123 1.1 1.1 3.1 6.4 3.7 5.5 0.5 4.5 9.4 4.2 3.9 3.6 4.0 (NOKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 6,746 12,568 0 1,549 5,432 26,295 2006 10,521 15,952 0 1,761 5,606 33,840 2007 4,078 16,628 0 2,815 4,995 28,516 2008 4,405 26,590 0 4,610 7,119 42,724 2009 3,810 21,670 0 6,531 7,915 39,926 2010 4,044 21,700 0 7,494 6,783 40,021 2011 3,673 14,525 0 9,604 6,310 34,112 2012 1,635 19,393 0 12,303 6,884 40,215 2013 2,856 25,238 0 11,821 8,242 48,157 2014 3,339 14,755 0 4,009 5,763 27,866 2015E 1,350 14,567 0 4,472 5,763 26,152 2016E 1,445 14,567 0 4,697 5,763 26,472 2017E 1,322 14,567 0 4,970 5,763 26,622 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 5,279 16,754 0 4,262 26,295 4,455 18,958 0 10,427 33,840 2,022 19,227 168 7,099 28,516 6,716 27,402 156 8,450 42,724 7,515 23,288 147 8,976 39,926 8,224 21,443 189 10,165 40,021 6,000 16,795 169 11,148 34,112 7,691 20,544 157 11,823 40,215 11,316 23,286 161 13,394 48,157 3,828 18,145 216 5,677 27,866 3,828 15,945 247 6,132 26,152 3,828 15,945 262 6,437 26,472 3,828 15,845 277 6,672 26,622 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover -1,467 (34.4) 16.2 (0.7) 5.7 -6,066 (58.2) 30.8 (2.1) 11.4 -2,056 (28.3) 25.5 (0.5) 18.7 2,311 26.9 20.1 0.7 8.5 3,705 40.6 22.8 0.8 7.9 4,180 40.4 25.9 1.0 8.5 2,027 17.9 33.2 0.8 5.9 6,056 50.6 29.8 1.4 8.0 8,010 59.1 28.1 2.0 4.9 939 15.9 21.1 0.4 8.5 2,928 45.9 24.4 1.3 7.7 2,833 42.3 25.3 1.5 8.4 2,956 42.5 26.1 1.8 7.5 (%) Votes 40.3 6.3 4.8 Capital 40.3 6.3 4.8 Cash flow (NOKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Aker Holding AS Aker ASA State Street Bank & Trust Co Management Title COB CEO CFO Name Øyvind Eriksen Luis Araujo Svein Oskar Stoknes Company information Contact Internet Phone number www.akersolutions.com +47 67 51 30 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this repor t SEB Credit Research 15 September 2015 34 Sector Report Nordic High Yield Update BW Offshore (BB+/Stable) ● Credit rating BW Offshore (BWO) stated in its Q2 report that hull activities on Catcher had slipped due to the yard's inability to progress the hull delivery in accordance with the contractual schedule. Therefore, the risk of capex overruns and later delivery of Catcher than initial scheduled in mid-2017 has increased. However, we believe the credit story remains strong as BWO has long-term contracts which offer high revenue visibility compared with seismic, drilling and offshore supply. The existing firm backlog of USD 4.1bn (USD 9.6bn with options) is related to fields under production and should, therefore, be robust and well covered with firm contracts of 97% for 2015, 98% for 2016 and 76% for 2017. Moreover, we expect that most of the options will be exercised after firm contracts expire. Therefore, we believe BWO has strong credit support in the current firm EBITDA backlog, and based on our estimates liquidity will be satisfactory even in the event of a USD 200m in capex overrun for Catcher or a one-year delay and USD 100m capex overrun for Catcher. We maintain our BB+/Stable rating. ● Bond recommendations BWO’s bonds have widened significant recently. BWO01 (+513bp), BWO02 (+613bp). BWO03 (+662bp) and BWO04 (+695bp) are all priced attractively relative to Aker Solutions and Prosafe bonds. We believe there is more risk and less revenue visibility related to the oil service segments of subsea, MMO, engineering and accommodation relative to the FPSO segment. Therefore, we keep our Overweight recommendation for the BWO bonds as we believe the cash flow visibility is strong on a relative basis. ● Recent financial update BWO reported strong Q2 EBITDA of USD 105m (4% above the SME consensus) driven by strong utilisation (99.8%). The dividend was cut from USD 0.02 to USD 0.01 in order to preserve cash in light of the weaker outlook. We believe BWO is fully funded for the total capex related to the Catcher project of USD 1.2bn, mainly due to bank facilities already in place. However, we believe there is a tendency in the market to overestimate the potential capex risk to BWO. Key bond covenants and terms: BWO01: Change of control with put at 100 Minimum equity ratio 25% Minimum liquidity USD 75m BWO02: Change of control with put at 100 Minimum equity ratio 25% Minimum liquidity USD 75m BWO03: Change of control with put at 100 Minimum equity ratio 25% Minimum liquidity USD 75m BWO03: Change of control with put at 100 Minimum equity ratio 25% Minimum liquidity USD 75m ● Overview chart Bond issuer BW Offshore Shipholding Ltd BW Offshore Limited Prosafe Production Pte Ltd Other group entities Credit strengths Credit concerns ● Strong order backlog with solid counterparties provides visible long-term earnings. ● ● The world’s second largest operator of FPSOs and a positive market outlook. Cost overrun on Catcher, which accounts for 33% of group EBITDA in 2018. ● Positive change in the industry with fewer players and better project economics. ● Oil companies may seek lower day rates as a pre-requisite for exercising options. ● Solid access to capital through equity markets and, we expect, strong backing from banks. ● Pure FPSO focus provides limited diversification and vulnerability to sector downturns. Selected outstanding bonds Issuer Bw Offshore Ltd Bw Offshore Ltd Bw Offshore Ltd Bw Offshore Ltd Ticker BWO01 BWO02 BWO03 BWO04 Our view BB+ BB+ BB+ BB+ Sector Oilservice Oilservice Oilservice Oilservice Issue date 15.03.2012 21.03.2013 11.03.2014 16.06.2015 Maturity date 15.03.2017 21.03.2018 11.03.2019 16.06.2020 Coupon Nibor + 425 Nibor + 415 Nibor + 350 Nibor + 425 Outst. Amount NOK 500m NOK 500m NOK 750m NOK 900m mid price 98.7 95.4 90.4 89.3 ASW 513 613 662 695 Recommendation Overweight Overweight Overweight Overweight Source: Bloomberg and SEB Bond spreads Debt maturity profile Source: SEB SEB Credit Research Source: SEB 15 September 2015 35 Sector Report Nordic High Yield Update Company description BW Offshore is a leading global provider of floating production services to the oil and gas industry. The company is the world’s second largest contractor with a fleet of 14 FPSOs, one FSO and one FPSO for delivery in mid-2017 (Catcher). BW Offshore has more than 30 years of experience and a solid track record with average uptime above 98% over the last five years. BW Offshore is present in all the major oil basins of the world. The company is listed on the Oslo Stock Exchange with a market capitalisation of around NOK 5bn. BW Offshore is controlled by the BW Group (49.75% shareholding), one of the world’s largest maritime groups. Credit Research Analyst Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2010 549 -382 167 -87 -85 -5 -15 -26 0 -37 2011 846 -534 312 -185 -139 -11 0 -46 19 -34 2012 909 -662 247 -227 75 95 1 -53 -1 -13 2013 982 -536 447 -266 0 181 1 -61 0 -1 2014 1,070 -572 499 -223 0 276 22 -63 0 -9 2015E 923 -539 384 -261 0 122 1 -76 2 -2 2016E 799 -463 335 -230 0 105 0 -110 0 0 2017E 768 -413 355 -246 0 109 0 -124 0 0 Reported pre-tax profit Minority interests Total taxes -83 0 -16 -73 0 -44 29 0 -29 120 0 -37 225 0 -38 47 0 -35 -5 0 -36 -16 0 -38 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -100 30.4 (0.9) (19.7) -116 36.9 (1.3) (60.6) 0 27.2 10.5 100.0 84 45.5 18.4 30.4 187 46.6 25.7 16.9 12 41.6 13.3 74.0 -41 42.0 13.2 (778.0) -54 46.2 14.1 (241.6) 0.0 n.a. 0.0 0.0 54.1 86.9 0.0 0.0 7.5 (20.9) 0.0 0.0 8.0 80.9 90.2 318.8 9.0 11.6 52.2 87.5 (13.8) (23.1) (55.6) (79.0) (13.4) (12.6) (13.9) 0.0 (3.9) 5.7 3.0 0.0 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2010 88 273 361 -520 -159 0 0 -159 0 0 0 -159 2011 189 -373 -184 -175 -360 0 0 -360 0 0 0 -360 2012 152 140 292 -196 96 -96 0 0 0 0 0 0 2013 349 -122 227 -79 148 -41 0 107 0 0 0 107 2014 388 76 464 -344 120 -76 0 44 122 0 0 166 2015E 271 1 272 -530 -258 -76 0 -334 1,049 0 0 716 2016E 189 1 190 -415 -225 -34 0 -259 396 0 0 136 2017E 192 0 192 -15 177 -28 0 150 -203 0 0 -53 Capex/sales (%) 56.3 47.1 25.1 11.2 39.4 57.4 52.0 2.0 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2010 228 155 0 3,124 163 3,670 2011 244 363 0 2,819 191 3,617 2012 102 237 0 2,895 190 3,424 2013 136 308 0 2,721 190 3,355 2014 215 337 0 2,925 191 3,669 2015E 931 291 1 3,196 191 4,609 2016E 1,067 252 1 3,381 191 4,891 2017E 1,014 242 1 3,150 191 4,597 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 1,729 566 0 1,376 3,670 1,969 476 0 1,172 3,617 1,779 518 0 1,127 3,424 1,749 481 0 1,124 3,355 1,871 666 0 1,132 3,669 2,920 620 0 1,069 4,609 3,316 582 0 994 4,891 3,113 572 0 913 4,597 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 1,507 109.5 37.5 9.0 5.2 1,732 147.8 32.4 5.5 6.4 1,685 149.5 32.9 6.8 4.6 1,621 144.2 33.5 3.6 7.1 1,670 147.5 30.9 3.3 7.7 2,004 187.5 23.2 5.2 4.8 2,263 227.7 20.3 6.7 2.7 2,113 231.6 19.8 6.0 2.5 Cash flow Balance sheet Main shareholders Name BW Group Limited FMR LLC Fidelity Funds (%) Votes 49.8 6.4 5.8 Capital 49.8 6.4 5.8 Management Title COB CEO CFO Name Helmut Sohmen Carl K. Arnet Knut Sæthre Company information Contact Internet Phone number www.bwoffshore.com (47) 23 13 00 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 36 Sector Report Nordic High Yield Update Cramo (BB/Stable) ● Credit rating Cramo’s profit improvement from last year in Q2 owed to internal efficiency initiatives, but also to improved market conditions, especially in Sweden and some Eastern European locations. Earnings guidance remained unchanged; Cramo expects its sales to grow in local currencies and EBITA margin to improve in 2015 compared to 2014. Given the slight improvement in market conditions, and H1 performance, this looks clearly reachable. Improved profitability should also enable some strengthening of credit metrics during H2 2015. Key bond covenants and terms: Cramo Sr. Unsecured bonds: Negative pledge Cross default Change of control Overview chart Bond ● Bond recommendations We keep our Overweight recommendation for the bond given the continued favourable earnings outlook, cash flow generation, and relative valuation to other BB rated names. The z-spread has somewhat tightened since the start of the year, which to us seems fair given the improvement in profitability. Carmo Oyj Subsidiaries ● Recent financial update Q2 EBITA of EUR 18.4m clearly increased from EUR 12.5m in Q2 2014. Sales grew by 1%, while the EBITA margin increased to 11.4% from 7.8% a year ago. Fixed costs were EUR 4m lower than in Q2 2014, while the small increase in sales also contributed to profits. Divisionally, EBITA margin and EBITA increased in all divisions, which was a particularly encouraging sign. Norway contributed most to the profit improvement from last year as the restructuring actions helped to restore division’s margins. Central Europe was still on losses, but nevertheless improved from last year. Adjusted net debt to EBITDA was 2.7x, down from 3.0x in Q2 2014 on improved profits and net debt that was only slightly up from last year. Credit strengths Credit concerns ● High market shares in key countries. ● ● Barriers to entry due to wide outlet coverage, sizable equipment fleet. Capital-intensive business with cyclical demand and pricing power highly dependent on demand supply balance. ● Adjustable capital expenditure, operating expenses and transportable equipment fleet. ● High dependency on construction industry clients. ● Relatively narrow geographical diversification. ● Long-term contracts within module business to public sector clients Selected outstanding bonds Issuer Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation Cramo N.R./N.R. BB 23/11/2012 23/02/2018 Fixed 4.5 EUR 100m 206 Overweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 250 450 400 200 350 300 150 Bps EURm 250 200 100 150 100 50 50 0 Source: SEB, Bloomberg SEB Credit Research 2015&16 Aug-15 Apr-15 Jun-15 Feb-15 Oct-14 Dec-14 Aug-14 Apr-14 Jun-14 Feb-14 Oct-13 Dec-13 Aug-13 Apr-13 Jun-13 Feb-13 Dec-12 0 2017 Bonds Bank loans and other 2018 2019 ST debt Source: SEB 15 September 2015 37 Sector Report Nordic High Yield Update Company description Cramo is a leading general equipment rental company focusing on equipment rental services and modular spaces. The company operates in the Nordic countries, Eastern Europe and central Europe. Cramo’s equipment fleets consist of tools, construction equipment such as excavators, loaders and dumpers, and access equipment such as vertical mast lifts and scissor lifts. In addition to equipment rental services, Cramo rents movable, flexible modular space units. Credit Research Analyst Lasse Rimpi (358) 9 6162 287 16 [email protected] Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 77 -48 29 -7 -4 18 0 -2 0 0 2006 402 -279 124 -51 -4 69 0 -12 0 0 2007 496 -338 158 -62 -4 92 0 -16 0 0 2008 580 -390 190 -85 -12 92 0 -28 0 0 2009 447 -341 106 -89 -29 -11 0 -23 0 0 2010 492 -374 118 -83 -7 27 0 -23 0 0 2011 680 -511 169 -98 -17 54 0 -18 0 -4 2012 688 -509 180 -102 -14 64 0 -20 0 0 2013 657 -484 174 -94 -13 67 0 -15 0 0 2014 652 -484 167 -97 -36 34 0 -13 0 0 2015E 674 -481 193 -100 -9 84 0 -12 0 0 2016E 696 -490 207 -100 -9 98 0 -12 0 0 2017E 719 -502 217 -100 -9 108 0 -11 0 0 Reported pre-tax profit Minority interests Total taxes 16 0 -4 57 0 -15 76 0 -18 64 0 -15 -34 0 -6 5 0 -7 32 0 -9 44 0 -6 52 0 -9 21 0 -5 72 0 -15 86 0 -18 97 0 -20 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 12 37.9 23.3 26.6 42 30.8 17.0 25.9 62 31.9 18.5 23.6 49 32.7 15.8 23.6 -40 23.7 (2.6) (16.5) -2 23.9 5.6 145.9 24 24.8 8.0 26.9 39 26.1 9.4 12.5 43 26.4 10.2 17.6 16 25.7 5.3 25.5 57 28.7 12.5 21.0 68 29.7 14.1 21.0 77 30.2 15.0 21.0 5.5 n.a. 48.0 41.2 422.8 324.5 281.8 248.2 23.4 27.8 34.0 34.0 16.8 19.7 (0.1) (16.0) (23.0) (44.1) 0.0 0.0 10.2 11.0 0.0 0.0 38.2 43.4 98.3 569.7 1.3 6.5 18.7 36.9 (4.5) (3.2) 3.7 17.9 (0.9) (3.7) (48.6) (58.6) 3.4 15.4 144.9 233.8 3.3 7.1 16.4 20.1 3.2 4.9 10.3 12.5 (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2005 23 2 25 -28 -3 -4 0 -7 0 0 0 -7 2006 97 -29 68 -110 -42 -8 13 -36 18 1 0 -18 2007 128 11 139 -175 -36 -15 0 -51 34 1 -8 -23 2008 126 -5 121 -201 -80 -20 -15 -116 68 0 37 -10 2009 65 9 74 -31 43 -6 23 59 -95 -2 49 10 2010 72 -10 62 -50 12 0 9 21 0 0 0 21 2011 130 3 133 -149 -17 -3 -50 -70 -33 108 -4 1 2012 121 25 146 -84 62 -12 -6 44 0 0 -55 -11 2013 154 6 160 -101 60 -18 -9 33 0 0 -37 -5 2014 149 -31 118 -148 -30 -26 23 -32 34 0 0 1 2015E 166 5 171 -120 51 -24 30 57 -20 0 0 37 2016E 177 -1 176 -125 51 -26 25 50 -20 0 0 30 2017E 186 -1 185 -130 55 -35 25 45 -20 0 0 25 Capex/sales (%) 36.9 27.3 35.3 34.7 7.0 10.2 22.0 12.2 15.3 22.7 17.8 17.9 18.1 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 2 14 0 93 12 121 2006 42 110 0 371 248 771 2007 18 134 0 494 248 895 2008 8 133 0 611 245 998 2009 19 119 0 547 228 913 2010 22 148 1 545 250 966 2011 23 174 0 641 289 1,127 2012 10 151 0 665 281 1,108 2013 5 138 18 647 266 1,075 2014 6 153 4 659 226 1,048 2015E 42 139 -11 664 217 1,052 2016E 72 144 -21 674 208 1,077 2017E 97 149 -31 689 199 1,103 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 50 16 0 54 121 347 131 0 292 771 383 178 0 334 895 485 193 0 319 998 410 171 0 338 919 404 192 1 369 966 412 220 0 495 1,127 359 216 0 533 1,108 370 205 0 501 1,075 391 202 0 455 1,048 371 193 0 487 1,052 351 197 0 529 1,077 331 201 0 571 1,103 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 49 89.7 44.8 1.7 15.4 306 104.6 37.9 2.5 10.3 365 109.3 37.3 2.3 9.9 477 149.4 32.0 2.5 6.7 441 130.4 36.8 4.2 4.7 432 117.0 38.2 3.7 5.2 439 88.8 43.9 2.6 9.5 399 74.9 48.1 2.2 8.8 365 72.9 46.6 2.1 11.7 385 84.7 43.4 2.3 13.0 329 67.4 46.4 1.7 15.6 279 52.6 49.1 1.3 17.6 234 41.0 51.7 1.1 19.6 (%) Votes 10.6 4.8 2.4 Capital 10.6 4.8 2.4 Cash flow Balance sheet Main shareholders Name Zeres Capital Rakennusmestarit -group Nordea Funds Management Title COB CEO CFO Name Helene Biström Vesa Koivula Martti Ala-Härkönen Company information Contact Internet Phone number www.cramo.com +358 10 661 10 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 38 Sector Report Nordic High Yield Update Det Norske Oljeselskap (BB/Negative) Key bond covenants and terms: DETNOR02 - Unsecured Leverage ratio – NIBD/EBITDAX < 3.5x Interest cover – EBITDA/Interest expense > 3.5x DETNOR03 - Subordinated: No financial covenants Overview Chart ● Credit rating Detnor announced at the Q2 presentation in July that the RBL and RCF had been increased from USD 2.8bn to USD 2.9bn and USD 500m to USD 550m, respectively. These changes in the capital structure increase the liquidity by USD 150m and lower the probability of default, but also put more debt ahead of bondholders in DETNOR02 (unsecured) and DETNOR03 (subordinated) in a recovery scenario. Nevertheless, simultaneous with the recent drop in the oil price to the lower end to below USD 50/b, uncertainty regarding the funding situation for Detnor has increased. However, we believe Detnor is fully funded even in a scenario where 1) the oil price is USD 55/b for H2 2015 and 2016 (almost fully hedged) and USD 50/b from 2017 to 2020, or 2) there is a capex overrun of 20% every year until start-up of Johan Sverdrup in Q4 2019 (PDO phase one). Moreover, we believe the current downturn in the oil service industry with lower margins and prices will have a positive impact on the initial capex estimate for Johan Sverdrup of NOK 117bn in PDO phase one. Therefore, we keep our BB/Negative rating and view the start-up of Ivar Aasen in Q4 2016 as the next important credit trigger, as a one-year delay costs around USD 250m. ● Bond recommendations We believe DETNOR02 (+652bp) and the PIK Toggle DETNOR03 (+979bp) currently is priced reasonably fairly, however, we point out that the current negative sentiment in the oil market could have a negative price impact short-term mark-to-market. ● Recent financial updates At the Q2 presentation in July the production guidance of 58-63k boe/d in 2015 was kept, but more importantly the Ivar Aasen (Q4 2016) and Johan Sverdrup (Q4 2019) projects were reported to be according to schedule. Also, the Ministry of Petroleum released information regarding the final decision for the unitisation of the Johan Sverdrup field. 11.57% was allocated to Detnor, which is 0.3% below the initial proposal. Detnor decided to appeal the decision to the King in Council. In August the Ministry of Petroleum also approved the POD phase one for Johan Sverdrup. Credit strengths Credit concerns ● ● Significant project execution risks due to large investment programmes and field developments. ● Capital structure dominated by debt. ● Exposed to the highly cyclical oil price. Attractive Norwegian fiscal regime protecting against capex risk. ● Strong and valuable asset base of reserves (Johan Sverdrup). ● Financial flexibility through current cash flow and valuable asset base, in addition to a committed owner and bank group. Selected outstanding bonds Ticker Issuer DETNOR02 Det Norske Oljeselskap DETNOR03 Det Norske Oljeselskap Our view BB B Issue date 02.07.2013 27.05.2015 Maturity date 02.07.2020 27.05.2022 Coupon Nibor + 650 10.250% Outst. Amount NOK 1900m USD 300m mid price 99.92 89.81 mid spread 652 979 Recommendation Underweight Underweight Source: Bloomberg and SEB Indicative Spreads Debt maturity profile (NOKm) Source: SEB SEB Credit Research Source: SEB 15 September 2015 39 Sector Report Nordic High Yield Update Company description Det Norske Oljeselskap is an independent exploration, development and production company operating on the Norwegian Continental Shelf. After the acquisition of Marathon Oil Norge in 2014, Det Norske moved from being an exploration company with a large resource base and high future production to a company which in addition has substantial current production and hence cash flow. As such, it will be important to monitor the Alvheim, Volund and Bøyla operations in addition to the development of Ivar Aasen and Johan Sverdrup. Total production is estimated at some 60-65 kboe/d in 2015. Credit Research Analyst Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Profit & loss statement (NOKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2007 131 -349 -218 -35 0 -252 2008 635 -695 -60 -111 -400 -572 2009 265 -1,434 -1,169 -53 -213 -1,436 2010 366 -2,036 -1,670 -159 -171 -2,000 2011 372 -1,287 -914 -79 -198 -1,191 2012 332 -1,914 -1,582 -112 -2,150 -3,843 2013E 948 -1,770 -822 -479 -9 -1,309 2014E 792 -1,401 -608 -419 0 -1,027 2015E 747 -1,284 -537 -398 0 -935 25 0 -20 100 0 56 23 0 12 -167 0 -16 -204 0 4 -73 0 -33 -233 0 -41 -304 0 0 -469 0 0 Reported pre-tax profit Minority interests Total taxes -247 0 206 -416 0 642 -1,400 0 879 -2,183 0 1,493 -1,391 0 932 -3,949 0 2,992 -1,583 0 1,279 -1,330 0 920 -1,404 0 868 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -41 (166.0) (192.4) 83.3 225 (9.5) (90.1) 154.2 -521 (441.0) (541.7) 62.8 -690 (456.3) (546.4) 68.4 -459 (245.8) (320.0) 67.0 -957 (475.8) (1,156.0) 75.8 -305 (86.7) (138.0) 80.8 -410 (76.8) (129.6) 69.2 -537 (71.9) (125.2) 61.8 0.0 n.a. 0.0 0.0 384.8 72.3 0.0 0.0 (58.3) (1,838.2) 0.0 0.0 38.1 (42.9) 0.0 0.0 1.7 45.2 0.0 0.0 (10.7) (73.0) 0.0 0.0 185.2 48.0 0.0 0.0 (16.4) 26.0 0.0 0.0 (5.7) 11.7 0.0 0.0 (NOKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Net change in cash 2007 305 0 305 -365 -61 0 -12 -72 -161 0 -233 2008 428 -199 229 -707 -478 0 1,490 1,012 -129 0 883 2009 418 -610 -192 -744 -936 0 -6 -942 600 0 -342 2010 1,750 -218 1,532 -2,266 -735 0 9 -726 -59 0 -785 2011 796 657 1,453 -1,747 -294 0 -393 -687 130 609 52 2012 990 577 1,567 -4,138 -2,571 0 415 -2,155 1,450 1,019 313 2013E -398 1,487 1,090 -2,870 -1,780 0 86 -1,694 2,040 0 346 2014E 535 0 535 -2,351 -1,816 0 0 -1,816 1,147 0 -669 2015E 164 0 164 -3,729 -3,565 0 0 -3,565 3,209 0 -356 Capex/sales (%) 278.8 111.3 280.9 619.3 469.6 1,244.6 302.7 296.7 499.2 (NOKm) Cash and liquid assets Other current assets Fixed tangible assets Intangibles Total assets 2007 585 869 360 4,613 6,426 2008 1,468 1,023 347 2,380 5,218 2009 1,574 2,521 706 2,912 7,713 2010 789 2,893 531 3,506 7,720 2011 842 2,135 920 3,819 7,716 2012 1,154 1,762 2,219 3,229 8,364 2013E 1,500 426 4,939 3,542 10,407 2014E 831 176 6,189 3,947 11,144 2015E 475 30 9,013 4,298 13,816 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 129 2,734 31 3,533 6,426 0 1,527 0 3,691 5,218 1,481 2,381 0 3,851 7,712 1,532 3,027 0 3,160 7,720 967 3,073 0 3,677 7,716 2,502 2,124 0 3,738 8,364 4,616 2,360 0 3,432 10,407 5,762 2,360 0 3,021 11,144 8,971 2,360 0 2,485 13,816 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover -448 (12.6) 55.4 2.1 (55.8) -1,452 (39.3) 70.7 24.1 (1.3) -1,164 (30.2) 49.9 1.0 (44.8) -336 (10.6) 40.9 0.2 (7.6) -208 (5.6) 47.6 0.2 (3.3) 735 19.7 44.7 (0.5) (12.3) 2,297 66.9 33.0 (2.8) (3.1) 3,780 125.1 27.1 (6.2) (1.9) 7,493 301.6 18.0 (13.9) (1.1) Net interest expenses Value changes Other financial items Cash flow Balance sheet Main shareholders Name Aker FOLKETRYGDFONDET Odin Norge (%) Votes 50.0 6.8 1.9 Capital 50.0 6.8 1.9 Management Title COB CEO CFO Name Sverre Skogen Sverre Skogen Alexander Krane Company information Contact Internet Phone number www.detnor.no +47 90 70 60 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 40 Sector Report Nordic High Yield Update DFDS (BB+/Positive) ● Credit rating Following the Q2 results in August, our BB+/Positive rating is unchanged. We noted that DFDS is getting closer to a rating migration to investment grade, which we now believe could happen later this year. This is based on our expectations of improved earnings throughout 2015 and unchanged capex guidance. Based on these expectations, we believe the financial risk profile of the company is set to improve enough for a one notch rating upgrade, even taking into account the more shareholder friendly divided ambition. The company raised its 2015 EBITDA guidance for the second time this year, expecting EBITDA of DKK 1.8-1.9bn, increased from DKK 1.651.75bn in May and DKK 1.55-1.65bn at the beginning of the year. Key bond covenants and terms: Change of control with put @ 100 Minimum equity ratio 30% ● Bond recommendations With lower bunker costs and positive profitability momentum, we hold a positive view of DFDS bonds. Although DFDS could experience a rating migration to investment grade (in the absence of major debt financed acquisition), we believe the current bond pricing is fair compared with low IG bonds, and remains relatively tight compared with selected crossover bonds. We have a Marketweight recommendation on the DFDS bonds. Overview chart Bond issuer DFDS A/S Shipping Division People & Ships Logistics Division ● Recent financial updates With positive cash flow and improved profitability, leverage (1.3x) appears to be under control and below its target of 2-3x. Although we do not assume that DFDS will participate in any short-term M&A activity, we note that its put option agreement that has been entered into with Eurotunnel for the purchase of the two MyFerryLink ferries could increase this leverage ratio. The put option expires by mid-2017. With respect to further scrubber investment, the company said it is on hold following the narrowing between the high and low sulphur content bunker fuel prices, which means payback time for new scrubber investment will take longer. It has benefited from the installation of scrubbers. Finance Credit strengths Credit concerns ● ● ● ● ● Strong market position with the largest integrated sea and land transportation network in northern Europe. Growing logistics business supports stability in earnings and customer diversification. Management has a credible track record. Anticipated strong support from banks and access to capital markets. ● ● ● Exposure to a cyclical industry, despite liner shipping being less volatile than commodity-based shipping. High exposure to the European economy with a muted economic outlook. Event risk related to acquisitions. Fierce competition, from peers and other related transport modes. Selected outstanding bonds Issuer Dfds A/S Dfds A/S Dfds A/S Ticker DFDS01 DFDS02 Bond rating BB+ BB+ BB+ Sector Shipping Shipping Shipping Issue date 02/05/2012 21/03/2013 13/06/2014 Maturity date 02/05/2016 21/03/2018 13/06/2019 Coupon Nibor + 350 Nibor + 290 Cibor + 163 Outst. Amount NOK 500m NOK 700m DKK 500m mid price 101.9 103.8 100.5 Spread 79 142 157 Recommendation Marketweight Marketweight Marketweight Source: Bloomberg and SEB Bond spreads Bond maturity schedule (DKKm) spread (bps) 300 600 250 500 200 400 150 300 200 100 50 May-14 100 Jul-14 Oct-14 DFDS01 Jan-15 Apr-15 Jul-15 2014 DFDS02 Source: SEB and Bloomberg SEB Credit Research 0 2015 2016 2017 2018 2019 Source: SEB 15 September 2015 41 Sector Report Nordic High Yield Update Company description DFDS is northern Europe's largest integrated shipping and logistics company. DFDS Seaways operates a network of 30 routes with 50 freight and passenger ships. DFDS Logistics provides freight and logistics services in Europe with trailers, containers, and rail. The key markets are Denmark, Sweden, Norway, the UK, Germany, the English Channel and the Baltics. DFDS has 6,000 employees in 20 countries, and revenues of about DKK 12bn. The company was founded in 1866, is headquartered in Copenhagen, and is listed on NASDAQ OMX Copenhagen. Targets include: a return on invested capital of approximately 10%; a dividend payout of about 30% of annual profits after tax, with due consideration to future investment plans and a satisfactory capital structure; and an equity ratio of at least 40%. Credit Research Analyst Henrik Blymke (47) 22 82 71 91 [email protected] Profit & loss statement (DKKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2004 5,723 -4,853 870 -515 14 369 2 -209 20 19 2005 6,278 -5,388 890 -487 1 404 1 -199 29 4 2006 7,524 -6,395 1,129 -565 -10 554 -1 -211 33 26 2007 8,310 -6,995 1,316 -596 2 722 -2 -226 33 0 2008 8,194 -7,182 1,011 -572 -22 417 4 -246 45 0 2009 6,555 -5,751 804 -572 -77 155 1 -154 18 0 2010 9,867 -8,594 1,273 -697 96 672 5 -135 5 0 2011 11,625 -10,039 1,586 -735 49 900 0 -183 26 0 2012 11,700 -10,732 968 -679 0 289 3 -138 6 -9 2013 12,097 -10,901 1,196 -710 0 486 -6 -127 6 -9 2014E 12,603 -11,270 1,334 -725 0 608 7 -122 0 -7 2015E 13,007 -11,506 1,501 -765 0 735 0 -121 0 -4 2016E 13,570 -11,977 1,593 -797 0 795 0 -112 0 -4 Reported pre-tax profit Minority interests Total taxes 200 -18 -7 238 -18 -37 402 -11 -39 526 -11 -114 221 -7 32 20 -3 69 547 -14 -25 742 0 -7 152 0 -4 350 0 -23 487 0 -64 610 0 -64 679 0 -71 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 176 15.2 6.4 3.3 183 14.2 6.4 15.7 352 15.0 7.4 9.7 400 15.8 8.7 21.7 247 12.3 5.1 (14.5) 86 12.3 2.4 (350.8) 508 12.9 6.8 4.5 735 13.6 7.7 1.0 148 8.3 2.5 2.4 327 9.9 4.0 6.6 424 10.6 4.8 13.0 546 11.5 5.7 10.5 608 11.7 5.9 10.5 8.7 n.a. 18.4 27.3 9.7 2.4 9.5 18.9 19.8 26.8 37.2 69.0 10.5 16.5 30.3 30.7 (1.4) (23.1) (42.2) (58.0) (20.0) (20.5) (62.9) (91.1) 50.5 58.3 333.6 2,673.4 17.8 24.6 34.0 35.8 0.6 (38.9) (67.9) (79.5) 3.4 23.5 68.1 130.1 4.2 11.6 25.3 39.3 3.2 12.5 20.9 25.3 4.3 6.1 8.1 11.3 2004 657 -23 634 -1,594 -960 -38 145 -853 573 0 170 -111 2005 656 -165 491 -573 -81 -61 -281 -423 68 0 309 -47 2006 906 45 950 -1,617 -666 -57 -82 -805 755 0 142 92 2007 1,025 13 1,039 -221 818 -85 70 803 -583 0 -97 123 2008 584 190 775 -468 307 -115 123 315 -380 0 -127 -192 2009 557 87 644 -1,265 -621 0 0 -621 458 0 16 -147 2010 1,425 -641 785 -1,858 -1,073 0 337 -736 948 2,081 -1,363 930 2011 793 452 1,246 -812 434 -117 1,031 1,348 -1,095 0 -406 -152 2012 817 -166 651 152 803 -208 39 634 -582 0 0 53 2013 1,066 440 1,506 -727 778 -208 66 637 400 -624 0 413 2014E 1,069 -19 1,050 -1,028 22 -203 -18 -199 -200 -200 0 -599 2015E 1,311 8 1,320 -730 590 -183 -2 404 -200 0 0 204 2016E 1,405 11 1,416 -670 747 -183 -3 561 -200 0 0 361 27.9 9.1 21.5 2.7 5.7 19.3 18.8 7.0 -1.3 6.0 8.2 5.6 4.9 (DKKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2004 327 813 152 6,595 100 7,986 2005 280 1,002 148 6,735 292 8,457 2006 371 1,250 121 7,756 493 9,991 2007 494 1,218 115 7,298 485 9,610 2008 302 1,025 130 6,739 415 8,610 2009 155 1,020 162 7,537 425 9,298 2010 1,084 2,597 204 9,563 401 13,849 2011 931 1,945 262 9,207 450 12,795 2012 984 2,005 225 8,382 450 12,046 2013 1,396 2,033 153 8,406 450 12,438 2014E 797 2,173 178 8,708 450 12,307 2015E 1,002 2,259 181 8,673 450 12,564 2016E 1,363 2,374 184 8,545 450 12,915 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 3,778 1,509 154 2,545 7,986 4,121 1,432 101 2,802 8,457 5,005 1,721 111 3,154 9,991 4,352 1,604 116 3,538 9,610 3,636 1,490 71 3,414 8,610 4,200 1,410 47 3,641 9,298 4,963 2,490 58 6,339 13,849 3,582 2,249 58 6,906 12,795 3,002 2,143 54 6,846 12,046 3,397 2,648 55 6,339 12,438 3,192 2,706 60 6,349 12,307 2,992 2,801 71 6,701 12,564 2,792 2,926 82 7,115 12,915 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 3,674 136.1 33.8 4.2 4.0 4,076 140.4 34.3 4.6 4.3 4,873 149.2 32.7 4.3 5.1 4,085 111.8 38.0 3.1 5.2 3,505 100.6 40.5 3.5 3.6 4,225 114.6 39.7 5.3 4.3 4,132 64.6 46.2 3.2 5.8 2,897 41.6 54.4 1.8 7.3 2,264 32.8 57.3 2.3 6.2 2,246 35.1 51.4 1.9 8.3 2,640 41.2 52.1 2.0 9.7 2,236 33.0 53.9 1.5 10.8 1,675 23.3 55.7 1.1 11.6 (%) Votes 44.0 Capital 44.0 Cash flow (DKKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Lauritzen Foundation Management Title COB CEO CFO Name Bent Østergaard Niels Smedegaard Torben Carlsen Company information Contact Internet Phone number www.dfds.dk (45) 3342 3342 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 42 Sector Report Nordic High Yield Update Dolphin Group (CCC+/Negative) Key bond covenants and terms DOLP01: Change of Control with put at 101 Minimum equity ratio 35% Minimum liquidity USD 10m Minimum Interest cover (EBITDA/ net interest) 2.5x Cross default (USD 10m) DOLP02: Change of Control with put at 101 Minimum equity ratio 35% Minimum liquidity USD 10m Minimum Interest cover (EBITDA/ net interest) 2.5x Cross default (USD 10m) Overview chart Bond issuer Dolphin Group ASA Dolphin Geophysical AS Dolphin Interconnect Solutions AS ● Credit rating Our E&P spending report (Pitch dark before any shimmer of light) of 13 August explain how the seismic market had become, and would be, tougher than our previous expectations and estimates. We now expect exploration spending to decline 32% in 2015 and 20% in 2016. Persistently difficult seismic market conditions and a continuing low oil price will put more pressure on cash flow and we now estimate a high likelihood of liquidity squeeze for Dolphin in H1 2016, even with easier terms from stakeholders. Therefore, we keep out CCC+/Negative rating on Dolphin. Our negative outlook reflects the deteriorating backlog which declined from USD 225m in Q1 to USD 135m in Q2. The result is poor cash flow visibility which combines with challenging industry conditions, characterised by an unfavourable supply-demand balance with declining utilisation and day rates in the market now equating to around opex (USD 150,000/d). ● Bond recommendations The indicative price for DOLP01 and DOLP02 is 40.50 and 39.50, respectively. Both bonds have widened significantly since our latest update on Dolphin from 13 August (The market killed Flipper), when they were indicated at 71.0 and 61.25, respectively. Despite the spread widening, we keep our Underweight recommendation as our bearish view on the fundamentals for the seismic was further supported by our E&P spending report. In addition, the expected recovery in a potential default is close to zero for the unsecured bonds. However, we believe there is incentive from stakeholders to ease terms and keep Dolphin as a “going concern”. ● Recent financial updates The fleet is 90% booked for Q3 and 55% for Q4, which puts utilisation at risk for Q4. Dolphin has cold stacked the 3D vessel Polar Duke and will return the vessel to the owner once the charter expires in May 2016. Right now, Dolphin has two vessels not in revenue generating operations. Polar Marquis was idle for all of August in Gibraltar, while Polar Duchess has been idle portside Lerwick. Credit strengths Credit concerns ● Flexible and asset-light business model. ● ● Vessels with high efficiency. Cyclical and capital intensive industry with short contracts and limited longterm visibility. ● Demand for seismic vessels sensitive to E&P spending. ● Weak seismic market puts pressure on contract rates and utilisation. Selected outstanding bonds Ticker DOLP01 DOLP02 Issuer Dolphin Group As Dolphin Group As Our view CCCCCC- Issue date 14.11.2012 05.12.2013 Maturity date 14.02.2018 05.03.2019 Coupon Nibor + 775 Nibor + 750 Outst. Amount NOK 400m NOK 500m mid price 40.50 39.50 mid spread Recommendation 5269 Underweight 4130 Underweight Source: Bloomberg and SEB Bond spread development Debt maturity profile Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 43 Sector Report Nordic High Yield Update Credit Research Analyst: Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Company description Dolphin Group is a seismic company operating six 3D vessels and one 2D vessel. The company has entered favourable multi-year charter agreements for the vessels, with options to extend charters for up to eight years. Dolphin owns the seismic equipment on the vessels. In 2012, the company also entered into the multi-client business. Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2009 2 -6 -4 -1 0 -5 2010 2 -5 -4 -1 0 -4 2011 98 -84 14 -11 0 3 2012 221 -140 81 -40 0 41 2013 246 -171 76 -45 0 31 2014 440 -315 125 -70 0 55 2015E 375 -286 89 -101 0 -12 2016E 362 -293 69 -94 0 -25 2017E 365 -270 95 -92 0 3 Net interest expenses Value changes Other financial items 0 0 -2 0 0 0 -2 0 0 -4 0 1 -9 0 -3 -16 0 -5 -20 0 -3 -21 0 0 -19 0 0 Reported pre-tax profit Minority interests Total taxes -7 0 0 -4 0 0 1 0 -2 37 0 -6 20 0 -7 34 0 -12 -35 0 8 -45 0 10 -16 0 3 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -7 (245.9) (293.4) 1.3 -4 (221.7) (269.6) 0.0 -1 13.9 3.1 176.2 31 36.6 18.4 16.0 12 30.8 12.7 37.1 22 28.3 12.5 36.3 -27 23.8 (3.1) 23.0 -36 19.0 (6.8) 21.0 -13 26.0 0.8 21.0 0.0 n.a. 0.0 0.0 (0.5) 10.3 0.0 0.0 5,760.1 468.6 0.0 0.0 126.8 495.1 1,262.4 3,356.7 11.4 (6.2) (22.7) (47.2) 78.6 64.3 74.6 73.6 (14.9) (28.6) 0.0 0.0 (3.3) (22.8) 0.0 0.0 0.6 37.5 0.0 0.0 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2009 -6 0 -6 -3 -9 0 0 -9 0 0 0 -9 2010 -4 0 -4 0 -4 0 0 -4 0 65 0 61 2011 12 -14 -2 -96 -98 0 0 -98 46 47 0 -6 2012 78 -40 38 -135 -97 0 0 -97 71 41 6 20 2013 64 31 96 -162 -66 0 0 -66 49 40 0 24 2014 96 -18 78 -181 -103 0 0 -103 50 1 0 -52 2015E 74 37 111 -141 -30 0 0 -30 1 18 0 -11 2016E 58 1 58 -75 -17 0 0 -17 15 0 0 -2 2017E 79 0 79 -80 -2 0 0 -2 -5 0 0 -7 Capex/sales (%) 185.5 0.0 98.4 61.1 65.7 41.1 37.6 20.8 22.0 2009 0 1 0 3 0 4 2010 63 1 0 8 0 72 2011 57 42 0 92 0 190 2012 78 121 0 178 0 376 2013 75 90 0 327 0 492 2014 37 177 0 432 0 646 2015E 26 127 0 472 0 625 2016E 24 124 0 454 0 602 2017E 18 124 0 443 0 585 0 1 0 3 4 0 1 0 70 72 46 28 0 116 190 127 60 0 189 376 177 70 0 245 492 243 142 0 261 646 244 129 0 252 625 259 127 0 216 602 254 127 0 203 584 0 8.7 68.2 (0.1) -63 (89.5) 98.3 17.1 -11 (9.5) 61.2 (0.8) 6.2 49 26.0 50.3 0.6 17.4 102 41.6 49.7 1.3 7.9 206 79.2 40.3 1.7 7.5 218 86.5 40.3 2.4 4.3 235 108.6 35.9 3.4 3.3 236 116.4 34.8 2.5 4.8 Cash flow Balance sheet (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Nordstjernan BNP PARIBAS SEC SERVICES S.C.A DnB Asset Managament (%) Votes 10.1 8.9 7.9 Capital 10.1 8.9 7.9 Management Title COB CEO CFO Name Tim Wells Atle Jacobsen Erik Hokholt Company information Contact Internet Phone number www.dolphingroup.no +47 23 16 70 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 44 Sector Report Nordic High Yield Update EG Gruppen (AX IV EG Holding III.) (B+/Stable) ● Credit rating We rate EG Gruppen B+ with a Stable outlook. Our rating view is primarily supported by the earnings stability provided by a partly recurring revenue base and the company’s strong local knowledge of its customers’ operating environment. Cash flow generation is solid and capex needs are limited. The well-diversified customer base partly offsets the narrow geographical and product focus. The primary concern is the high leverage, which we expect will remain high despite underlying deleveraging potential. Other concerns include a market characterised by fragmentation and intense competition. The weak organic growth seen in recent years was improved in Q2. Key bond covenants and terms: Senior secured 2020 bond Change of control with put at 101 Debt incurrence covenants: 1. Net leverage <5.25x until 12 months after signing, thereafter 5.0x until 24 months after signing, thereafter 4.75x until 36 months after signing and thereafter <4.5x 2. Interest coverage >2.25x Carve-outs: 1. SEK 90m WC facility ● Bond recommendations EG’s senior secured Cibor +650 bond due 2 December 2020 offers a yield of some 6%. We argue that this is fair and keep our Marketweight recommendation. Overview chart ● Recent financial updates Q2 sales were DKK 455m, in line with our expectations. This corresponded to 18 y-o-y growth and 7% q-o-q growth. Sales were driven by acquisitions and to some extent by organic growth of some 3%. EBITDA at SEK 41m was down in terms of margins (9.2% in Q2 2015 versus 9.6% in Q2 2014). This was due to cost mix effects. Adjusted net debt/EBITDA at 5.9x was in line with Q2 2014 and Q1 2015. Adjusted net debt/normalised EBITDA showed an improvement compared with the same period last year, now standing at 5.1x. We expect full-year leverage below 5.2x. Gross debt chiefly comprised the DKK 1,100 bond. Axcel IV Axcel internal structure AX IV EG Holding ApS. AX IV EG Holding II ApS. AX IV EG Holding III ApS DKK 900m Sr. Sec. bond DKK 60m super sr. RCF EG A/S Subsidiaries Credit strengths Credit concerns ● ● Highly leveraged balance sheet and strategy to focus on acquisitions are likely to prevent any meaningful debt reduction. ● Organic growth rates have been weak in recent years and the market is fragmented and competition fierce. ● Weak geographical and product diversification. Relatively large share of recurring revenues. ● Strong local knowledge of clients’ operating environment. ● Well diversified customer base spanning several industries. ● Stable cash flow generation supported by limited investment needs. Selected outstanding bonds Issuer EG Gruppen Public N.R./ SEB B+ Issue date 02/12/2013 Maturity date 02/12/2020 Cpn 3mS+650 Amount DKK 1,100m Spread 599 Recommendation Marketweight Source: Bloomberg and SEB Relative value Debt maturity profile 900 Golden Heights 1,200 NSP Nynas 800 SAS Textilia Björn Borg Arise Spread (bps) 1,000 Bravida 700 600 800 Diamorph Wallvision WestAtlantic 500 Opus 600 Aligera Orexo 400 Consilium 400 Ainmt BE Bio Energy 300 JSM Fin SAA 200 Lauritz.com 200 EG Gruppen 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 6.0 Source: SEB and Bloomberg. For illustrative purposes. Not currency adjusted. SEB Credit Research 0 2014 2015 2016 2017 2018 2019 2020 Source: SEB 15 September 2015 45 Sector Report Nordic High Yield Update Company description EG is an IT service and software provider focused on installing and optimising the usage of ERP systems. ERP systems are used for, among other things, support accounting, order and inventory processing, ledgers, production planning, project planning, procurement, time tracking and personnel. EG mainly works with systems with an origin in Denmark, such as Navision and Damgaard, but also other systems in the Microsoft family, SAP and Oracle. EG has a strong presence in Scandinavia with Denmark being its most important market (representing 78%) of sales. Norway accounts for 17% of revenues while Sweden is the smallest market with 5%. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (DKKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 824 -761 63 -12 -5 46 0 11 0 0 2006 830 -761 69 -15 0 55 0 5 0 0 2007 911 -848 63 -13 -5 45 0 5 0 23 2008 1,032 -968 65 -16 -19 30 0 0 0 0 2009 924 -849 75 -12 -23 41 0 -16 3 5 2010 1,017 -928 88 -14 -24 50 0 -12 0 1 2011 1,330 -1,202 128 -19 -41 68 0 -15 0 -1 2012 1,502 -1,359 143 -22 -64 56 0 -13 0 1 2013 1,611 -1,437 174 -21 -30 123 0 -43 0 0 2014 1,636 -1,459 177 -29 -99 49 0 -81 0 0 2015E 1,816 -1,609 207 -24 -112 71 0 -76 0 0 2016E 1,852 -1,636 216 -38 -105 73 0 -75 0 0 2017E 1,889 -1,663 226 -20 -100 106 0 -77 0 0 Reported pre-tax profit Minority interests Total taxes 57 0 -14 59 0 -21 73 0 -11 30 0 -11 33 0 -7 40 0 -11 53 0 -14 44 0 -14 80 0 -20 -32 0 -13 -5 0 1 -2 0 0 29 0 -6 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 43 7.7 5.6 24.9 38 8.3 6.6 35.4 62 6.9 4.9 15.1 19 6.2 2.9 36.8 26 8.1 4.4 21.5 28 8.7 5.0 28.2 39 9.6 5.1 25.9 30 9.5 3.7 31.5 60 10.8 7.6 24.9 -45 10.8 3.0 (40.6) -4 11.4 3.9 22.0 -2 11.7 3.9 22.0 23 12.0 5.6 22.0 (4.9) n.a. 149.5 46.2 0.7 9.6 17.8 3.4 9.8 (9.1) (17.9) 22.7 13.3 2.4 (32.6) (58.8) (10.5) 16.5 35.5 11.4 10.0 17.7 23.3 18.9 30.8 45.0 35.0 32.6 12.9 11.2 (18.1) (16.7) 7.3 21.9 120.5 83.1 1.6 1.7 (60.2) 0.0 11.0 17.0 45.5 0.0 2.0 4.5 2.6 0.0 2.0 4.4 45.0 0.0 2005 46 58 104 -17 86 -18 31 99 -12 0 0 87 2006 53 -97 -44 0 -44 0 0 -44 0 0 0 -44 2007 46 -9 38 -9 29 0 -99 -70 2 2 -2 -67 2008 49 62 112 -18 93 0 -10 84 4 2 0 90 2009 58 80 137 -10 127 0 -37 90 3 0 8 101 2010 59 -83 -24 -23 -46 0 -55 -102 -18 0 0 -119 2011 93 78 171 -33 137 0 -282 -145 -19 56 -5 -112 2012 122 9 132 -38 93 0 -97 -4 -21 19 -2 -8 2013 111 0 111 -48 63 0 -907 -844 882 515 -8 545 2014 83 -21 63 -17 46 -120 -304 -378 198 0 0 -181 2015E 132 15 148 -38 110 0 -70 40 0 0 0 40 2016E 141 3 145 -20 125 0 -70 55 0 0 0 55 2017E 143 3 146 -20 126 0 -70 56 0 0 0 56 2.1 0.0 0.8 1.4 0.8 1.5 1.4 0.9 1.2 1.0 2.1 1.1 1.1 (DKKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 157 206 21 54 9 447 2006 116 281 0 44 22 463 2007 51 312 4 53 153 572 2008 139 234 1 55 156 584 2009 221 222 0 34 445 921 2010 123 242 0 31 485 882 2011 46 319 0 45 760 1,169 2012 49 311 0 44 813 1,217 2013 230 293 0 39 1,454 2,015 2014 49 376 0 0 1,727 2,152 2015E 89 418 70 14 1,615 2,205 2016E 143 426 140 -4 1,510 2,215 2017E 199 435 210 -4 1,410 2,250 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 15 175 0 257 447 14 181 0 268 463 5 236 0 332 572 8 223 0 354 584 356 327 0 238 921 340 273 0 268 882 361 450 0 359 1,169 336 473 0 408 1,217 932 584 0 499 2,015 1,129 708 0 314 2,152 1,129 765 0 311 2,205 1,129 777 0 309 2,215 1,129 789 0 332 2,250 -156 (60.8) 57.5 (2.5) 63.2 -102 (38.0) 57.9 (1.5) 53.3 -45 (13.7) 57.9 (0.7) 40.7 -131 (37.1) 60.5 (2.0) 11.5 136 56.9 25.9 1.8 4.1 217 80.9 30.4 2.5 7.0 315 87.8 30.7 2.5 8.2 286 70.3 33.5 2.0 10.7 702 140.8 24.8 4.0 4.0 1,080 343.4 14.6 6.1 2.1 1,040 334.7 14.1 5.0 2.7 986 318.9 14.0 4.6 2.8 930 280.0 14.8 4.1 3.0 (%) Votes 100.0 Capital 100.0 Cash flow (DKKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Axcel Management Title COB CEO CFO Name Klaus Holse Leif Vestergaard Allan Buhl Møller Company information Contact Internet Phone number www.global.eg.dk +45 7013 2211 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 46 Sector Report Nordic High Yield Update Fred Olsen Energy (BB/Negative) Key bond covenants and terms: Fred Olsen Unsecured Bonds: Liquidity > USD 30m NIBD/EBITDA< 4.5x EBITDA/Net interest expense > 2.5x CoC put @ 101 Overview Chart ● Credit rating We recently cut our rating on Fred Olsen Energy by one notch from BB+ to BB. This was primarily due to our updated dayrate estimates and outlook for the drilling market. The main credit risk for FOE, aside from a continued downturn in the offshore drilling market, is the company’s aging fleet. Although Fred Olsen has undergone extensive upgrades to its fleet, we are not comfortable about the competitiveness of all the rigs and question how many will survive the current downturn. The company has relatively low financial risks, due to having a conservatively leveraged balance sheet. In the short term, our biggest concern is the uncertainty surrounding the newbuild Dolphin Bollsta. This unit is scheduled to commence a USD 560,000 per day contract with Chevron for the Rosebank field in Q4 2015 and represents 40% of the EBITDA backlog within Fred Olsen. Chevron stated back in 2013 that it did not see a positive NPV in going through with the project. ● Bond recommendations We believe that FOE04 has priced in a too-high refinancing risk at +684bp. Although cost overruns mean that FOE no longer can pay down the bond with cash at hand, we expect that the company’s owner, which as per Q2 had more than USD 1bn in cash at hand, will step up in the event that the bond market remains closed. We remain wary of FOE05 (+1399bp): although the bonds have traded down significantly, and yield could be argued as attractive against the company’s net loan to value position, we need to get comfortable on the Bollsta contract until we feel in a position to change our Underweight recommendation. ● Recent financial updates Our updated estimates assume idle time for Belford and Byford throughout 2016 and Bredford and Borgholm through 2017. Based on our new forecast we expect leverage to increase to 3.4x in 2016. There is limited risk to our 2016 estimates as our revenue estimate for 2016 is based on current contracts only. Credit strengths Credit concerns ● Strong market position in an industry with a positive fundamental outlook. ● Cyclical and capital intensive industry. ● Extensive operational track record with profitable operations and low financial gearing. ● Old asset base with five class renewal surveys in 2014-2015 which could lead to capex overruns and increased leverage. ● Perceived strong support from banks at attractive financing terms and good access to capital markets. ● Exposure to event risk such as construction risk, political risk and accidents. ● Strong supply growth expected towards 2016 Selected outstanding bonds Issuer Ticker Our view Sector Issue date Maturity date Coupon #VALUE! Fred Olsen FOE04 BB/BB- Oilservice 12.05.2011 12.05.2016 Fred Olsen FOE05 BB/BB- Oilservice 28.02.2014 28.02.2019 #VALUE! Outst. Amount mid price ASW Recommendation NOK 1400m 97.51 928 Overweight NOK 1100m 69.60 1497 Underweight Source: Bloomberg and SEB Indicative spreads Debt maturity profile (NOKm) 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00 2014 2015 2016 Bank Source: SEB SEB Credit Research 2017 2018 2019 Bonds Source: SEB 15 September 2015 47 Sector Report Nordic High Yield Update Company description Fred Olsen Energy controls a fleet of 10 floating drilling rigs (six midwater units and four deepwater units) and one semi-submersible accommodation rig. The midwater units are second, third and fourth generation semi-submersibles, three of which are certified to operate in Norway. The deepwater units include one fifth generation semi-submersible and three ultra-deepwater drillships, two of which are under construction and scheduled for delivery in 2014. Headquartered in Oslo, the company has over 35 years' experience in offshore drilling. Engineering and fabrication services are based in Belfast, Northern Ireland. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 2,883 -1,962 921 -618 0 302 2006 4,048 -2,339 1,709 -500 0 1,209 2007 4,277 -2,322 1,955 -500 0 1,454 2008 5,787 -2,450 3,337 -728 0 2,609 2009 6,600 -2,619 3,981 -973 0 3,008 2010 997 -434 563 -202 0 361 2011 1,137 -515 622 -224 0 398 2012 1,199 -584 615 -236 0 380 2013 1,194 -622 573 -242 0 330 2014 1,184 -668 516 -372 0 144 2015E 1,124 -585 539 -354 0 185 2016E 1,106 -620 487 -351 0 136 2017E 1,249 -693 556 -351 0 205 -194 0 -120 -173 0 -39 -77 0 41 -147 0 -345 -143 0 -37 -12 0 -16 -15 0 -13 -21 0 -18 0 0 -16 -23 0 52 -61 0 20 -61 0 0 -48 0 0 Reported pre-tax profit Minority interests Total taxes -12 0 -4 997 0 -23 1,418 0 -26 2,118 0 -21 2,828 0 -74 333 0 -12 370 0 -3 340 0 -14 314 0 -36 173 0 -35 144 0 -26 75 0 -28 157 0 -31 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -16 31.9 10.5 (32.0) 974 42.2 29.9 2.3 1,392 45.7 34.0 1.8 2,097 57.7 45.1 1.0 2,754 60.3 45.6 2.6 321 56.5 36.2 3.7 367 54.7 35.0 0.9 326 51.3 31.7 4.2 278 47.9 27.7 11.4 138 43.6 12.2 20.4 118 47.9 16.4 18.2 48 44.0 12.3 36.8 126 44.5 16.4 19.9 23.1 n.a. 0.0 0.0 40.4 85.6 299.9 0.0 5.6 14.4 20.3 42.2 35.3 70.7 79.4 49.3 14.1 19.3 15.3 33.5 (84.9) (85.8) (88.0) (88.2) 14.0 10.4 10.2 11.2 5.5 (1.1) (4.6) (8.2) (0.4) (6.9) (13.0) (7.6) (0.9) (9.8) (56.4) (44.9) (5.1) 4.4 28.2 (16.9) (1.6) (9.7) (26.4) (47.7) 12.9 14.2 50.7 108.8 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2005 693 -290 403 -994 -591 0 0 -591 54 0 731 194 2006 1,497 -70 1,427 -1,262 165 0 0 165 81 0 13 259 2007 1,878 -116 1,762 -1,465 297 0 0 297 821 0 -1,241 -123 2008 3,072 -1,198 1,873 -1,680 193 -1,668 0 -1,474 3,892 0 564 2,982 2009 3,814 1,122 4,936 -1,876 3,060 -1,657 0 1,404 -1,716 0 -741 -1,053 2010 542 266 809 -280 529 -110 0 419 -215 0 88 292 2011 593 44 636 -287 349 -233 0 117 39 0 0 155 2012 575 424 999 -445 554 -231 0 323 -64 0 -343 -84 2013 511 -13 498 -212 285 -226 1 61 -76 0 -11 -27 2014 545 -152 394 -941 -548 -223 1 -770 750 0 0 -19 2015E 498 -78 419 -1,019 -599 0 2 -598 842 0 0 244 2016E 426 -31 394 -100 294 0 0 294 -240 0 0 54 2017E 508 -5 502 -100 402 0 0 402 -240 0 0 162 Capex/sales (%) 34.5 31.2 34.3 29.0 28.4 28.0 25.2 37.1 17.8 79.5 90.6 9.0 8.0 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 697 983 0 5,540 0 7,220 2006 892 1,020 0 6,302 0 8,214 2007 714 1,217 0 7,266 0 9,197 2008 3,674 2,456 0 10,556 0 16,686 2009 2,014 1,722 0 10,134 0 13,870 2010 248 294 0 1,682 16 2,241 2011 384 364 0 1,847 17 2,612 2012 242 276 0 2,239 17 2,775 2013 222 324 0 2,503 16 3,066 2014 203 290 0 3,072 16 3,581 2015E 447 275 0 3,735 16 4,473 2016E 502 271 0 3,484 16 4,273 2017E 664 0 0 3,233 16 3,913 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 2,860 994 0 3,366 7,220 2,941 921 0 4,352 8,214 4,157 952 0 4,088 9,197 9,963 1,190 0 5,533 16,685 6,722 1,468 0 5,680 13,870 918 79 0 1,150 2,147 1,010 198 0 1,403 2,612 859 589 0 1,326 2,775 793 836 0 1,437 3,066 1,544 685 0 1,352 3,581 2,386 618 0 1,470 4,473 2,146 610 0 1,517 4,273 1,906 365 0 1,643 3,913 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 2,163 64.3 46.6 2.3 4.7 2,049 47.1 53.0 1.2 9.9 3,443 84.2 44.5 1.8 25.4 6,289 113.7 33.2 1.9 22.7 4,708 82.9 41.0 1.2 27.8 670 58.2 53.6 1.2 47.9 626 44.6 53.7 1.0 41.7 617 46.6 47.8 1.0 25.8 571 39.8 46.9 1.0 1,341 99.2 37.8 2.6 20.0 1,938 131.9 32.9 3.6 7.6 1,644 108.4 35.5 3.4 6.2 1,242 75.6 42.0 2.2 7.9 (%) Votes 26.0 26.0 3.8 Capital 26.0 26.0 3.8 Net interest expenses Value changes Other financial items Cash flow Balance sheet Main shareholders Name Ganger Rolf ASA Bonheur State Street Bank and Trust Co Management Title COB CEO CFO Name Anette S. Olsen Ivar Brandvold Hjalmar Krogseth Moe Company information Contact Internet Phone number www.fredolsen-energy.no (47) 22 34 12 43 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 48 Sector Report Nordic High Yield Update GasLog (BB-/Stable) ● Credit rating GasLog’s credit rating is primarily supported by strong cash flow visibility, with the majority of the vessels being on long-term charters towards BG/Shell. Further rating support is given by the company’s modern fleet and its extensive track record in shipping. The financial risk in the company is high with loan to value being in the 6575% range, and high cash flow gearing. We feel this is to some extent mitigated by GasLog’s long term contracts giving 79% coverage in 2016, 75% in 2017 and 62% in 2018. GasLog has an aggressive growth strategy where it plans to expand its current fleet of 27 vessels to 40. We expect that the strategy will to a large degree will be financed by debt capital and recycling of capital through MLP drop-downs (which subordinate the bond). Large speculative ordering of newbuilds or acquisitions without contracted backlog is the main credit risk as we see it. Key bond covenants and terms: Gaslog Senior unsecured bonds: Callable @ 105 (3 years), 103 (4 years) 101.75 (4.5 years) Change of control @ 101 Financial covenants: EBITDA to Debt Service> 1.10x Max leverage >75% Market Adjusted Net worth > USD 350m Minimum free liquidity > USD 20m and 3% of total indebtedness ● Bond recommendations GLOG01 is trading at a premium to peers such as GOLP01 but tighter than SFLN02. We find this to be fair given the aggressive new growth strategy, which prevents deleveraging in the shorter term. Overview Chart ● Recent financial updates GasLog reported Q2 EBITDA of USD 66m which was in line with our estimate of USD 65m. Operationally, Gaslog delivered another strong quarter, with fleet utilisation around 86% and a TCE equivalent day rate of USD 70,999 per day. Credit metrics improved substantially during the quarter and in particular leverage decreased from 8.7x to 7.7x primarily due to the issuance of USD 110m in preference shares and USD 172m in MLP equity issuance. We estimate that as of today, GasLog has a firm EBITDA backlog of approximately USD 2.4bn. Credit strengths Credit concerns ● Long term contracts secured with highly rated counterparties. ● Exposure to cyclical and capital intensive industry. ● A modern fleet which embed technical and financial advantages relative to the competing fleet. ● Heavy expansion programme between 2014 and 2017 that will lead to negative free cash flow. ● Extensive track record in an industry with stronger-than-average requirements for efficient, safe and reliable operations. ● Financing risk in open newbuilds and financing that depend on satisfactory charter contracts. Selected outstanding bonds Issuer Gaslog Ltd Our view BB-/B+ Sector Shipping Issue date 27.06.2013 Maturity date 27.06.2018 Coupon Nibor + 550 Outst. Amount NOK 1000m ASW 441 Recommendation Marketweight Source: Bloomberg and SEB Relative value 700 650 600 550 500 450 400 350 300 250 Debt maturity profile BWO02 TOP04 TOP03 TOP05 BWO03 BWO04 BWO01 TOP02 SFLN03 HLNG2020 SFLN02 GLOG01 OCY03 SNI05 SNI04SNI06 HLNG01 OCY02 SNI03TLG01 SNI01 Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 49 Sector Report Nordic High Yield Update Company description GasLog is an owner, operator and manager of liquefied natural gas (LNG) carriers, supporting its energy oriented clients with maritime transportation and related services. The fleet comprises 27 vessels, of which eight are newbuilds for delivery between 2015 and 2017 Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2011 66 -29 38 -13 0 25 1 0 0 0 2012 69 -35 33 -13 0 20 1 -10 0 -7 2013 157 -57 101 -29 0 72 1 -33 0 17 2014E 318 -106 212 -66 0 146 2 -67 0 -6 2015E 439 -127 313 -93 0 219 2 -94 0 -5 2016E 513 -143 371 -110 0 261 2 -102 0 -2 Reported pre-tax profit Minority interests Total taxes 26 0 0 4 0 0 57 0 0 74 0 0 121 0 0 159 0 0 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 26 56.6 44.4 0.0 4 48.9 36.3 0.0 57 64.1 49.2 0.0 74 66.8 47.5 0.0 121 71.2 51.4 0.0 159 72.2 52.1 0.0 97.2 n.a. 92.2 81.3 0.9 (10.9) (17.7) (83.8) 158.4 200.8 250.2 1,250.9 111.3 110.8 104.1 30.1 38.9 47.2 50.1 63.7 17.4 18.6 19.1 30.7 2011 38 7 45 0 45 0 0 45 0 0 0 45 2012 16 6 23 -109 -86 -7 0 -93 -44 329 0 193 2013 85 23 108 -1,038 -930 -7 0 -937 984 0 0 47 2014E 139 -8 131 -1,299 -1,168 -28 0 -1,195 869 309 0 -17 2015E 213 2 215 -287 -72 -36 0 -108 59 0 0 -49 2016E 267 3 270 -664 -394 -36 0 -430 434 0 0 4 0.0 193.3 714.0 422.9 67.3 132.6 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2011 20 24 0 555 0 599 2012 216 7 28 651 10 912 2013 108 18 15 1,665 10 1,817 2014E 91 18 17 2,898 10 3,034 2015E 42 18 19 3,092 10 3,180 2016E 46 18 20 3,646 10 3,739 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 281 35 0 290 607 254 51 0 603 909 1,115 62 0 637 1,815 1,984 54 0 993 3,032 2,043 56 0 1,079 3,178 2,476 59 0 1,202 3,737 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 261 89.9 47.8 6.9 39 6.4 66.4 1.2 2.9 1,007 157.9 35.1 10.0 3.0 1,893 190.5 32.8 8.9 3.1 2,001 185.4 34.0 6.4 3.3 2,431 202.2 32.2 6.6 3.7 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Peter G Livanos John S A Radziwill A S Onassis Foundation (%) Votes 39.3 9.0 8.0 Capital 39.3 9.0 8.0 Management Title COB CEO CFO Name Peter Livanos Wogan Paul Simon Crowe Company information Contact Internet Phone number http://www.gaslogltd.com/ +377 9797 5115 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 50 Sector Report Nordic High Yield Update Getinge (BB+/Negative) ● Credit rating Getinge hosted a capital markets day on 2 September at which it announced a new organizational structure and new financial targets for 2016-2019. We interpret the new financial targets as detailed and credible and revise our rating outlook to stable from negative. The target to exceed 10% EBITA growth a year through 2019 compares with our 2017-2019 y-o-y EBITA growth forecast of 7-8%, while our long-term organic sales growth forecast of 3-4% compares with Getinge’s updated target of 2-4%. Adding Getinge’s ambition to deleverage and reduce financial costs, the EBITA target should translate into EPS growth of more than 12%. If Getinge delivers on these targets we see scope for the adjusted net debt to EBITDA to improve from the 4.1x we expect for 2015 to 2.8x by the end of 2017. Key bond covenants and terms: Getinge MTN program: Change of control with put at 100 Negative pledge: For market debt only Overview chart Getinge AB MTN program ● Bond recommendations The spread of Getinge’s 2018 bond has tightened around 10bps after the CMD and the bond now looks a little expensive versus other double-B credits such as Stora Enso, Millicom and Cloetta. At the same time it offers a 40-50bps pick-up versus BBB- rated credits such as NCC, Husqvarna and BillerudKorsnäs. Overall, we believe Getinge now looks fairly priced and have revised our Underweight recommendation to Marketweight. Bank debt ● More details from the CMD Getinge aims to reduce its SEK 20bn discretionary cost base by SEK 2.5-3.0bn to 2019, which could include reducing job numbers by more than 5%. A re-organization with the aim of increasing customer focus is the cornerstone of the cost saving. The bulk of the savings should relate to administrative and support functions, while the marketing organisation is left unchanged. Getinge does not include any contributions from reducing manufacturing costs in its estimate. Also, the cost target should not be seen as a profit increase target since there will be reinvestments in R&D, continued price pressure (Getinge includes 1% yearly price pressure in its EBITA target), and other spending such as marketing investments in the US and emerging markets. Credit strengths Credit concerns ● Strong market positions in selected niches and moderate cyclicality of earnings. ● Acquisition-oriented strategy. ● Long-term growth prospects due to demographic changes and growing global prosperity. ● Fluctuating and sometimes stretched leverage. ● Regulatory risks. ● Stable ownership structure. Selected outstanding bonds Issuer Getinge Getinge Sector Healthcare Healthcare Public SEB N.R./N.R. BB+ N.R./N.R. BB+ Issue date 21/05/2013 21/05/2013 Maturity date 21/05/2018 21/05/2018 Cpn type Cpn FRN 3mS +188 FIX 3.50% Amount SEK 1500m SEK 500m Spread 145 156 Recommendation Marketweight Marketweight Source: Bloomberg and SEB Relative value Debt maturity profile (31 December 2014) 350 300 Spread (bps) 250 200 150 100 50 0 0.0 1.0 2.0 3.0 4.0 5.0 Sobi SSAB Stena Metall Stora Enso Meda Millicom Getinge Elekta Cloetta NCC Husqvarna BillerudKorsnäs Hexagon 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Years to maturity < 1 year Source: SEB and Bloomberg SEB Credit Research 1‐2 years 2‐5 years > 5 years Source: SEB 15 September 2015 51 Sector Report Nordic High Yield Update Company description Getinge has three divisions: Medical Systems (50% of sales), Infection Control (25%) and Extended Care (25%). Medical Systems manufactures operating theatre equipment (surgical tables, lights and ceiling service units), heart-lung machines, respiratory products (ventilators) and a broad range of cardiosurgery products. Infection Control manufactures sterilisation and disinfection systems. Extended Care produces labour-saving lifts, hygiene care and special beds to prevent and treat pressure sores. Getinge's customer groups are hospitals (75%), long-term care (15%) and the life science industry (10%). Europe accounts for 40% of sales, North America 35% and Asia/Australia 25%. It has leading market positions in most of its segments. Sales are split fairly evenly between capital products and consumables. Credit Research Analyst Ebba Lindahl (46) 8 506 232 08 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 11,880 -9,749 2,132 -297 -32 1,803 2006 13,001 -10,731 2,270 -297 -37 1,936 2007 16,445 -13,479 2,966 -545 -139 2,282 2008 19,272 -15,426 3,846 -639 -330 2,877 2009 22,816 -18,369 4,447 -849 -527 3,071 2010 22,172 -17,060 5,112 -920 -502 3,690 2011 21,854 -16,479 5,375 -980 -471 3,924 2012 24,248 -18,500 5,748 -1,127 -615 4,006 2013 25,287 -19,675 5,612 -1,262 -604 3,746 2014 26,669 -21,906 4,763 -1,460 -658 2,645 2015E 29,660 -24,175 5,485 -1,650 -765 3,070 2016E 30,610 -24,215 6,395 -1,780 -765 3,850 2017E 31,580 -24,635 6,945 -1,910 -765 4,270 -190 0 -11 -208 0 0 -507 0 0 -751 0 0 -664 0 228 -573 0 0 -480 0 0 -562 0 -44 -581 0 -34 -632 0 -27 -698 0 -35 -689 0 -15 -651 0 -15 Reported pre-tax profit Minority interests Total taxes 1,601 -11 -452 1,728 -5 -469 1,775 -1 -514 2,126 0 -603 2,635 -3 -720 3,117 0 -836 3,444 0 -907 3,400 0 -905 3,131 0 -858 1,986 0 -510 2,337 0 -608 3,146 0 -818 3,604 0 -937 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 1,138 17.9 15.2 28.2 1,254 17.5 14.9 27.1 1,260 18.0 13.9 29.0 1,523 20.0 14.9 28.4 1,912 19.5 13.5 27.3 2,281 23.1 16.6 26.8 2,537 24.6 18.0 26.3 2,495 23.7 16.5 26.6 2,273 22.2 14.8 27.4 1,476 17.9 9.9 25.7 1,729 18.5 10.4 26.0 2,328 20.9 12.6 26.0 2,667 22.0 13.5 26.0 9.1 n.a. 3.7 3.9 9.4 6.5 7.4 7.9 26.5 30.7 17.9 2.7 17.2 29.7 26.1 19.8 18.4 15.6 6.7 24.0 (2.8) 15.0 20.2 18.3 (1.4) 5.1 6.3 10.5 11.0 6.9 2.1 (1.3) 4.3 (2.4) (6.5) (7.9) 5.5 (15.1) (29.4) (36.6) 11.2 15.2 16.1 17.7 3.2 16.6 25.4 34.6 3.2 8.6 10.9 14.5 2005 1,459 -327 1,133 -403 730 -333 -254 142 143 0 -123 162 2006 1,623 -108 1,515 -521 994 -405 -115 474 568 0 -1,042 0 2007 1,981 -485 1,496 -948 548 -444 -5,622 -5,518 4,518 0 1,222 222 2008 2,518 -744 1,774 -1,299 475 -515 -5,008 -5,048 3,301 3,453 -1,094 612 2009 3,533 468 4,001 -1,741 2,260 -572 -5,556 -3,868 2,712 0 1,040 -116 2010 3,997 127 4,124 -1,453 2,671 -655 -10 2,006 -3,259 0 957 -296 2011 4,089 -593 3,496 -1,506 1,990 -775 -4,649 -3,434 3,958 0 -410 114 2012 4,275 -624 3,651 -2,000 1,651 -894 -2,226 -1,468 1,040 0 439 11 2013 4,342 -818 3,524 -1,982 1,542 -989 -248 305 -277 0 -154 -126 2014 3,784 -301 3,483 -1,839 1,644 -993 -1,236 -585 4,004 0 -3,075 344 2015E 4,144 -641 3,504 -1,839 1,665 -667 0 997 -997 0 0 0 2016E 4,873 -676 4,198 -1,970 2,228 -834 0 1,394 -1,394 0 0 0 2017E 5,342 -362 4,980 -2,060 2,920 -1,001 0 1,919 -1,919 0 0 0 2.0 2.4 3.9 4.5 5.1 3.5 4.3 5.2 5.2 4.4 3.9 4.1 4.1 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 684 6,172 650 1,498 5,530 14,533 2006 673 6,414 1,876 1,398 5,516 15,877 2007 894 8,470 755 2,327 10,524 22,970 2008 1,506 11,140 1,250 3,257 15,879 33,032 2009 1,389 10,947 1,134 3,674 20,355 37,499 2010 1,093 10,315 761 3,190 19,226 34,585 2011 1,207 11,562 750 3,452 24,498 41,469 2012 1,254 11,819 887 4,066 24,895 42,921 2013 1,148 13,021 667 4,341 25,127 44,304 2014 1,482 14,891 1,410 4,971 30,064 52,818 2015E 1,482 16,167 1,410 5,157 29,302 53,518 2016E 1,482 17,099 1,410 5,377 28,507 53,875 2017E 1,482 17,723 1,410 5,607 27,662 53,884 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 4,109 5,043 74 5,307 14,533 4,418 5,454 21 5,984 15,877 9,213 7,164 25 6,568 22,970 13,244 9,112 24 10,652 33,032 16,052 8,884 24 12,539 37,499 12,656 8,681 25 13,223 34,585 16,689 10,144 28 14,608 41,469 17,525 10,196 30 15,170 42,921 17,169 10,574 30 16,531 44,304 20,752 13,342 30 18,694 52,818 19,755 13,977 30 19,756 53,518 18,361 14,234 30 21,250 53,875 16,442 14,496 30 22,916 53,884 5,141 95.5 37.0 2.4 10.2 5,517 91.9 37.8 2.4 9.9 9,745 147.8 28.7 3.3 5.6 13,468 126.2 32.3 3.5 5.0 15,683 124.8 33.5 3.5 6.5 13,377 101.0 38.3 2.6 8.6 17,109 116.9 35.3 3.2 11.0 18,382 120.9 35.4 3.2 9.9 18,319 110.6 37.4 3.3 9.4 22,541 120.4 35.5 4.7 7.3 21,544 108.9 37.0 3.9 7.7 20,150 94.7 39.5 3.2 9.1 18,231 79.4 42.6 2.6 10.4 (%) Votes 48.9 5.1 1.8 Capital 18.1 8.1 2.8 Net interest expenses Value changes Other financial items Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Bennet Carl & Family and Co. Franklin Templeton Robur Funds Management Title COB CEO CFO Name Carl Bennet Alex Myers Ulf Grunander Company information Contact Internet Phone number www.getinge.com (46) 10 33 500 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 52 Sector Report Nordic High Yield Update Golden Heights (B+/Stable) ● Credit rating We rate Golden Heights B+ with a stable outlook. We also rate the issued senior secured bond at B+ as we expect an adequate recovery (exceeding 30% of the outstanding bond) in a default scenario. The rating reflects the company´s marketleading position, concept name recognition, well-integrated value chain position (including sourcing, logistics, distribution and store network) and sufficient cash flow generation to service debt in a down case scenario. The rating also takes into consideration what seems to be falling market share, an industry in transition (ecommerce) and, not least, owner concentration risk. Key bond covenants and terms: Senior secured 2019 bond Change of control with put @ 101 Incurrence test for dividends or additional debt other than permitted debt: Adj EBITDA/net interest payables > 2.5x Net debt/adj EBITDA < 4.0x 0-12 months post issuance, < 3.75x 12-24 months post issuance and < 3.25x 24 months maturity ● Bond recommendations We noted some trading activity in the Golden Heights 2019 SEK 400m senior secured 3mS+475 bonds at the end of June and the beginning of July. There is a rather significant spread difference between different shadow rated B+ SEK names and we argue that Golden Heights is fairly positioned in that span. Thus, we have changed our recommendation from Underweight to Marketweight. Carve-outs: SEK 225m WC facility and SEK 18m real estate loan Overview chart Golden Heights Oy Bond SEK 400m Senior working capital facility SEK 225m ● Recent financial updates Sales in Q2 were SEK 364m, up from SEK 360m during the same period last year. This corresponded to a 0.9% increase or 0.4% FX adjusted. The gross margin improved to 52.0% (50.4%), driven by a more favourable product mix. Sweden continued to grow, reaching sales of SEK 284m, corresponding to a 3.2% increase compared to Q2 2014. However, Finland, with sales of SEK 80m, suffered a contraction of 6.8%. Adjusted net debt/EBITDA stood at 5.6x and unadjusted at 4.2x in Q2. We expect this to come down at year-end to 3.4x (compared to 5.2x adjusted leverage). Silver arrow loan Golden Heights AB Kultajousi Oy (Finland) Iduna AB (Sweden) Oy Tillanders AB CG Hallbergs AB Real estate loan SEK 18m = Share pledge Credit strengths Credit concerns ● Leading market position. ● Losing market share. ● Well-known brands. ● Industry transition. ● Strong value chain position. ● High leverage. ● Adequate/strong cash generation. ● Owner concentration risk. Selected outstanding bonds Issuer Golden Heights Public N.R./ SEB B+ Issue date 18/06/2014 Maturity date 18/06/2019 Cpn 3mS+475 Amount SEK 400m Z-sprd mid 473 Recommendation Marketweight Source: Bloomberg and SEB Relative value Debt maturity profile 900 450 Golden Heights NSP 400 Nynas 800 SAS Textilia 350 Bravida 700 Björn Borg 300 Diamorph Wallvision WestAtlantic 500 Opus Aligera SEKm Spread (bps) Arise 600 250 200 Orexo 400 Consilium 150 Ainmt BE Bio Energy 300 JSM Fin 100 SAA Lauritz.com 200 50 EG Gruppen 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 6.0 2015 Source: SEB and Bloomberg SEB Credit Research 0 2016 2017 2018 2019 Source: SEB 15 September 2015 53 Sector Report Nordic High Yield Update Company description Golden Heights offers a wide range of designed jewellery and accessories. The company is one of the largest specialist jewellery retailers in Sweden and Finland and operates four retail chain brands and two independent jewellery stores with a strong local presence. In Sweden, Golden Heights operates via the brands Guldfynd, Hallbergs Guld and Albrekts Guld. In Finland, the company is active via the retail chain brand Kultajousi. The company’s Finnish organisation operates two independent luxury jewellery stores – Westerback and A. Tillander. The company employs some 1,580 people. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2010 1,446 -1,278 168 -30 0 138 2011 1,450 -1,297 153 -29 0 125 2012 1,397 -1,266 131 -26 0 105 2013 1,354 -1,238 116 -24 0 92 2014 1,406 -1,296 110 -23 0 87 2015E 1,482 -1,361 121 -18 0 102 2016E 1,542 -1,418 124 -30 0 95 2017E 1,585 -1,458 127 -28 0 99 Net interest expenses Value changes Other financial items -59 0 0 -79 0 0 -76 0 0 -74 0 0 -65 0 0 -70 0 0 -74 0 0 -77 0 0 Reported pre-tax profit Minority interests Total taxes 79 0 -21 45 0 -12 30 0 -2 18 0 -4 23 0 -5 33 0 -7 21 0 -5 22 0 -5 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 58 11.6 9.5 26.6 33 10.6 8.6 26.5 27 9.4 7.5 7.7 14 8.6 6.8 24.0 17 7.9 6.2 24.0 26 8.2 6.9 22.0 16 8.1 6.1 22.0 17 8.0 6.2 22.0 8.1 n.a. 25.0 69.6 0.3 (8.8) (9.7) (42.5) (3.7) (14.3) (15.4) (34.7) (3.1) (11.5) (12.4) (38.5) 3.9 (4.8) (5.3) 24.5 5.4 9.5 17.1 44.9 4.1 2.8 (7.5) (35.9) 2.8 2.2 4.5 5.4 2010 123 14 136 -23 114 0 0 114 0 0 -117 -3 2011 94 -95 -1 -19 -20 0 0 -20 0 0 9 -11 2012 76 19 95 -14 80 0 0 80 0 0 -68 12 2013 121 -28 93 -25 68 0 0 68 -72 0 -1 -5 2014 107 11 118 -32 86 0 0 86 -93 0 0 -8 2015E 92 -17 74 -43 32 -9 0 23 0 0 0 23 2016E 98 -14 84 -25 59 -13 0 46 0 0 0 46 2017E 101 -10 92 -25 67 -9 0 58 0 0 0 58 1.6 1.3 1.0 1.9 2.3 2.9 1.6 1.6 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2010 60 594 109 120 877 1,760 2011 49 645 92 110 875 1,771 2012 61 605 74 100 870 1,709 2013 56 622 72 103 872 1,725 2014 49 648 55 92 898 1,743 2015E 72 683 55 117 898 1,825 2016E 118 711 55 112 898 1,894 2017E 176 730 55 109 898 1,969 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 477 980 0 303 1,760 483 975 0 312 1,771 415 978 0 316 1,709 371 1,021 0 334 1,725 478 917 0 348 1,743 478 982 0 365 1,825 478 1,047 0 368 1,894 478 1,113 0 377 1,969 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 422 139.5 17.2 2.5 2.8 439 140.6 17.6 2.9 1.9 360 113.9 18.5 2.7 1.7 318 95.3 19.3 2.7 1.5 430 123.5 20.0 3.9 1.7 407 111.4 20.0 3.4 1.7 361 97.9 19.5 2.9 1.7 303 80.3 19.1 2.4 1.6 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Sten Warborn (%) Votes 100.0 Capital 100.0 Management Title COB CEO CFO Name Sten Warborn Sten Warborn Madelene Wingård Company information Contact Internet Phone number www.iduna.se +46(0)340 59 54 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 54 Sector Report Nordic High Yield Update Heimstaden (BB/Stable) ● Credit rating We rate the Swedish property company Heimstaden as a BB credit with a Stable outlook. We consider Heimstaden, which owns and manages predominately residential properties, as having a strong business risk profile, while we view the financial risk profile as fairly aggressive due to its high leverage and a relatively determined acquisition policy. Heimstaden is a privately held property company, 100% owned by the Norwegian property group Fredensborg AS. Our credit rating is supported by Heimstaden’s large share of the rental revenues from residential tenants, providing a strong and stable cash flow. We view Heimstaden’s property portfolio as being of high quality (attractive locations and good condition). At the end of Q2, the company reported a loan-to-value (LTV) of 51% which is moderate. However, we expect that M&A activity will continue and that leverage will rise to 60-65% (LTV) in the medium term. However we believe that residential properties can carry more debt than commercial ones. Total interest bearing gross debt was SEK 6.6bn at the end of Q2. Key bond covenants and terms: Senior unsecured bond LTV (net debt basis) maximum 75% Overview chart Bond issuer: Heimstaden AB ● Bonds Overweight, one of the best yielding property bonds around We consider the pricing of Heimstaden’s SEK 1bn 2019 FRN with a coupon of 3mS+300bps to be interesting, hence our Overweight recommendation. We maintain our view that the lack of covenants protecting senior unsecured bondholders is a negative rating factor. Capital distributions are possible throughout the tenor of the bond, given LTV stays below 75%. However, the bonds are among the highest yielding in the Swedish property sector, currently trading at a spread of about 350bps. ● Recent financial updates In the first half of 2015, the main focus was on refining the portfolio, the main focus being to acquire and manage residential properties in central areas. The company has participated in M&A activity of about SEK 5bn (acquisition and divestments) and entered into joint ventures, e.g. one with Swedish property giant Castellum which is where the commercial property from the HSAB acquisition will go. Underlying performance was stable, with vacancies remaining firm below 1%. Credit strengths Credit concerns ● High quality assets, residential properties in attractive locations. ● Privately held company. ● Low vacancy ratio in residential portfolio. ● No restriction on distribution of profits. ● Stable cash flow with low volatility. ● Ambitious growth target, leverage increasing. ● Solid track record and established in local markets. ● Geographical concentration to Malmö/Öresund. Selected outstanding bonds Issuer Sector Public SEB Issue date Maturity date Cpn type Cpn Amount Heimstaden Property N.R./N.R. BB 16/09/2014 16/09/2019 Floating 3mS+ 300 SEK 1000m Spread 353 Recommendation Overweight Source: Bloomberg and SEB Market value of properties and LTV Hemsö 350 Vasakronan Rikshem 250 Kungsleden 200 Atrium Ljung. Hufvudstaden 150 Klövern 100 50 80.0 12,000 75.0 10,000 SEKm Spread (bps) 300 14,000 70.0 8,000 65.0 6,000 Castellum 4,000 Hemfosa 2,000 (%) Relative value, SEK bonds 60.0 55.0 Heimstaden 0 0 1 2 3 4 Years to maturity 5 Vacse Ikano Bostad Source: SEB and Bloomberg SEB Credit Research 0 50.0 2012 2013 2014E Market value of properties (LHS) 2015E 2016E LTV (RHS) Source: SEB and Company reports 15 September 2015 55 Sector Report Nordic High Yield Update Company description Heimstaden is a Swedish property company that owns and manages mainly residential properties located predominantly in southern and the middle part of Sweden. Heimstaden was founded in 1998 through an acquisition of a property portfolio. Heimstaden had a total property portfolio with a market value of SEK 10bn at the end of 2014. Credit Research Analyst Michael Andersson (46) 8 506 23482 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2009 815 -411 404 0 0 404 0 -334 333 0 2010 756 -399 357 0 0 357 5 -329 883 0 2011 774 -386 387 0 0 387 0 -333 -81 0 2012 803 -405 398 0 0 398 0 -323 50 0 2013 647 -355 292 0 0 292 50 -249 172 0 2014 471 -251 220 0 0 220 36 -144 144 0 2015E 680 -332 348 0 0 348 50 -179 7 23 2016E 750 -370 380 0 0 380 31 -192 15 23 2017E 820 -405 415 0 0 415 31 -213 17 23 Reported pre-tax profit Minority interests Total taxes 403 0 -86 916 0 -197 -27 0 31 126 0 81 265 0 102 256 0 11 249 0 -55 256 0 -56 272 0 -60 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 318 49.6 49.6 21.3 719 47.3 47.3 21.5 4 50.0 50.0 116.2 206 49.6 49.6 (64.2) 367 45.2 45.2 (38.5) 267 46.7 46.7 (4.3) 194 51.2 51.2 22.0 200 50.6 50.6 22.0 212 50.6 50.6 22.0 0.0 n.a. 0.0 0.0 (7.3) (11.6) (11.6) 127.1 2.4 8.4 8.4 0.0 3.8 2.9 2.9 0.0 (19.5) (26.7) (26.7) 111.4 (27.2) (24.7) (24.7) (3.5) 44.4 58.2 58.2 (2.8) 10.3 9.1 9.1 2.9 9.3 9.3 9.3 6.3 2009 65 64 129 -79 49 0 -41 9 -461 0 -157 -609 2010 29 29 59 -228 -169 -15 -10 -194 -526 0 -68 -788 2011 56 56 112 -280 -169 0 -45 -214 -54 0 -21 -289 2012 65 65 131 -19 112 0 -20 91 -22 0 -78 -10 2013 36 36 72 -34 38 0 3,520 3,559 -2,864 0 -170 524 2014 77 19 96 -184 -88 0 -507 -595 848 0 -201 52 2015E 192 -30 162 -30 132 0 -365 -233 200 0 0 -33 2016E 210 -11 199 -30 169 0 -965 -796 700 0 0 -96 2017E 225 95 320 -30 290 0 -965 -675 800 0 0 125 9.7 30.1 36.2 2.4 5.3 39.1 4.4 4.0 3.7 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2009 160 99 575 10,428 0 11,261 2010 124 212 92 10,461 0 10,889 2011 162 30 233 10,741 0 11,165 2012 170 21 430 10,721 0 11,342 2013 359 22 414 7,044 0 7,839 2014 369 50 489 10,380 0 11,288 2015E 336 88 539 10,782 0 11,746 2016E 240 96 570 11,792 0 12,698 2017E 365 24 601 12,804 0 13,794 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 7,226 1,255 0 2,780 11,261 6,700 1,283 0 2,906 10,889 6,645 1,493 0 3,027 11,165 6,623 1,360 0 3,359 11,342 3,724 902 0 3,213 7,839 6,426 1,408 0 3,480 11,314 6,626 1,471 0 3,674 11,772 7,326 1,524 0 3,874 12,724 8,126 1,607 0 4,086 13,819 7,066 254.2 24.7 17.5 1.1 6,576 226.3 26.7 18.4 1.1 6,484 214.2 27.1 16.7 1.1 6,453 192.1 29.6 16.2 1.2 3,366 104.7 41.0 11.5 1.1 6,057 174.1 30.8 27.5 1.3 6,290 171.2 31.2 18.1 1.9 7,086 182.9 30.4 18.7 1.9 7,761 189.9 29.6 18.7 1.9 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Fredensborg AS (%) Votes 100.0 Capital 100.0 Management Title COB CEO CFO Name Ivar Tollefsen Patrik Hall Carl-Fredrik Streiby Company information Contact Internet Phone number www.heimstaden.se +46 40 6602 000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 56 Sector Report Nordic High Yield Update Hemfosa (BB/Stable) ● Credit rating We maintained our BB credit rating on Hemfosa following the Q2 report. We rate the senior unsecured debt one notch below the corporate credit rating as Hemfosa has a significant share of secured debt. The credit metrics remained stable albeit aggressive in Q2 with the loan-to-value (LTV) ratio at 68%, unchanged from the end of 2014. We include 50% of the SEK 1.6bn preference shares that were issued in December 2014. Reported LTV was 65% at the end of Q2, also unchanged since the end of 2014. Hemfosa’s leverage is clearly among the highest in the Swedish property sector for which the average within SEB's coverage universe is 55%, which is a clear rating constraint in our view. However Hemfosa’s strategic focus on community service properties, which made up about 60% of net operating income in H1 and 67% of acquired value in 2014, is a strong mitigating factor as these tenants are usually stable rent payers with low tenant turnover. The aggressive acquisition policy is also a credit concern in our view, but again, the focus is largely on community service properties and offices in growing municipalities. Also, the company is growing and also becoming more diversified geographically, which is positive from a credit point of view. Key bond covenants and terms: Senior unsecured bond Equity ratio minimum 20% Interest coverage minimum 1.25x Overview chart Bond Hemfosa Fastigheter AB Multiple property holding companies Bond issuer: Hemfosa Fastigheter AB ● Leverage more than reflected in pricing – bonds Overweight We have an Overweight recommendation on Hemfosa’s April 2017 bonds as we think they offer an attractive pick-up compared with the sector. ● Highly active in the transaction market We expect Hemfosa to remain active in the transaction market in 2015 and 2016. Activity in the Swedish transaction market was high in 2014, particularly in non-core locations outside the three largest cities which typically represent most transaction volumes. We have updated our estimates on Hemfosa, taking into consideration all announced acquisitions. We expect Hemfosa to continue to benefit from the benign funding market and to lower its funding costs in 2015. We believe improving financing conditions will contribute to a continued yield contraction, mostly in non-prime locations where Hemfosa operates, backed by increasing investor interest outside CBD areas. Credit strengths Credit concerns ● Large share of revenues from public sector tenants. ● Relatively high leverage. ● Good geographic diversification within Sweden. ● Limited history, company established in 2009. ● Experienced management with solid knowledge within its business area. ● Properties located in non-prime locations. ● Successful business model. ● Transaction driven growth strategy increases business risk. Selected outstanding bonds Issuer Sector Public SEB Issue date Maturity date Cpn type Cpn Amount Hemfosa Hemfosa Property Property N.R./N.R. N.R./N.R. BBBB- 08/05/2014 08/05/2014 04/04/2017 04/04/2017 Floating Fixed 3mS+225 3.375% SEK 1100m SEK 100m Spread 238 241 Recommendation Overweight Overweight Source: Bloomberg and SEB Relative value, SEK bonds Property type by recognized value 350 Vasakronan 300 Spread (bps) Transaction properties 12% Hemsö Rikshem 250 Kungsleden 200 Atrium Ljung. Logistics properties 10% Hufvudstaden 150 Klövern 100 Community service properties 57% Castellum Hemfosa 50 Heimstaden 0 0 1 2 3 4 Years to maturity 5 Vacse Ikano Bostad Source: SEB and Bloomberg SEB Credit Research Office properties 21% Source: SEB 15 September 2015 57 Sector Report Nordic High Yield Update Company description Hemfosa is a Swedish property company whose asset base comprises largely high-yielding properties in non-prime locations across Sweden, with a substantial and growing proportion of public sector tenants. Formed in the wake of the financial crisis of the late 2000s, Hemfosa’s SEK 27bn property portfolio was initially built by acquisitions from sellers in financial distress. Today, Hemfosa is one of the larger, private property companies in Sweden. Management is targeting further growth in property assets over the coming years. Credit Research Analyst Michael Andersson (46) 8 506 23482 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2011 1,262 -486 776 0 0 776 0 0 741 0 2012 1,573 -670 903 0 0 903 62 103 841 21 2013 1,584 -616 968 0 0 968 125 -485 -191 0 2014 1,674 -612 1,062 0 0 1,062 239 -419 210 -61 2015E 2,432 -861 1,572 0 0 1,572 132 -426 216 0 2016E 2,462 -856 1,606 0 0 1,606 125 -424 0 0 2017E 2,519 -874 1,645 0 0 1,645 127 -430 0 0 Reported pre-tax profit Minority interests Total taxes 1,517 0 -195 1,930 0 -187 417 0 26 1,031 0 -69 1,493 0 -329 1,307 0 -288 1,342 0 -295 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 1,322 61.5 61.5 12.9 1,743 57.4 57.4 9.7 443 61.1 61.1 (6.2) 962 63.4 65.9 6.7 1,165 64.6 64.6 22.0 1,020 65.2 65.2 22.0 1,046 65.3 65.3 22.0 0.0 n.a. 0.0 0.0 24.6 16.4 16.4 27.2 0.7 7.2 7.2 (78.4) 1.8 9.7 9.7 147.2 50.9 48.0 48.0 44.8 1.2 2.2 2.2 (12.5) 2.3 2.4 2.4 2.6 2011 772 175 947 0 947 0 0 947 0 0 0 947 2012 1,047 -74 973 -859 114 0 937 1,051 -204 0 0 847 2013 71 223 294 -659 -365 -47 257 -155 64 9 0 -82 2014 580 144 724 -8,069 -7,345 0 -370 -7,715 5,152 2,535 0 -28 2015E 1,071 -221 850 -3,715 -2,865 -494 1,040 -2,319 2,319 0 0 0 2016E 1,116 -2 1,115 -405 710 -691 0 19 -19 0 0 0 2017E 1,080 -3 1,077 -407 670 -665 0 5 -5 0 0 0 0.0 54.6 41.6 500.5 152.7 16.4 16.1 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2011 298 467 46 15,140 0 15,951 2012 242 125 282 16,067 0 16,716 2013 174 65 455 16,317 0 17,011 2014 594 94 609 24,410 0 25,707 2015E 594 142 741 27,301 0 28,777 2016E 594 144 866 27,705 0 29,309 2017E 594 147 994 28,112 0 29,846 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 10,059 1,169 0 4,723 15,951 13,339 1,201 0 2,176 16,716 10,690 1,092 0 5,229 17,011 15,760 1,246 0 8,701 25,707 18,079 1,327 0 9,372 28,777 18,061 1,549 0 9,700 29,309 18,056 1,710 0 10,081 29,846 9,761 206.7 29.6 12.6 13,097 601.9 13.0 14.5 (8.8) 10,516 201.1 30.7 10.9 2.0 15,166 174.3 33.8 14.3 2.5 17,485 186.6 32.6 11.1 3.7 17,467 180.1 33.1 10.9 3.8 17,462 173.2 33.8 10.6 3.8 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name AP4 Kåpan Alecta (%) Votes 9.1 6.3 5.0 Capital 9.1 6.3 5.0 Management Title COB CEO CFO Name Bengt Kjell Engwall Jens Karin Osslind Company information Contact Internet Phone number http://hemfosa.se/ 08-4480480 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report SEB Credit Research 15 September 2015 58 Sector Report Nordic High Yield Update Höegh LNG (B+/Positive) ● Credit rating Höegh LNG’s credit rating is primarily supportive by its high earnings visibility with stable cash flows. As the FSRUs are part of the LNG terminal infrastructure, the FSRUs are typically on very long dated contracts that are not exposed to volatility in energy prices to the same degree as traditional LNG shipping. This is exemplified by the company having an average remaining contract length of 13 years (16 years for the MLP) with an EBITDA backlog of USD 3.5bn. What restrains the credit rating is the fact that the company has a shareholder friendly financial policy, which relies on MLP drop-downs to recycle cash flows which effectively subordinate the bonds security position. Furthermore, the company’s policy to always build one FSRU on speculation increases capex risk. Our positive outlook reflects our view that Höegh LNG will delever significantly in 2015 due to the FSRU programme beginning to generate cash flows. Key bond covenants and terms HLNG01: Callable at106 until October 2016 Callable at 103.5 after October 2016 Change of control put at 101 De-listing event put at 101 Min book equity at USD 200m or 27.5% If distributions are made, Book Equity must be at least 30% of total assets and Free Group Cash must be no less than USD 50m Financial covenants on bank debt: Liquidity > USD 40m or 5% of total debt Book equity > USD 200m and 25% of assets ● Bond recommendations HLNG01 is currently trading +448bp, having widened with the general market and on the news that FSRU#7 and FSRU#8 have switched contracts (FSRU#8 which is scheduled for delivery in 2018 now has the octopus contract) which increases the risk in the shorter end of the credit curve. We have an Overweight recommendation on HLNG01 as we believe the default risk is significantly lower than the spread should indicate given the strong contract backlog at maturity of the HLNG01 bond, in combination with no major amortizations in the same time period. Furthermore, against other BB/BB- peers, the spread level is attractive against peers such as OCY02 and TLG. Hoegh LNG 2020 gives an additional 70bp pick-up for holding three-year longer risk. We find these levels attractive against OCY03 (+448bp) and assign an Overweight recomendation. Overview chart Bond issuer Høegh FLNG Ltd Høegh LNG Holdings Ltd Methane Ventures ltd Høegh LNG Ltd ● Recent financial updates Höegh LNG reported Q2 numbers of USD 23m against our USD 21m estimate, with a quarter on quarter EBITDA increase of USD 6m. The increase relates to the start-up of Höegh Galant’s five year charter with Egas in Egypt in April. During Q2, the company also agreed to the sale of the LNG Libra for USD 21m. Credit strengths Credit concerns ● ● ● ● ● ● ● Cash flow visibility due to long-term charter contracts with solid counterparts. Competent management and a key shareholder that we believe is supportive and long-term. A leading position in an industry with positive growth prospects and high entry barriers. Selected outstanding bonds Issuer Ticker HLNG01 Hoegh Lng Holdings HLNG02 Hoegh Lng Holdings Our view B B Sector Shipping Shipping Highly leveraged capital structure and negative free cash flow. Small-scale operations and low diversification. Capital-intensive industry with parts of the business being cyclical. Project risk through always building one FSRU on speculation Issue date Maturity date Coupon Outst. Amount ASW 03.10.2012 03.10.2017 Nibor + 600 NOK 750m 448 05.06.2015 05.06.2020 Libor + 500 USD 130m 512 Recommendation Overweight Overweight Source: Bloomberg and SEB Bond spreads 700 650 600 550 500 450 400 350 300 250 Debt maturity profile (USDm) BWO02 TOP04 TOP03 TOP05 BWO03 BWO04 BWO01 TOP02 SFLN03 HLNG2020 SFLN02 OCY03 SNI05 GLOG01 SNI04SNI06 HLNG01 OCY02 SNI03TLG01 SNI01 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 59 Sector Report Nordic High Yield Update Company description Although listed in 2010, Höegh LNG is a direct continuation of LNG activities stretching back to 1969 and through this the company has a broad knowledge base and first class reputation in the business. The company is active in all parts of the LNG floating supply chain with a net ownership of 3.84 LNG carriers, four FSRU newbuilds and rolling FSRU options. It is developing at least two LNG import terminals and is involved in three LNG FPSO FEED studies. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2010 91 -71 21 -14 0 7 2011 110 -84 26 -20 0 7 2012 136 -89 47 -23 0 24 2013 146 -148 -2 -17 0 -19 2014 154 -154 0 -21 0 -21 2015E 211 -127 84 -34 0 50 2016E 254 -136 118 -40 0 78 2017E 290 -147 143 -47 0 96 Net interest expenses Value changes Other financial items -22 0 1 -25 0 0 -27 10 1 -1 0 0 -17 -45 -4 -39 3 -7 -45 0 -8 -54 0 -8 Reported pre-tax profit Minority interests Total taxes -15 0 0 -18 0 0 9 0 0 -20 0 0 -86 0 -2 7 0 0 25 0 0 35 0 0 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -15 22.4 7.3 0.0 -18 23.8 6.2 1.1 9 34.6 20.4 0.0 -21 (1.3) (30.8) (2.4) -88 0.2 (24.7) (2.3) 7 39.9 25.9 0.0 25 46.5 33.6 0.0 35 49.3 35.7 0.0 3,541.8 n.a. 0.0 0.0 14.8 27.2 (1.9) 0.0 13.3 80.2 269.7 0.0 (48.0) (104.0) 0.0 0.0 35.3 119.2 0.0 0.0 129.2 23,168.3 0.0 0.0 21.8 40.9 57.6 242.1 15.0 21.1 22.4 37.5 2010 47 -40 7 0 7 0 0 7 0 0 0 7 2011 -144 48 -96 -63 -159 0 52 -107 -12 126 0 8 2012 -214 5 -209 -218 -426 0 203 -223 117 202 0 96 2013 66 -43 23 -182 -159 0 80 -79 10 0 0 -69 2014 -146 34 -112 -661 -773 0 42 -731 544 0 203 16 2015E 37 -1 36 -73 -38 -43 2 -78 111 0 0 32 2016E 69 -8 61 -237 -176 -48 0 -224 154 0 0 -71 2017E 87 -7 79 -194 -115 -55 0 -170 164 0 0 -6 0.0 56.3 182.7 293.7 788.0 37.8 101.4 72.2 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2010 29 60 11 469 80 649 2011 37 5 13 608 83 745 2012 133 6 25 835 74 1,072 2013 71 61 31 864 74 1,101 2014 66 36 66 1,163 37 1,369 2015E 99 33 53 1,212 38 1,435 2016E 28 34 49 1,409 38 1,558 2017E 22 35 45 1,556 38 1,695 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 451 125 0 74 649 439 172 0 133 745 559 169 0 344 1,072 571 141 0 390 1,102 683 226 94 366 1,369 794 217 101 323 1,435 947 209 109 293 1,558 1,111 202 116 265 1,695 422 578.1 11.3 20.6 0.9 312 234.4 17.9 12.0 1.0 313 91.0 32.1 6.7 1.8 486 124.6 35.4 (258.5) (0.6) 499 108.5 33.6 1,383.5 0.0 578 136.1 29.6 6.9 2.1 802 199.6 25.8 6.8 2.5 972 254.8 22.5 6.8 2.6 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Leif Hoegh & Co Ltd JP Morgan Clearing corp. (%) Votes 44.2 3.9 Capital 44.2 3.9 Management Title COB CEO CFO Name Morten Høegh Sveinung Søhle Steffen Føreid Company information Contact Internet Phone number www.hoeghlng.com +47 97557400 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 60 Sector Report Nordic High Yield Update Hoist Finance (BB/Stable) ● Credit rating We rate Hoist Finance at BB with a Stable outlook. We rate the bond BB in light of what we perceive to be a meaningful recovery in the event of a default scenario. The company has a leading position in a market with underlying growth fundamentals. It is regulated by the Swedish FSA (creating regulatory and capital requirements), it has comparatively high geographical diversification, a solid collection history and strong deleveraging ability in a run off scenario. Our rating also considers the portfolio acquisition pricing risk, the recent rapid portfolio acquisition growth, some originator and concentration of funding (deposits) and high leverage. Key bond covenants and terms: Sr. Unsecured 2017 bond: Change of control with put @ 101 Incurrence test for dividends or additional debt other than permitted debt: Capital Cover Ratio: 1.30x, Interest Coverage Ratio: 2.75x Dividend restriction: Not to exceed 50% ● Bond recommendations We changed the recommendation on the company´s EUR 2017 bond from Overweight to Marketweight following the Q2 report in late July. The bond has tightened healthily since the beginning of the year, largely on the back of the company´s IPO. Now, however, we argue that the tightening has come to an end and believe that a Marketweight recommendation better reflects the relative yield. Overview chart Among others incl. Toscafund (<10%) Family trust related to Erik Fällström Mikael Wirén 100% 100% Beagle Investments S.A. 39.5% ● Recent financial updates In the Q2 report, gross collections were SEK 834m, undershooting our expectations by some 6%, although the year-on-year increase was still some 35%. The CET1 ratio fell during the quarter to 12.6%, but adjusted for profits and a share issue that were not included for technical reasons, the ratio was 13.5%. We note that there is plenty of headroom to the regulatory requirement. The EBIT margin was 30%. Total acquired loan portfolios on the balance sheet were SEK 8.7bn. Deposits continued to increase, at SEK 12.8bn. Minority shareholders Achilles Trust 38.4% 22.1% Hoist International AB (publ) 100% Bond EUR 100m Hoist Kredit AB (publ) Bond SEK 750m Regulated entity 100% Fully owned subsidiaries 50% 90% Hoist Finance UK Ltd. UK BEST III NS FIZ (Poland) Credit strengths Credit concerns ● Underlying industry growth. ● Portfolio acquisition pricing risk. ● Licensed and supervised by the SFSA. ● Deposit funding with untested stickiness. ● Geographically well diversified. ● High leverage. ● Strong run off scenario cash generation. Selected outstanding bonds Issuer Hoist Finance Public N/R SEB BB Issue date 02/10/2014 Maturity date 02/10/2017 Cpn type Floating Cpn 3mS+375 Amount EUR 100m Z-sprd mid 304 Recommendation Marketweight Source: Bloomberg and SEB Relative value Debt maturity profile 1,000 600 Metsa Board 500 900 Cramo 800 Nokia Ramirent 700 Outotec 600 Stora Enso 300 SSAB Stena Finnair 200 St1 Nordic Hornbach 100 TUI Tesco Hoist 0 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 6.0 500 400 300 200 100 0 2014 Source: SEB and Bloomberg SEB Credit Research SEKm Spread (bps) 400 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: SEB. The majority of the Hoist debt is deposits payable on demand (not depicted above). Assumed SEK/EUR 9.5. 15 September 2015 61 Sector Report Nordic High Yield Update Company description Hoist is a Sweden-based purchaser of non-performing consumer debt, focusing on the financial services sector. Hoist acquires defaulted debt portfolios at heavy discounts with an average payback period of some two and a half to three years (gross) in a number of European countries. Being under the Swedish FSA´s regulation, the company is primarily funded via Swedish public deposits. Hoist employed some 1,000 people (average) in 2014. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (SEKm) Net interest income Net commissions Trading income Result from insurance operations Other income Total income Personnel expenses Other expenses Total non- interest expenses Profit before credit losses Credit losses Net capital gains (losses) Pre-tax profit Taxes Other items Net profit 2011 -60 22 34 0 782 779 -188 -216 -404 376 0 -353 23 5 0 28 2012 -29 44 -37 0 552 531 -512 -20 -532 -1 0 56 55 3 0 57 2013 -92 121 -5 0 1,151 1,175 -387 -662 -1,049 126 0 36 163 -35 0 128 2014 -255 153 -18 0 1,411 1,291 -407 -724 -1,131 160 0 59 218 -38 0 180 2015E n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2016E n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2017E n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 0.0 0.0 (31.8) 0.0 142.6 121.2 0.0 197.8 9.8 26.2 34.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. (SEKm) Cash & financial institutions Securities Net loans Other assets Total assets 2011 2,430 2,487 0 353 5,270 2012 2,975 3,545 0 896 7,415 2013 5,219 6,190 0 665 12,074 2014 5,560 8,802 0 699 15,062 2015E n.a n.a n.a n.a n.a 2016E n.a n.a n.a n.a n.a 2017E n.a n.a n.a n.a n.a Borrowing from fin. institutions Deposits from customers Securities issued Equity Other Total liabilities and equity 0 4,495 0 511 265 5,270 0 6,366 46 641 362 7,415 0 9,702 995 825 553 12,074 0 10,987 1,826 1,397 852 15,062 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Risk-weighted assets 3,181 5,745 8,796 11,307 n.a. n.a. n.a. Net interest margin Cost/income ratio Credit losses/loans Net interest income / Total revenues Return on Average Assets ROE 2011 (2.27) 51.8 n.a. (7.7) 1.0 5.4 2012 (0.45) 100.2 n.a. (5.4) 0.9 8.9 2013 (0.94) 89.2 n.a. (7.8) 1.3 15.5 2014 (1.88) 87.6 n.a. (19.8) 1.3 12.9 2015E n.a. n.a. n.a. n.a. n.a. n.a. 2016E n.a. n.a. n.a. n.a. n.a. n.a. 2017E n.a. n.a. n.a. n.a. n.a. n.a. Tier 1 ratio Capital ratio Gross non-perf. / Gross loans Net non-performing loans Acc provisions % of gross non-perf. Net non-performing % of net loans Net non-performing % of equity 11.4 11.4 0.0 0 n.a. 0.0 0.0 9.7 9.7 0.0 0 n.a. 0.0 0.0 7.9 11.6 0.0 0 n.a. 0.0 0.0 10.2 12.2 0.0 0 n.a. 0.0 0.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Loans/assets (%) Loan growth y-o-y Deposits/loans (%) 0.0 0.0 n.a. 0.0 0.0 n.a. 0.0 0.0 n.a. 0.0 0.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Growth rates y-o-y (%) Total income Profit before credit losses Pre-tax profit Balance sheet Key ratios Main shareholders Name Swedbank Robur fonder AB Toscafund Asset Management LLP Carve Capital AB (%) Votes 9.1 9.1 9.0 Capital 9.1 9.1 9.0 Management Title COB CEO CFO Name Ingrid Bonde Jörgen Olsson Pontus Sardal Company information Contact Internet Phone number www.hoistfinance.com +46 (0)8 55 51 77 90 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 62 Sector Report Nordic High Yield Update IM Skaugen (CCC/Negative) ● Credit rating IM Skaugen’s rating is held back by high leverage, a small fleet and poor operational performance in recent years. The company has shown a remarkable ability to raise liquidity through divestments and sale-and-leasebacks, which has helped it reduce debt and maintain an equity ratio above 25%. In recent years, IM Skaugen’s fleet has been reduced from owning 11 vessels to currently 2.3 vessels. These divestments have reduced gross debt but have come at the cost of financial flexibility. We estimate that the net loan-to-value is 77% (we estimate the gross LTV to be 102%) based on shipbroker indications. As the company is currently burning some USD 5-8m per quarter, we estimate that it has liquidity for three to four more quarters. Asset divestments could release a further USD 21m, but in such a scenario the asset coverage for the bonds would be zero. Key bond covenants and terms: Change of control put @100 Financial covenants Relevant Assets > USD amount of aggregate outstanding bonds Equity ratio >25% IMSK13: Callable @105 between years 3-4 Callable @102.5 thereafter Overview Chart ● Bond recommendations At current market pricing (around 55% of par) the bonds should be covered in the event of default with a gross LTV (using debt at current market prices) of 81%. The most likely timing of a default is in Q2 2016, upon the maturity of IMSK12, which would provide approximately 10% of par in cash coupon payment. This implies that there is some 20-30% upside to owning the bonds if our shipbroker valuations are correct. That said, we are not comfortable recommending a speculative trade on recoveries for unsecured bonds. Particularly in a company that is highly likely in our view to continue divestments of assets in order to increase survivability, therefore increasing the option value of the equity. However, unless we see a quarter where operating cash flow covers interest payments, we will be hesitant to change our Underweight recommendations. This is mainly due to lack of management transparency regarding possible solutions, which leads us to fear further asset sales. ● Recent financial updates IM Skaugen reported LBITDA of USD 0.6m against our estimate of LBITDA of 0.5m The company reported credit positive news as it managed to divest its SPT joint venture for USD 22m, significantly above our and market estimates. This should improve the liquidity situation substantially, as the company had USD 7m in cash equivalents at the end of the quarter. The interest coverage ratio was -1.3 while the equity ratio was 25%. Credit strengths Credit concerns ● Modern and versatile fleet strongly positioned to take advantage of improved market conditions. ● Exposure to a highly cyclical and capital-intensive industry with limited transparency. ● Limited committed future capex requirements. ● ● Strong market position in niche shipping segments with low order book to fleet levels. High leverage and weak cash flow profile following years of large investments to renew its fleet. ● Event risk related to accidents and political decisions. Selected outstanding bonds Issuer Ticker Our view Im Skaugen Se IMSK13 CCC/ CCCIm Skaugen Se IMSK12 CCC/ CCC- Sector Issue date Maturity date Shipping 11.04.2012 11.04.2017 Shipping 27.02.2012 30.06.2016 Coupon Nibor + 900 Nibor + 825 Outst. Amount NOK 350m NOK 340m ASW 5,654 9,567 Recommendation Underweight Underweight Source: Bloomberg and SEB Spread development Debt maturity profile (USDm) 120 100 100 80 80 USDm 120 60 60 40 40 20 20 0 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 IMSK12 Apr.15 May.15 Jun.15 Jul.15 2014 2015 Bank Source: SEB SEB Credit Research 0 Aug.15 IMSK13 2016 IMSK12 2017 IMSK13 Source: SEB 15 September 2015 63 Sector Report Nordic High Yield Update Company description IM Skaugen operates petrochemical gas carriers and lightering. The gas carriers are in the 10,000CBM range and are mostly ethylene capable. This means these ships can cool the cargo more than normal LPG tankers and that the tanks can hold highly corrosive ethylene. Demand growth for petrochemical transportation is driven by strong production growth for ethylene in the Middle East and continued strong demand in China. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 140 -93 46 -12 0 34 0 -9 -8 3 2006 144 -109 35 -13 0 22 0 -12 0 1 2007 180 -140 40 -12 0 28 0 -11 4 0 2008 136 -119 17 -8 0 9 19 -16 0 -2 2009 108 -108 0 -8 0 -8 4 -13 0 6 2010 103 -108 -5 -7 0 -12 11 -13 0 1 2011 117 -121 -4 -6 0 -9 12 -17 1 1 2012 97 -94 3 -5 0 -2 1 -17 2 0 2013 98 -97 1 -8 0 -7 8 -14 31 1 2014 75 -84 -8 -6 0 -14 0 -12 0 0 2015E 73 -80 -7 -2 0 -10 0 -9 0 0 2016E 84 -81 4 -2 0 2 0 -9 0 0 2017E 98 -87 10 -2 0 8 0 -8 0 0 Reported pre-tax profit Minority interests Total taxes 20 -1 0 11 -1 0 21 -2 -4 9 0 0 -10 0 0 -11 0 0 -11 0 0 -16 0 0 19 0 -1 -26 0 -1 -19 0 -1 -7 0 0 0 0 0 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 19 33.2 24.6 0.0 11 24.2 15.4 0.0 15 22.3 15.3 20.0 9 12.6 6.4 3.0 -10 0.2 (7.2) (2.3) -11 (4.8) (11.3) 3.0 -11 (3.1) (7.9) 3.0 -16 2.8 (2.3) 0.7 18 1.2 (7.4) 3.6 -27 (11.3) (18.9) (3.0) -19 (10.3) (13.2) (3.0) -7 4.5 2.2 (3.0) 0 10.6 8.6 (3.0) 27.1 n.a. 182.8 299.4 2.8 (25.1) (35.7) (43.7) 25.6 15.7 25.0 81.9 (24.4) (57.4) (68.2) (56.6) (20.8) (98.7) 0.0 0.0 (4.6) (2,400.5) 0.0 0.0 14.0 25.5 0.0 0.0 (28.6) 174.7 0.0 0.0 14.8 (55.3) 0.0 0.0 (21.9) (792.7) 0.0 0.0 (3.5) 12.1 0.0 0.0 16.2 150.9 0.0 0.0 15.6 172.8 352.1 0.0 2005 32 0 32 -5 27 -16 -26 -16 74 -1 0 57 2006 24 3 27 -39 -13 -8 0 -21 20 4 0 4 2007 28 -49 -21 -18 -39 -8 0 -47 80 0 0 33 2008 -1 -74 -76 1 -75 -8 -34 -116 -2 0 47 -71 2009 -7 44 38 -7 31 0 0 31 19 0 0 50 2010 -16 -17 -34 -6 -40 0 -5 -45 -12 0 0 -57 2011 -19 52 34 3 37 0 0 37 -38 0 0 -1 2012 -14 -18 -32 3 -29 0 0 -29 9 0 0 -20 2013 -12 -6 -17 0 -17 0 106 88 -51 0 0 38 2014 -22 9 -13 0 -13 0 50 37 -54 0 0 -17 2015E -17 5 -12 0 -12 0 0 -12 -7 0 0 -19 2016E -5 1 -4 0 -4 0 0 -4 -7 0 0 -11 2017E 2 1 3 0 3 0 0 3 -7 0 0 -4 3.9 27.5 10.1 -0.4 6.0 6.1 -2.5 -4.1 0.0 0.0 0.0 0.0 0.0 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 81 36 12 153 6 288 2006 80 37 12 180 6 315 2007 102 117 60 62 5 346 2008 31 123 71 67 5 297 2009 96 80 113 51 3 343 2010 40 73 116 45 3 276 2011 41 32 112 45 3 233 2012 23 42 109 36 3 212 2013 59 40 13 148 3 263 2014 27 32 34 79 3 173 2015E 8 34 34 76 3 154 2016E -4 38 34 74 3 145 2017E -8 42 34 73 3 143 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 174 30 4 81 288 189 33 5 87 315 200 21 1 124 346 194 0 1 103 298 213 36 1 94 343 186 11 1 78 276 140 24 1 69 233 143 15 0 55 213 170 21 0 71 263 106 24 0 44 174 99 31 0 25 155 92 36 0 18 146 85 41 0 18 144 93 109.6 29.4 2.0 4.7 109 119.0 29.2 3.2 2.4 80 64.1 36.0 2.0 2.6 153 146.9 34.9 8.9 1.0 116 122.8 27.5 541.8 0.0 142 180.6 28.5 (28.9) (0.4) 91 130.4 30.0 (24.9) (0.2) 115 210.4 25.7 42.0 0.2 111 156.3 27.1 91.1 0.1 80 180.1 25.4 (9.4) (0.7) 91 368.4 16.0 (12.3) (0.8) 96 537.7 12.2 25.2 0.4 93 512.6 12.6 9.0 1.3 (%) Votes 36.0 10.5 7.3 Capital 36.0 10.5 7.3 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Skaugen Family SES Odin Norge Management Title COB CEO CFO Name Erik Eik Morits Skaugen Jr Bente Flø Company information Contact Internet Phone number www.skaugen.com (47) 2312 0400 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 64 Sector Report Nordic High Yield Update J. Lauritzen (B/Negative) Key bond covenants and terms JLA02: Change of control with put at 100 Minimum equity ratio 30% Minimum liquidity USD 50m Overview chart ● Credit rating As we see it, over the past year J. Lauritzen has gone from having lower business risk (through being diversified into several commodity shipping sectors) to higher business risk in exchange for a reduction of financial risks. This has happened via asset divestments where the proceeds have gone primarily to deleverage the company. In Q2 2015, the company reported a mixed bag of results from a credit perspective and operationally it continued to lose money due to poor market conditions in dry bulk. This led the company to take write-downs of its book values, as vessel values had been reduced by 17% since year-end 2014. Nevertheless, the company continues to take steps to strengthen its balance sheet as it has monetized two long-term charters which we expect to boost cash inflow by USD 77m in four down-payments between Q3 2015 and 2017. The company further has sold Capesize vessels related to these contracts, which gave a liquidity boost of USD 98m in total. With a cash balance of USD 155m, we expect J. Lauritzen to be funded through the current dry bulk downturn. However, cash flow from operations will remain negative, we estimate, which will put a strain on the asset coverage as we expect the loan to value to continue to worsen (currently 63%, with a gross loan to value we estimate at 93%). ● Bond recommendations JLA02 has traded flat since Q2 2014, despite the net loan to value position increasing from 37% to 63% in the same timeframe (we estimate the gross LTV at 93%). We expect the dry bulk market to continue to be challenging and retain our Underweight recommendation, but note that the current spread of +745bp is attractive against the Odfjell credit curve. ● Recent financial updates J. Lauritzen reported results in line with our expectations, delivering LBIDTA of USD 8m against our USD 8m estimate. The company took impairments of USD 170m, primarily related to the dry bulk assets. However, this should be netted against a USD 77m receivable. In terms of guidance, the company has revised its LBIDTA range to USD 55-25m, with net income in the range of USD 200-170m. This is in line with our previous estimates when adjusting for the lower income as a result of the monetization of the long-term charters (not booked over the P&L). Credit strengths Credit concerns ● Established shipping expertise and solid market position in selected segments. ● Cyclical business with significant embedded capital intensity. ● Sound contracting policy secures long-term coverage in highly volatile segments. ● ● Young, modern diversified fleet with an average age of five years. Private ownership provides limited transparency and restricts access to equity markets. ● Supportive owner in the Lauritzen foundation. ● Weak economic outlook and a retained large order book create risk of prolonged weak shipping markets. Selected outstanding bonds Issuer Ticker Our view Sector Issue date Maturity date Coupon Outst. Amount mid price ASW Recommendation J Lauritzen A/S JLA02 B/B- Shipping 24.10.2012 24.10.2017 Nibor + 825 NOK 500m 101.30 758 Underweight Source: Bloomberg and SEB Spread development Debt maturity profile (USDm) Bank amortization Bonds Bullet 2018 2019 200 150 100 50 0 2015 Source: SEB SEB Credit Research 2016 2017 2020+ Source: SEB 15 September 2015 65 Sector Report Nordic High Yield Update Company description Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Founded in 1884, J.Lauritzen is a shipping company with a modern and diversified portfolio. Its current fleet of 178 vessels has an average age of five years and operates dry bulk carriers and small gas tankers. The company is fully owned by the Lauritzen foundation. Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2009 503 -368 135 -75 -2 58 17 -22 0 6 2010 740 -487 252 -53 0 199 11 -48 0 -8 2011 621 -475 146 -91 0 55 5 -69 0 0 2012 709 -621 89 -250 0 -161 -26 -59 0 0 2013 364 -355 9 -63 0 -55 -11 -31 0 0 2014E 478 -414 64 -58 0 6 0 -30 0 0 2015E 503 -429 74 -59 0 15 0 -15 0 0 2016E 490 -419 71 -59 0 12 0 -11 0 0 Reported pre-tax profit Minority interests Total taxes 59 0 4 154 0 -6 -10 0 2 -247 0 1 -96 0 0 -24 0 0 0 0 0 1 0 0 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 80 26.8 12.1 (6.2) 136 34.1 27.7 3.7 -44 23.5 9.1 19.9 -348 12.5 (23.2) 0.3 -284 2.4 (15.4) (0.1) 10 13.4 1.2 0.0 0 14.6 3.0 0.0 1 14.5 2.5 0.0 (27.5) n.a. 258.1 967.4 48.9 87.0 240.3 160.9 (15.9) (42.1) (72.5) 0.0 15.1 (39.2) 0.0 0.0 (49.2) (90.0) 0.0 0.0 44.9 617.4 0.0 0.0 (1.8) 15.3 151.7 0.0 (2.5) (3.5) (17.4) 527.3 2009 55 -79 -24 -455 -479 0 0 -479 1,062 0 -219 363 2010 159 6 164 -325 -161 0 0 -161 234 0 189 263 2011 51 35 86 -330 -244 0 0 -244 656 0 -29 383 2012 30 4 34 -108 -74 0 0 -74 -74 0 -35 -183 2013 11 -190 -178 28 -150 0 0 -150 -126 0 0 -276 2014E 68 -24 44 441 485 0 0 485 -381 0 0 104 2015E 47 0 47 -73 -26 0 0 -26 -151 0 0 -177 2016E 47 0 47 -99 -52 0 0 -52 27 0 0 -25 94.2 45.2 54.6 15.5 -8.0 -86.1 14.5 20.2 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2009 218 299 169 1,501 0 2,188 2010 224 125 134 1,929 0 2,411 2011 234 87 146 2,215 0 2,682 2012 267 117 179 1,752 0 2,315 2013 154 537 154 1,030 0 1,875 2014E 258 290 154 531 0 1,234 2015E 81 290 154 546 0 1,071 2016E 57 290 154 586 0 1,087 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 936 121 5 1,126 2,188 1,054 113 5 1,239 2,411 1,394 87 2 1,199 2,682 1,375 88 0 852 2,315 794 341 1 740 1,876 413 71 1 750 1,235 250 71 1 750 1,072 265 71 1 751 1,088 718 63.5 51.7 5.3 4.9 830 66.7 51.6 3.3 4.4 1,160 96.6 44.8 7.9 2.0 1,108 130.0 36.8 12.5 1.2 640 86.4 39.5 71.9 0.2 155 20.6 60.8 2.4 2.1 169 22.5 70.0 2.3 5.0 208 27.7 69.1 2.9 6.3 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Lauritzen Fonden (%) Votes 100.0 Capital 100.0 Management Title COB CEO CFO Name Bent Østergaard Jan Kastrup-Nielsen Birgit Aagaard-Svendsen Company information Contact Internet Phone number http://www.j-lauritzen.com/ +45 3396 8000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 66 Sector Report Nordic High Yield Update Meda (BB-/Stable) ● Credit rating Meda’s credit quality came under pressure in connection with the SEK 21bn acquisition of Rottapharm in July 2014. Leverage is declining but we still estimate that the adjusted net debt to EBITDA ratio (including the EUR 275m unconditional deferred payment for Rottapharm due 2017) will end the year at 5.0x. While our estimates indicate that this ratio could decline to 3.7x by 2017, which would be in line with the rating, Meda has clearly indicated an interest in making additional sizeable acquisitions in a not too distant future, perhaps already in 2016. At its capital markets day in May 2015, Meda said that debt financing would be maximized in connection with acquisitions, even if equity components are possible if the conditions are right. In terms of leverage, it would be comfortable with net debt to EBITDA peaking above 5x. According to an article on Bloomberg on 28 August 2015, Meda is considering selling its US business which is about 15% of the company and could fetch around SEK 1214bn if Meda is paid the same earnings multiple that it is acquiring companies for, and could be used to finance acquisitions. Key bond covenants and terms: Meda MTN programme: Change of control with put at 100 Negative pledge: For market debt only Overview chart Meda AB MTN program ● Bond recommendations We maintain our Underweight recommendation on Meda’s bonds due to the event risk associated with the pronounced focus on growth through acquisitions. Given how stretched the balance sheet currently is, a debt-financed acquisition would most likely push spreads wider. Bank debt ● Recent financial updates Meda reported year-on-year sales growth in Q2 to SEK 5.2bn. This was 6% better than our SEK 4.9bn forecast, and in contrast to Q1, when sales decreased organically by 5% y-o-y. Operating expenses were lower than we had expected so EBITDA was 18% better than we had anticipated, excluding acquisition-related items. Since the positive deviation seems to be explained by timing factors and as Meda repeated the view that significant marketing investments will impact EBITDA in the quarters ahead, we have kept our full year earnings forecasts unchanged. Credit strengths Credit concerns ● Strong market positions in selected niches and moderate cyclicality of earnings. ● Acquisition-oriented strategy. ● Long-term growth prospects due to demographic changes and growing global prosperity. ● Fluctuating and currently stretched leverage. ● Pricing pressure in mature markets. ● Stable ownership structure. Selected outstanding bonds Issuer Meda Meda Meda Sector Pharma Pharma Pharma Public N.R./N.R. N.R./N.R. N.R./N.R. SEB BBBBBB- Issue date 05/04/2013 05/04/2013 21/05/2014 Maturity date 05/04/2016 05/04/2018 21/05/2019 Cpn type FRN FRN FRN Cpn 3mS +220 3mS +285 3mS +165 Amount SEK 400m SEK 600m SEK 750m Spread 123 240 267 Recommendation Underweight Underweight Underweight Source: Bloomberg and SEB Relative value Debt maturity profile (31 December 2014) 350 Sobi 300 SSAB Spread (bps) 250 25,000 20,000 Stena Metall 200 Stora Enso 150 Meda 100 Millicom 50 Getinge 15,000 10,000 5,000 Elekta 0 0.0 1.0 2.0 3.0 4.0 Years to maturity 5.0 Source: SEB and Bloomberg SEB Credit Research 0 Cloetta < 1 year 1‐2 years 2‐5 years > 5 years Source: SEB 15 September 2015 67 Sector Report Nordic High Yield Update Company description Meda is a pharmaceutical company focused on the European and US markets with a strategy of acquiring and in-licensing non-core and niche products from pharmaceutical companies, reviving growth and profitability for these products, and continuing with new acquisitions and product launches. Meda's acquisition targets have often been off-patented products, but the company is increasingly focusing on products in earlier stages of their life cycles. Following Meda's acquisition of Viatris in Q3 2005 – when the number of employees increased from 200 to 1,700 – its core therapeutic areas span the cardiovascular, gastrointestinal, respiratory, pain, dermatology and OTC segments. Meda's sales are now nearly USD 3bn. The acquisition spend has averaged SEK 5bn a year over the last 10 years. Credit Research Analyst Ebba Lindahl (46) 8 506 232 08 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 2,870 -2,104 766 -42 -199 525 2006 5,256 -3,443 1,813 -87 -292 1,434 2007 8,145 -5,697 2,448 -89 -689 1,670 2008 10,675 -7,250 3,425 -94 -1,029 2,302 2009 13,178 -8,791 4,387 -131 -1,354 2,902 2010 11,571 -7,265 4,306 -117 -1,660 2,529 2011 12,856 -8,173 4,683 -126 -1,913 2,644 2012 12,991 -9,046 3,945 -120 -2,024 1,801 2013 13,114 -9,380 3,734 -119 -2,067 1,548 2014 15,352 -11,362 3,990 -155 -2,348 1,487 2015E 19,730 -13,466 6,264 -249 -3,012 3,003 2016E 20,570 -13,970 6,600 -260 -3,000 3,340 2017E 21,080 -14,220 6,860 -260 -3,000 3,600 Net interest expenses Value changes Other financial items -207 0 0 -243 0 0 -573 0 65 -884 0 0 -618 0 0 -517 0 -35 -604 0 0 -565 0 0 -545 0 0 -665 0 -240 -1,161 0 -258 -1,092 0 0 -1,006 0 0 Reported pre-tax profit Minority interests Total taxes 318 0 -90 1,191 0 -402 1,162 0 -329 1,418 0 -464 2,284 0 -747 1,977 0 -549 2,040 0 -432 1,236 0 -61 1,003 0 -198 582 0 -180 1,584 0 -238 2,248 0 -506 2,594 0 -571 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 228 26.7 18.3 28.3 789 34.5 27.3 33.8 833 30.1 20.5 28.3 954 32.1 21.6 32.7 1,537 33.3 22.0 32.7 1,428 37.2 21.9 27.8 1,608 36.4 20.6 21.2 1,175 30.4 13.9 4.9 805 28.5 11.8 19.7 402 26.0 9.7 30.9 1,346 31.7 15.2 15.0 1,742 32.1 16.2 22.5 2,023 32.5 17.1 22.0 175.4 n.a. 270.8 150.8 83.1 136.7 173.1 274.8 55.0 35.0 16.5 (2.4) 31.1 39.9 37.8 22.1 23.4 28.1 26.1 61.0 (12.2) (1.8) (12.9) (13.4) 11.1 8.8 4.5 3.2 1.1 (15.8) (31.9) (39.4) 0.9 (5.3) (14.0) (18.9) 17.1 6.9 (3.9) (41.9) 28.5 57.0 102.0 171.9 4.3 5.4 11.2 42.0 2.5 3.9 7.8 15.4 2005 445 -51 394 0 394 -25 -6,315 -5,946 3,140 3,075 0 269 2006 1,061 -297 764 -79 685 -52 -142 491 -705 0 0 -214 2007 1,662 -425 1,237 -88 1,149 -116 -11,053 -10,020 8,051 2,103 -14 120 2008 2,003 -52 1,951 -72 1,879 -194 -4,030 -2,345 806 1,471 25 -43 2009 3,087 37 3,124 -109 3,015 -227 -409 2,379 -2,496 0 -4 -121 2010 2,734 -198 2,536 -127 2,409 -302 -2,725 -619 667 0 -14 34 2011 3,130 -272 2,858 -124 2,734 -604 -5,545 -3,415 3,448 0 -4 29 2012 3,055 -242 2,813 -126 2,687 -680 -1,017 990 -928 0 -8 54 2013 2,956 -111 2,845 -157 2,688 -680 -1,098 910 -917 0 -9 -16 2014 3,254 -212 3,042 -141 2,901 -680 -8,765 -6,544 6,583 2,011 83 2,133 2015E 3,707 -92 3,616 -250 3,366 -914 -1,500 952 -952 0 0 0 2016E 5,002 -330 4,672 -250 4,422 -1,005 -1,500 1,917 -1,917 0 0 0 2017E 5,283 -83 5,200 -250 4,950 -1,096 -1,500 2,353 -2,571 0 0 -218 0.0 1.5 1.1 0.7 0.8 1.1 1.0 1.0 1.2 0.9 1.3 1.2 1.2 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 331 1,342 253 764 8,809 11,499 2006 121 1,673 275 625 8,625 11,318 2007 242 2,948 567 787 24,105 28,649 2008 198 4,124 949 935 29,609 35,815 2009 76 3,757 883 854 27,453 33,023 2010 111 3,825 624 788 28,214 33,562 2011 140 4,869 592 811 32,306 38,718 2012 194 4,417 946 795 30,419 36,771 2013 178 4,665 936 848 29,666 36,293 2014 2,311 8,296 2,015 1,692 50,798 65,112 2015E 2,311 8,433 2,015 1,693 49,286 63,738 2016E 2,311 8,848 2,015 1,683 47,786 62,643 2017E 2,093 9,183 2,015 1,673 46,286 61,250 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 4,990 2,749 0 3,760 11,499 4,176 2,847 0 4,296 11,318 13,695 5,589 0 9,365 28,649 15,426 7,099 0 13,290 35,815 12,678 6,681 0 13,664 33,023 12,858 6,779 0 13,925 33,562 16,715 7,032 0 14,971 38,718 14,947 7,101 0 14,723 36,771 14,096 6,986 0 15,211 36,293 28,208 16,224 0 20,680 65,112 27,256 15,369 0 21,113 63,738 25,339 15,454 0 21,850 62,643 22,768 15,706 0 22,777 61,250 5,261 139.9 32.7 6.9 3.6 4,512 105.0 38.0 2.5 7.2 14,213 151.8 32.7 5.8 4.3 16,129 121.4 37.1 4.7 3.8 13,467 98.6 41.4 3.1 7.0 13,524 97.1 41.5 3.1 8.3 17,361 116.0 38.7 3.7 7.8 16,037 108.9 40.0 4.1 7.0 15,025 98.8 41.9 4.0 6.9 28,244 136.6 31.8 7.1 6.0 27,375 129.7 33.1 4.4 5.4 25,458 116.5 34.9 3.9 6.0 23,104 101.4 37.2 3.4 6.8 (%) Votes 20.7 9.0 5.1 Capital 20.7 9.0 5.1 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Stena Group Fidim Pelham Long/Short Master Fund Ltd. Management Title COB CEO CFO Name Martin Svalstedt Jörg-Thomas Dierks Henrik Stenqvist Company information Contact Internet Phone number www.meda.se +46 8 630 19 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 68 Sector Report Nordic High Yield Update Metsä Board (BB/Stable) Key bond covenants and terms: Indebtedness restriction: Net debt / EBITDA 4.5x for first three years, 4.25x thereafter Asset disposals, mergers and de-mergers restricted Negative pledge Information undertakings Covenant fall-away at Ba2/BB, if ratings subsequently fall below Ba2/BB the coupon will increase by 1.25 subject to Incurrence Test level ● Credit rating Metsä Board’s profitability and cash flow generation has continued to improve due to the increase in paperboard deliveries. The divestment of the Gorshmuhle mill in Germany is another positive as it meant a less costly exit than closing the business, and the elimination of its losses (around EUR 20m operating loss in 2014) – completing the transformation to a paperboard company. Credit metrics have further improved, with FFO to adjusted net debt at 43% at the end of Q2, up from 41% in Q1 and 18% in Q2 2014. Although current investments seem very rational, the near-to-medium-term flipside of the coin is high investments – EUR 170m for the Husum conversion, and EUR 25m for Metsä Fibre’s pulp mill in Finland. ● Bond recommendations While we acknowledge Metsä Board’s credit profile has significantly improved, and the earnings outlook remains favourable, we think many of these positives have already been priced in. The z-spread has widened from Q1 and is now indicated at +172bps. We reiterate our Marketweight recommendation for the bonds. ● Recent financial update Q2 EBIT ex NRI was EUR 47m, up from EUR 28m in Q2 2014 as sales grew by 6% yo-y and EBIT margin improved from 5.7% in Q2 2014 to 9.0%. This was mainly explained by higher paperboard delivery volumes on stable prices, a positive effect from currencies, and an increase in associate income (market pulp volumes declined though).Operating cash flow before working capital changes improved from a year ago, but the cash flow after investments in the quarter was negative EUR 27m. This was mainly explained by investments, and costs associated with the Gorshmühle divestment (EUR 37m). However, pension obligations were reduced by EUR 94m. Metsä Board guided for Q3 EBIT to be slightly better than EUR 47m in Q2. Credit strengths Credit concerns ● Improved group level profitability and cash generation ● Financial leverage compared with cash flow generation remains high. ● Market leading positions in selected core businesses. ● Relatively small size of the company with limited diversification ● Low earnings volatility in core consumer board business, ● Industry is capital intensive with high operating leverage. ● Reasonably good growth prospects in core products. ● Remaining exposure to paper products and net long position in market pulp. Selected outstanding bonds Issuer Metsä Board Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation Ba2/BB BB 13/03/2014 13/03/2019 Fixed 4 EUR 225m 171 Marketweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 300 350 300 250 250 200 Bps EURm 200 150 150 100 100 50 50 0 0 2015 2016 2017 Interest bearing liabilities Source: SEB, Bloomberg SEB Credit Research 2018 2019 2020 2021 2021=> Committed undrawn credit facilities Source: SEB 15 September 2015 69 Sector Report Nordic High Yield Update Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Company description Metsä Board is a leading European paperboard company and major uncoated fine and printing paper and market pulp supplier with annual sales of around EUR 2bn.Through shareholdings in Metsä Fibre and Pohjolan Voima (PVO), the company has access to pulp capacity and electricity production. It has a global sales and customer service network in 70 countries and production units in Finland, Sweden and Germany. Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 5,241 -4,883 358 -403 0 -45 -2 -115 81 -33 2006 5,624 -5,325 299 -370 -200 -271 0 -137 0 0 2007 4,440 -3,996 444 -379 -185 -120 -3 -147 0 -3 2008 3,236 -2,982 254 -315 0 -61 -1 -155 0 13 2009 2,432 -2,343 89 -356 0 -267 -16 -80 0 5 2010 2,605 -2,293 312 -166 0 146 -24 -75 0 1 2011 2,485 -2,508 -23 -191 0 -214 -7 -63 0 3 2012 2,108 -1,788 320 -100 0 220 0 -49 0 5 2013 2,019 -1,804 215 -101 0 114 0 -55 0 -1 2014 2,008 -1,766 242 -126 0 117 0 -42 0 3 2015E 2,062 -1,757 305 -105 0 200 0 -30 0 -6 2016E 2,088 -1,756 332 -112 0 220 0 -22 0 0 2017E 2,106 -1,747 359 -112 0 247 0 -12 0 0 Reported pre-tax profit Minority interests Total taxes -114 0 34 -408 0 9 -273 0 23 -204 0 34 -358 0 27 48 0 -21 -281 0 8 176 0 -3 58 0 6 78 0 -9 164 0 -14 197 0 -45 235 0 -54 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -80 6.8 (0.9) 29.8 -399 5.3 (4.8) 2.2 -195 10.0 (2.7) 8.4 -508 7.8 (1.9) 16.7 -354 3.7 (11.0) 7.5 27 12.0 5.6 43.8 -273 (0.9) (8.6) 2.9 173 15.2 10.4 1.7 64 10.6 5.6 (10.9) 69 12.1 5.8 11.7 151 14.8 9.7 8.3 152 15.9 10.5 23.0 181 17.0 11.7 23.0 (4.0) n.a. 0.0 0.0 7.3 (16.5) 0.0 0.0 (21.1) 48.5 0.0 0.0 (27.1) (42.8) 0.0 0.0 (24.8) (65.0) 0.0 0.0 7.1 250.6 0.0 0.0 (4.6) (107.3) 0.0 0.0 (15.2) 1,509.7 0.0 0.0 (4.2) (32.8) (48.4) (67.2) (0.5) 12.7 2.6 34.3 2.7 26.0 72.0 112.0 1.2 8.7 9.6 19.9 0.9 8.2 12.4 19.2 2005 218 -82 136 -452 -316 -39 312 -43 -100 12 0 -131 2006 157 65 222 -428 -206 -39 28 -217 259 31 0 73 2007 367 -240 127 -259 -132 -20 628 476 -282 6 0 200 2008 -111 14 -97 -128 -225 -20 507 262 -95 2 0 169 2009 -30 111 81 -73 8 0 284 292 -344 0 0 -52 2010 135 -204 -69 -64 -133 -2 84 -51 -39 0 0 -90 2011 2 81 83 -90 -7 0 101 94 -201 0 4 -103 2012 -20 18 -2 -58 -60 0 218 158 -35 0 0 123 2013 93 -11 82 -61 22 -20 -335 -334 -82 0 0 -415 2014 139 59 198 -43 156 -30 46 172 -16 0 0 157 2015E 281 -57 224 -170 54 -39 0 14 -114 100 0 0 2016E 279 -3 276 -100 176 -50 0 126 -126 0 0 0 2017E 308 -2 306 -50 256 -57 0 199 -199 0 0 0 8.6 7.6 5.8 4.0 3.0 2.5 3.6 2.8 3.0 2.1 8.2 4.8 2.4 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 279 1,964 171 3,259 654 6,327 2006 345 1,886 159 3,344 438 6,172 2007 442 1,527 121 2,894 210 5,194 2008 550 1,248 438 2,167 102 4,505 2009 497 872 362 1,356 45 3,132 2010 408 958 449 1,263 39 3,117 2011 305 785 500 1,071 27 2,688 2012 428 723 508 894 27 2,580 2013 104 655 468 834 35 2,097 2014 250 648 485 738 28 2,149 2015E 250 665 460 803 28 2,206 2016E 250 674 445 791 28 2,188 2017E 250 680 430 729 28 2,117 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 2,529 1,482 45 2,271 6,327 2,781 1,485 63 1,843 6,172 2,336 1,188 52 1,618 5,194 2,106 1,013 57 1,329 4,505 1,411 797 8 916 3,132 1,350 768 5 994 3,117 1,137 814 5 732 2,688 1,110 603 5 862 2,580 701 546 0 850 2,097 677 630 0 841 2,149 563 591 0 1,053 2,206 437 596 0 1,155 2,188 238 599 0 1,279 2,117 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 2,205 95.2 36.6 6.2 2.7 2,403 126.1 30.9 8.0 1.9 1,867 111.8 32.2 4.2 2.5 1,254 90.5 30.8 4.9 1.4 777 84.1 29.5 8.7 1.1 827 82.8 32.1 2.7 4.2 783 106.2 27.4 (34.5) (0.3) 758 87.4 33.6 2.4 6.5 597 70.3 40.5 2.8 3.0 427 50.7 39.2 1.8 5.2 312 29.7 47.7 1.0 7.6 187 16.2 52.8 0.6 10.2 -12 (0.9) 60.4 (0.0) 16.4 (%) Votes 61.6 8.0 5.7 Capital 40.7 4.1 4.8 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Metsäliitto Ilmarinen Mutual Pension Insurance Varma Mutual Pension Insurance Management Title COB CEO CFO Name Kari Jordan Mika Joukio Markus Holm Company information Contact Internet Phone number www.metsaboard.com (358) 1046 11 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 70 Sector Report Nordic High Yield Update Millicom (BB+/Stable) ● Credit rating We rate Millicom BB+ with a Stable outlook and the senior unsecured bonds BB due to structural subordination. Millicom benefits from leading positions in its core markets and a relatively conservative financial profile. However, its 100% exposure to emerging markets in Africa and Latin America with significant political and economic risk limits the upside potential for the credit rating. The key for the company onwards is to increase the share of wallet among its customers, where it has clearly improved its content offering with new services and products. Q2 adjusted net debt/EBITDA was to 2.3x, down compared to the same period last year. We expect the company to deleverage over time. Key bond covenants and terms: Millicom Sr. Unsecured bonds: Change of control with put at 101 Debt incurrence covenants: 1. Net leverage <2.3x 2. Additional debt to mature after bonds Negative pledge: 1. General carve-out SEK 10m 2. Subsidiaries may create security over its assets or revenues provided that such debt instruments are not guaranteed by the issuer. ● Bond recommendations We maintain our Marketweight recommendation on Millicom’s 2017 bonds (rated one notch below the corporate rating as the bonds are structurally subordinated), which are trading fair compared with other BB names in the SEK bond market, in our view. We assign an over Overweight recommendation to the company´s 2020 USD bond. We argue that it looks attractive compared to its SEK equivalent. Overview chart ● Recent financial updates Millicom’s Q2 sales of USD 1,704m were in line with our estimate (USD 1,707m). EBITDA was USD 561m (including corporate costs), roughly in line with our expectations of USD 558m. The underlying EBITDA growth was strong at 9% year-onyear and the free cash flow generation continued. Looking ahead we expect more of the same with growth from data and cable to spur EBITDA growth supported by a reduced regulatory impact, further UNE synergies, and continued management focus on opex and capex. Millicom International Bond Cellular S.A Subsidiary Subsidiary Subsidiary Senior debt at subsidiaries Credit strengths Credit concerns ● Leading positions in all focus markets. ● ● Wide regional spread, with leading positions in all focus markets. Large exposure to emerging markets with significant political and economic risks. Competition is intense in Millicom’s markets. ● Significant organic growth opportunities due to the relatively low degree of utilisation of fixed and mobile telephony services in emerging markets. Strong cash flow generation, despite the capex-intensive nature of the industry. ● The impact of exchange rate fluctuations could be significant as many subsidiaries have US dollar denominated debt. ● Aggressive shareholder distribution policy. ● Selected outstanding bonds Issuer Millicom Millicom Millicom Sector Telecom Telecom Telecom Public Ba2/NR Ba2/NR Ba2/NR SEB BB BB BB Issue date 30/10/2012 30/10/2012 22/05/2013 Maturity date 30/10/2017 30/10/2017 22/05/2020 Cpn type Fixed Floating Fixed Cpn 5.1% 3mS+3.5% 4.8% Amount SEK 250m SEK 1750m USD 500m Z-sprd mid 184 170 396 Recommendation Marketweight Marketweight Overweight Source: Bloomberg and SEB Relative value Debt maturity profile as of Q3 2014 900 400 SSAB 800 Meda 350 Millicom Cloetta 600 Sefyr Värme 250 Getinge Aker 200 Stena Metall Nordax 150 NCC USDm Spread (bps) 700 Stora Enso 300 500 400 300 BillerudKorsnäs 100 Intrum Justitia 200 SOBI 50 Resurs Bank 100 Comhem 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Years to maturity 3.5 4.0 4.5 5.0 Opus Bonnier 2016 2017 2018 2019 Amount Available in Revolvers Source: SEB and Bloomberg SEB Credit Research 0 2020 2021 2022 Term Loan Outstanding 2023 2024 2025 Bond Principal Source: SEB and Bloomberg 15 September 2015 71 Sector Report Nordic High Yield Update Company description Millicom has operations in large parts of Latin America and Africa, covering a population under licence of around 250m. Millicom is slowly transforming into a full scale operator, entertainment and media company but still has a large share of its business from cost efficient pre-paid services, where the company is using a mass-market distribution. In Q3 2008, Millicom acquired Amnet, the largest Central American CATV company. During 2009, Millicom divested its Asian operators and entered Rwanda. In 2014 Millicom finally got approval to buy the Colombian cable operator UNE. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 923 -511 412 -139 0 273 1 -93 2 -13 2006 1,576 -909 667 -233 0 433 1 -88 8 -1 2007 2,631 -1,586 1,045 -382 0 663 4 -138 0 10 2008 3,412 -2,020 1,393 -525 0 867 9 -116 0 -56 2009 3,373 -1,903 1,470 -619 0 851 2 -162 33 -33 2010 3,920 -2,185 1,735 -693 0 1,042 0 -200 1,060 -32 2011 4,530 -2,556 1,974 -717 0 1,257 0 -187 -14 15 2012 5,275 -3,080 2,195 -865 -1 1,329 -24 -217 0 21 2013 5,565 -3,559 2,006 -934 -29 1,043 -15 -258 -18 -112 2014 6,386 -4,293 2,093 -1,169 0 924 55 -404 2,453 8 2015E 7,017 -4,758 2,259 -1,350 0 909 -35 -394 -157 -17 2016E 7,685 -5,102 2,582 -1,350 0 1,232 0 -406 0 0 2017E 8,295 -5,382 2,914 -1,355 0 1,559 5 -402 0 0 Reported pre-tax profit Minority interests Total taxes 171 6 -69 354 9 -118 539 -14 -87 704 113 -277 692 47 -188 1,870 -3 -227 1,071 -204 19 1,109 -186 -415 640 -204 -207 3,036 -158 -256 305 -130 -275 827 -160 -289 1,162 -170 -407 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 10 44.6 29.6 40.2 169 42.3 27.5 33.4 697 39.7 25.2 16.1 518 40.8 25.4 39.4 851 43.6 25.2 27.2 1,652 44.3 26.6 12.1 925 43.6 27.7 (1.8) 508 41.6 25.2 37.4 229 36.0 18.8 32.3 2,643 32.8 14.5 8.4 -99 32.2 12.9 90.0 377 33.6 16.0 35.0 585 35.1 18.8 35.0 0.1 n.a. 9.6 18.8 70.8 61.9 58.8 106.9 66.9 56.8 53.0 52.4 29.7 33.3 30.8 30.6 (1.2) 5.5 (1.9) (1.8) 16.2 18.0 22.4 170.4 15.6 13.8 20.7 (42.7) 16.3 11.2 5.7 3.5 5.5 (8.6) (21.5) (42.3) 14.9 4.3 (11.4) 374.4 9.9 7.9 (1.7) (89.9) 9.5 14.3 35.6 170.9 7.9 12.8 26.5 40.6 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2005 274 51 325 -281 45 0 0 45 206 0 -68 183 2006 499 17 516 -793 -277 0 266 -11 136 0 -65 60 2007 804 47 851 -1,020 -170 0 174 4 245 0 269 518 2008 1,085 62 1,147 -1,431 -284 0 -468 -753 286 0 -33 -500 2009 1,147 78 1,225 -769 456 0 256 712 124 0 1 837 2010 1,371 1 1,372 -730 642 -787 202 58 -248 -300 3 -488 2011 1,597 15 1,612 -793 819 -506 120 433 -103 -498 26 -142 2012 1,739 -15 1,724 -1,243 481 -541 -177 -237 644 -190 -30 187 2013 1,405 -6 1,399 -1,192 207 -264 -779 -836 779 0 7 -50 2014 1,101 57 1,158 -1,312 -154 -264 1,036 618 -804 0 -29 -215 2015E 1,373 -65 1,308 -1,298 10 -264 -131 -385 257 0 0 -128 2016E 1,667 4 1,671 -1,310 361 -280 0 81 0 0 0 81 2017E 1,855 3 1,859 -1,330 529 -300 0 229 0 0 0 229 Capex/sales (%) 30.4 50.3 38.8 41.9 22.8 18.6 17.5 23.6 21.5 20.5 18.5 17.0 16.0 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 597 645 12 936 371 2,560 2006 657 425 50 1,706 483 3,321 2007 1,175 569 14 2,189 468 4,414 2008 674 690 0 2,866 990 5,221 2009 1,511 564 0 2,871 1,045 5,991 2010 1,023 632 18 3,044 2,283 7,000 2011 881 833 63 3,335 2,170 7,282 2012 1,084 1,117 194 3,754 2,491 8,640 2013 909 1,791 122 3,493 2,458 8,773 2014 694 1,712 185 5,203 5,503 13,297 2015E 566 1,799 31 5,202 5,544 13,143 2016E 647 1,868 31 5,162 5,544 13,253 2017E 876 1,932 36 5,137 5,544 13,525 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 1,233 993 34 300 2,560 1,494 1,245 78 505 3,321 1,834 1,211 80 1,288 4,414 2,158 1,411 -26 1,678 5,221 2,347 1,334 -74 2,384 5,991 2,352 1,489 46 3,113 7,000 2,438 2,398 192 2,254 7,282 3,470 2,676 1,119 1,375 8,640 3,928 2,764 152 1,929 8,773 4,829 4,721 1,405 2,342 13,297 5,086 4,743 1,335 1,979 13,143 5,086 4,816 1,275 2,076 13,253 5,086 4,883 1,195 2,361 13,525 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 630 188.7 13.0 1.5 3.5 830 142.5 17.5 1.2 5.4 648 47.4 31.0 0.6 5.4 1,463 88.5 31.6 1.1 9.3 835 36.1 38.6 0.6 8.5 1,329 42.1 45.1 0.8 8.1 1,557 63.7 33.6 0.8 10.6 2,386 95.7 28.9 1.1 9.5 3,019 145.1 23.7 1.5 7.1 4,135 110.4 28.2 2.0 4.9 4,520 136.4 25.2 2.0 5.5 4,439 132.5 25.3 1.7 6.1 4,210 118.4 26.3 1.4 6.9 (%) Votes 37.2 10.8 5.6 Capital 37.2 10.8 5.6 Cash flow Balance sheet Main shareholders Name Kinnevik Dodge & Cox Funds Nordea Funds Management Title COB CEO CFO Name Cristina Stenbeck Mauricio Ramos Tim Pennington Company information Contact Internet Phone number www.millicom.com (352) 27 759 101 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 72 Sector Report Nordic High Yield Update Navigator Gas (B+/Positive) ● Credit rating Navigator’s credit rating is supported by the company’s position as the world’s largest owner and operator of handysize gas carriers and a modern and relatively new fleet. It also operates under relatively low leverage by shipping standards, with 3.0-4.0x net debt to EBITDA, and interest-bearing debt/capitalization of 40%. However, it is constrained by its exposure to a cyclical and capital intensive shipping sector. Also, the industry standard 12-month time-charter contract gives relatively poor cash flow visibility. Our biggest worry from a credit perspective is the large order book for handysize gas carriers. However, Navigator Gas is on track to de-leverage substantially and, assuming no more speculative contracts on new vessels, is in line for a rating upgrade. Key bond covenants and terms: Navigator senior unsecured bonds: Callable @104 (December 2015-2016) Callable @102 (December 2016- June 2017) Callable @ 101 (June 2017-) Change of control put @101 Financial covenants: Interest coverage ratio >3.0x Equity ratio >30% Asset coverage (market value of groups vessels + balance on escrow account) >120% of total debt Liquidity >USD 12.5m or 5% of total debt Positive working capital ● Bond recommendations We expect NAVIG01 to continue to pull to call (104 in December 2015), so there is limited tightening potential left in the bond. But we note that it is attractively priced compared with rating peers such as HLNG01 and GOLP01. Negative pledge preventing further indebtedness on Existing vessels (new assets can be pledged and existing indebtedness may be refinanced but capped to amount outstanding and same amort. profile) ● Recent financial updates Navigator Gas reported EBITDA of USD 48m, beating our expectations of USD 46m, but in line with consensus (Bloomberg) estimates. The main reason for the outperformance versus our estimates was another quarter with strong fleet utilization (98%). Towards the end of the quarter, one of Navigator’s vessels was involved in a collision with a container ship in an Indonesian port. While the repairs are covered by insurance, the company does not have a loss of hire insurance for its time charter, which will result in a loss of revenue during the repair of the vessel (this is expected to take six months at a loss of some USD 3m in EBITDA). In terms of guidance, management expects the current earnings trend to continue for the remainder of the year, adjusting for the collision. We expect Navigator’s leverage metrics to worsen temporarily as it takes delivery of newbuilds, but remain in the 3.0x-4.5x range. Overview Chart Bond issuer Navigator Holdings 100% Bank Debt Navigator Gas 100% Vessel owning companies Bank guarantor's and cash generating companies Credit strengths Credit concerns ● Market leading position in the handysize semi-refrigerated market. ● Cyclical business with significant embedded capital intensity. ● Solid operational track record, average utilization of 98% in the past seven years. ● ● Favourable market outlook with low expected supply growth and fundamental drivers to support demand. The company operates in international waters with some embedded political and event risk. ● Navigator has a relatively short operational history and is small in scale. ● Large, modern and versatile fleet. ● ● Strong and stable management. Typical contract durations in the segment are short, limiting longer-term visibility. Selected outstanding bonds Issuer Navigator Hlgs Ltd Ticker NAVIG01 Our view B+/B Sector Shipping Issue date 18.12.2012 Maturity date 18.12.2017 Coupon 9.000% Outst. Amount USD 125m ASW 618 Recommendation Marketweight Source: Bloomberg and SEB Indicative spreads Debt maturity profile (USDm) 700 300 NAVIG01 TOP04 650 SFLN02 550 200 GLOG01 TOP02 USDm 600 HLNG01 500 KSH01 100 OCY02 450 0 TOP03 400 2014 TKLNG01 350 0 1 2 3 4 5 Source: SEB SEB Credit Research 2015 2016 Secured bank debt 2017 2018 Bond Source: SEB 15 September 2015 73 Sector Report Nordic High Yield Update Company description Navigator Gas Holdings Ltd is a Marshall Islands-based international provider of seaborne transportation services to producers, traders and consumers of LPG, petrochemical gases and ammonia. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2007 51 -15 36 -11 0 25 2008 60 -28 31 -12 0 19 2009 73 -28 45 -15 0 29 2010 82 -47 35 -18 0 17 2011 89 -49 40 -19 0 21 2012 147 -83 64 -24 0 40 2013 238 -132 107 -37 0 70 2014 260 -99 161 -46 0 115 2015E 274 -98 176 -52 0 124 2016E 290 -110 180 -52 0 127 2017E 313 -126 188 -52 0 135 2 0 0 0 0 -17 -2 0 0 -2 0 0 -2 0 0 -9 0 0 -29 0 0 -30 0 0 -36 0 0 -45 0 0 -49 0 0 Reported pre-tax profit Minority interests Total taxes 27 0 0 2 0 0 27 0 0 15 0 0 19 0 0 31 0 -1 41 0 -1 85 0 -1 88 0 -2 82 0 -2 86 0 -2 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 27 70.4 48.9 0.2 2 52.3 32.3 6.3 27 61.4 40.2 0.3 15 43.1 21.3 0.7 19 44.8 23.8 0.6 31 43.6 27.1 1.7 41 44.8 29.9 2.0 84 61.9 37.7 1.0 87 64.3 42.5 2.0 80 61.9 43.8 2.0 84 59.9 43.2 2.0 0.0 n.a. 0.0 0.0 16.1 (13.8) (23.2) (91.1) 21.5 42.6 50.9 1,026.9 13.1 (20.6) (40.1) (43.6) 8.4 12.7 21.1 23.9 65.1 60.5 87.8 65.9 59.7 67.1 76.6 33.3 30.1 50.6 63.9 105.1 (4.0) 9.8 8.2 4.2 (0.9) 1.7 2.2 (7.7) 8.0 4.5 6.4 5.3 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2007 38 -9 29 -21 8 -20 0 -12 0 0 0 -12 2008 34 -12 22 -63 -41 0 0 -41 29 0 0 -12 2009 44 14 58 -138 -80 0 14 -66 80 0 0 14 2010 34 0 34 -5 29 -3 0 26 -12 0 0 14 2011 38 0 38 -86 -47 -10 0 -57 45 15 0 4 2012 57 0 57 -193 -136 -2 -10 -148 218 47 0 116 2013 77 1 79 -456 -377 0 0 -377 192 231 0 46 2014 129 1 130 -229 -99 0 0 -99 -33 0 0 -132 2015E 139 -4 136 -234 -98 0 0 -98 122 0 0 23 2016E 133 4 137 -331 -193 0 0 -193 200 0 0 7 2017E 137 18 156 -21 134 0 0 134 -68 0 0 66 Capex/sales (%) 40.9 106.3 190.9 6.0 96.3 131.4 194.8 75.0 79.9 114.0 6.8 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2007 13 2 23 270 0 308 2008 12 3 15 323 0 353 2009 11 7 1 432 0 450 2010 16 15 1 419 0 451 2011 27 11 1 486 0 525 2012 151 21 7 654 0 832 2013 195 32 11 1,087 0 1,325 2014 63 22 9 1,277 0 1,371 2015E 86 38 9 1,459 0 1,591 2016E 93 39 9 1,737 0 1,878 2017E 159 64 9 1,706 0 1,938 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 0 6 0 302 308 30 18 0 305 353 110 6 0 334 450 98 6 0 347 451 144 8 0 372 525 368 16 0 448 832 575 29 0 721 1,325 543 22 0 806 1,371 665 34 0 893 1,592 865 41 0 973 1,878 796 85 0 1,057 1,938 -13 (4.3) 98.1 (0.4) 18 5.9 86.4 0.6 31.3 99 29.8 74.2 2.2 18.2 82 23.6 77.0 2.3 15.0 118 31.6 70.9 3.0 16.3 217 48.6 53.8 3.4 7.3 381 52.8 54.4 3.6 3.7 480 59.6 58.8 3.0 5.3 579 64.8 56.1 3.3 4.9 772 79.4 51.8 4.3 3.9 637 60.3 54.5 3.4 3.8 Net interest expenses Value changes Other financial items Cash flow Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name WL Ross TA MCkay & Co David Butters (%) Votes 57.0 11.0 7.0 Capital 57.0 11.0 7.0 Management Title COB CEO CFO Name David Butters David Butters Niall Nolan Company information Contact Internet Phone number http://www.navigatorgas.com/ +44 (0)20 7340 4850 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 74 Sector Report Nordic High Yield Update Nokia (BB/Stable) ● Credit rating Nokia’s Q2 results surprised on the upside and Networks’ EBIT margin returned to a healthier level. This also however highlights the inherent volatility and rather low visibility in the mobile networks industry. On a more negative note Nokia posted operating cash outflow of EUR 258m (operating cash flow of EUR 790m in Q2 2014). The net cash balance was still strong but declined to EUR 3.8bn versus EUR 4.7bn at the end of Q1. The proposed merger with Alcatel-Lucent should improve Nokia’s longterm business risk profile, driven by increased geographic and product line diversification (Alcatel-Lucent is strong in the US), market position (in mobile networks new Nokia will be no.2 after Ericsson) and scale. But these key credit supportive factors, and potential synergies, are too remote to factor into our rating today. Key bond covenants and terms Nokia 2019 EUR bond: Negative pledge Cross default Negative covenants Restriction of activities Restrictive covenants ● Bond recommendations While we thought that it was premature to revise our credit rating following Nokia’s strong Q2 report, the better-than expected results from Nokia and Alcatel-Lucent may support bond market sentiment towards Nokia. The Nokia 2019 EUR bond, currently indicated at spread around 155bps, has widened significantly since the Q1 report. We think that Moody’s rating upgrade of Alcatel-Lucent and continued solid numbers from Nokia and Alcatel-Lucent over the next few quarters may support spread tightening. We have initiated recommendation on Nokia’s 15 May 2019 USD bond with an Overweight recommendation: the USD bond offers attractive pick-up vs. the Nokia EUR 2019 (Overweight). Overview chart Bond issuer Nokia 100% Advanced Technologies HERE NSN ● Recent financial updates Nokia delivered a strong Q2 2015 report beating the market’s expectations by 26% on a clean level. The main reason for the positive deviation was a higher share of software related sales in Networks. 2015 Networks guidance was left unchanged. Separately, Alcatel-Lucent a posted better-than-expected Q2 EBIT with positive free cash flow. Credit strengths ● ● ● ● Credit concerns Conservative financial policy and currently strong balance sheet, reinforced by divestment of D&S. Strong liquidity. Substantial intellectual property rights support earnings and cash generation. Alcatel-Lucent deal will support diversification, scale and market positions. Risk exposure to a volatile and maturing telecom networks business.. Exposed to fierce competition. Largely reliant on a single sector, mobile communications networks. Alcatel-Lucent deal implies significant restructuring expenses and execution issues. ● ● ● ● Selected outstanding bonds Issuer Nokia Nokia Sector Telecom Telecom Public Ba2/BB+ Ba2/BB+ SEB BB BB Issue date 2009-02-04 2009-05-07 Maturity date 2019-02-04 2019-05-15 Cpn type Fixed Fixed Z-sprd mid 155 214 Recommendation Overweight Overweight Source: Bloomberg and SEB Bond spread development Carlsberg 160 SCA 1,600 1,400 Securitas BBB Volvo 100 SKF 80 1,200 Swedish Match 120 Huhtamaki A Neste Oil 60 1,000 (EURm) 140 Spread (bps) Debt maturity profile 180 800 600 Metso 40 TDC 20 Ericsson 400 200 Nokia 0 0 1 2 3 4 5 6 7 8 Years to maturity 9 10 Alfa Laval Source: SEB and Bloomberg SEB Credit Research 0 2015E 2016E Bonds Sponda 2017E 2018E Convertible RCF drawn 2019E 2020E 2021=> RCF undrawn Source: SEB 15 September 2015 75 Sector Report Nordic High Yield Update Credit Research Analyst Mats Nyström (46) 8 506 233 11 [email protected] Company description Nokia – After divesting mobile phones business in early 2014, Nokia's operations now comprise three segments: Networks focusing on network infrastructure (89% of revenues), HERE maps services (7% of revenues) and Technologies focusing on developing Nokia’s industry leading patent portfolio (5% of revenues). Nokia’s key competitors in network infrastructure are Ericsson, Huawei and Alcatel-Lucent. Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 34,191 -28,812 5,379 -740 0 4,639 10 321 0 0 2006 41,121 -34,921 6,200 -712 0 5,488 28 207 0 0 2007 51,058 -41,867 9,191 -818 -388 7,985 44 239 0 0 2008 50,710 -44,683 6,027 -375 -686 4,966 6 -2 0 0 2009 40,984 -38,003 2,981 -843 -941 1,197 30 -265 0 0 2010 42,446 -38,612 3,834 -803 -961 2,070 1 -285 0 0 2011 38,659 -37,080 1,579 -715 -1,937 -1,073 -23 -102 0 0 2012 30,176 -31,153 -977 -634 -692 -2,303 -1 -340 0 0 2013 12,709 -11,334 1,375 -560 -296 519 4 -280 0 0 2014 12,732 -12,193 539 -297 -72 170 -12 -396 0 0 2015E 13,833 -11,760 2,073 -240 -64 1,769 0 -132 0 0 2016E 14,169 -12,121 2,048 -240 -64 1,744 0 -147 0 0 2017E 14,658 -12,450 2,208 -240 -64 1,904 0 -117 0 0 Reported pre-tax profit Minority interests Total taxes 4,970 0 -1,281 5,723 0 -1,357 8,268 459 -1,522 4,970 99 -1,081 962 631 -702 1,786 507 -443 -1,198 324 -290 -2,644 683 -1,145 243 124 -202 -238 8 1,408 1,637 0 -300 1,597 0 -250 1,787 0 -250 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 3,689 15.7 13.6 25.8 4,366 15.1 13.3 23.7 7,205 18.0 15.6 18.4 3,988 11.9 9.8 21.8 891 7.3 2.9 72.9 1,850 9.0 4.9 24.8 -1,164 4.1 (2.8) (24.2) -3,106 (3.2) (7.6) (43.3) -615 10.8 4.1 83.3 3,483 4.2 1.3 592.6 1,337 15.0 12.8 18.3 1,347 14.5 12.3 15.7 1,537 15.1 13.0 14.0 16.8 n.a. 7.1 5.5 20.3 15.3 18.3 15.2 24.2 48.2 45.5 44.5 (0.7) (34.4) (37.8) (39.9) (19.2) (50.5) (75.9) (80.6) 3.6 28.6 72.9 85.6 (8.9) (58.8) 0.0 0.0 (21.9) (161.9) 0.0 0.0 (57.9) 240.7 0.0 0.0 0.2 (60.8) (67.2) 0.0 8.6 284.3 938.1 0.0 2.4 (1.2) (1.4) (2.4) 3.5 7.8 9.2 11.9 2005 3,934 209 4,143 -743 3,400 -1,531 2,587 4,456 0 -4,258 402 600 2006 5,050 -572 4,478 -777 3,701 -1,553 1,783 3,931 0 -3,371 -93 467 2007 7,227 655 7,882 -872 7,010 -1,760 162 5,412 0 -3,819 1,732 3,325 2008 7,457 -4,260 3,197 -1,020 2,177 -2,048 -1,885 -1,756 2,891 -3,121 684 -1,302 2009 4,281 -1,034 3,247 -558 2,689 -1,546 -1,590 -447 850 0 -25 378 2010 3,957 812 4,769 -679 4,090 -1,519 -1,742 829 607 0 224 1,660 2011 2,187 -1,050 1,137 -597 540 -1,536 -269 -1,265 -109 0 3,018 1,644 2012 644 -367 277 -415 -138 -742 362 -518 0 0 0 -518 2013 1,017 -945 72 -407 -335 -71 -284 -690 1,429 0 -1,835 -1,096 2014 3,856 -2,582 1,274 -311 963 -1,392 5,030 4,601 -2,670 0 -514 1,417 2015E 1,476 -1,041 435 -250 185 -515 0 -330 0 0 0 -330 2016E 1,486 72 1,558 -250 1,308 -550 0 758 0 0 0 758 2017E 1,676 -116 1,560 -250 1,310 -623 0 687 0 0 0 687 1.8 1.6 1.4 1.8 1.3 1.6 1.5 1.4 3.2 2.4 1.8 1.8 1.7 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 9,910 9,041 439 2,347 561 22,298 2006 8,537 10,049 512 2,438 1,081 22,617 2007 11,753 17,541 666 3,519 4,120 37,599 2008 6,820 17,650 608 4,090 10,414 39,582 2009 8,873 14,740 623 3,426 8,076 35,738 2010 12,275 14,870 669 3,618 7,691 39,123 2011 10,902 14,553 708 3,792 6,250 36,205 2012 9,909 10,969 747 2,801 5,523 29,949 2013 8,971 4,825 806 6,998 3,591 25,191 2014 7,716 6,008 879 3,548 2,913 21,064 2015E 7,386 6,744 879 3,558 2,849 21,417 2016E 8,144 6,721 879 3,568 2,785 22,098 2017E 8,831 6,908 879 3,578 2,721 22,917 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 398 9,540 205 12,155 22,298 316 10,241 92 11,968 22,617 1,274 18,987 2,565 14,773 37,599 4,452 18,620 2,302 14,208 39,582 5,203 15,786 1,661 13,088 35,738 5,279 17,613 1,847 14,384 39,123 5,321 16,968 2,043 11,873 36,205 5,549 14,953 1,386 8,061 29,949 6,662 11,869 193 6,467 25,191 2,692 9,703 58 8,611 21,064 2,692 9,234 58 9,433 21,417 2,692 9,117 58 10,230 22,098 2,692 9,023 58 11,144 22,917 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover -9,512 (77.0) 55.4 (1.8) -8,221 (68.2) 53.3 (1.3) -10,479 (60.4) 46.1 (1.1) -2,368 (14.3) 41.7 (0.4) 38.3 -3,670 (24.9) 41.3 (1.2) 8.9 -6,996 (43.1) 41.5 (1.8) 10.3 -5,581 (40.1) 38.4 (3.5) 4.5 -4,360 (46.2) 31.5 4.5 (2.6) -2,309 (34.7) 26.4 (1.7) 3.5 -5,024 (58.0) 41.2 (9.3) 1.1 -4,694 (49.5) 44.3 (2.3) 10.0 -5,452 (53.0) 46.6 (2.7) 9.1 -6,139 (54.8) 48.9 (2.8) 10.9 (%) Votes 4.1 2.3 1.6 Capital 4.1 2.3 1.6 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Dodge & Cox Ilmarinen Mutual Pension Insurance Varma Management Title COB CEO CFO Name Risto Siilasmaa Rajeev Suri Timo Ihamuotila Company information Contact Internet Phone number www.nokia.com (358) 7180 08000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 76 Sector Report Nordic High Yield Update North Atlantic Drilling (B-/Negative) Key bond covenants and terms ● NADL 2018 senior unsecured bonds: Change of control put @ 101 Financial covenants: Market adjusted equity ratio > 30 Liquidity > USD 75m Credit rating We recently downgraded North Atlantic Drilling from B to B- with a Negative outlook. The negative outlook reflects our expectation that leverage will increase significantly due to more idle time and lower day rate assumptions. On our estimates the company might see the need for additional liquidity in 2016. Our base case is that Seadrill will provide support through either shareholder loans or through acquiring the rest of the company. We have downgraded North Atlantic Drilling from B to B- and maintain our Negative outlook. The rating includes a one-notch uplift based on our belief that Seadrill will provide support for the company, as Seadrill currently owns 71% of the shares outstanding and has guaranteed the secured debt and Norwegian bonds. Bank covenants (tested against SDRL): Minimum liquidity > USD 75m Interest coverage ratio > 3x Current ratio >1x Equity ratio > 30 (market adjusted) NIBD/EBITDA <4.5x ● Bond recommendations We expect the drilling market to worsen in 2016, which will further lower rig valuations and apply pressure on credit metrics and continue to widen bonds spreads. On a relative basis we prefer NADL01 over NADL 2019 because NADL01 is guaranteed by Seadrill. The NADL 2019 bonds have a weaker covenant package and we feel that an irrevocable Seadrill guarantee is worth significantly more than 150bp per year. Overview chart ● Recent updates North Atlantic Drilling reported an EBITDA of USD 119m versus consensus of USD 107m. NIBD/EBITDA was 4.7x, increasing by 0.1x q-o-q. Based on our new drilling market assumptions, we expect year-end 2015 NIBD/EBITDA to reach 7.7x and year-end 2016 to reach 11.3x Credit strengths Credit concerns ● Strong market position in the North Atlantic basin with support from an extensive track record of operations in the North Sea. ● ● Financially strong committed long-term owner. Highly cyclical and capital intensive industry. ● Highly leveraged balance sheet. ● High redeployment risk in the coming quarters, with a potential liquidity squeeze coming. Selected outstanding bonds Issuer Ticker Our view Sector North Atlantic Drilling NADL01 B/B+ Oilservice North Atlantic Drilling B/B- Oilservice Issue date 30.10.2013 31.01.2014 Maturity date 30.10.2018 01.02.2019 Coupon Outst. Amount Nibor + 440 NOK 1500m 6.250% USD 600m mid price 69.05 74.25 Z-spread Recommendation 1760 Underweight 1379 Underweight Source: Bloomberg and SEB Bond spreads Maturity profile (USDm) 1500 NADLNO 6 1/4 02/01/19 OCRGNO 7 1/4 04/01/19 1400 OCRGNO 6 1/2 10/01/17 1300 ISDRIL 9 1/2 04/03/18 1200 SONG04 VTG 7 1/2 11/01/19 DEED01 SDRLNO 5 5/8 09/15/17 1100 BDA01 SONG05 SNMARA 8 7/8 BDRLNO 8 09/23/19 07/03/18 SDRL08 AWDR01 PACD 7 1/4 12/01/17 1000 SDRL07 900 800 0.0 1.0 2.0 3.0 4.0 5.0 Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 77 Sector Report Nordic High Yield Update Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Company description North Atlantic Drilling was established in February 2011 through an equity carve-out from Seadrill, which remains the majority shareholder in the company. The fleet comprises eight units including one ultra-deep water drillship, two ultra-deep water semis (one under construction), one deep water semi and one mid-water semi, in addition to three ultra-harsh environment jackups. Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2011 711 -286 425 -106 0 319 2012 1,045 -478 567 0 0 567 2013 1,324 -776 549 -188 0 361 2014E 1,252 -650 602 -196 0 406 2015E 930 -510 419 -166 0 253 2016E 1,059 -586 473 -166 0 307 Net interest expenses Value changes Other financial items -61 0 -56 -83 0 -29 -84 0 -12 -70 0 -42 -78 0 0 -72 0 0 Reported pre-tax profit Minority interests Total taxes 201 0 -21 454 0 -55 265 0 -29 294 0 -31 176 0 -37 235 0 -42 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 181 59.7 45.7 10.2 400 54.3 54.3 12.0 236 41.4 32.3 10.9 262 48.1 33.6 10.7 139 45.1 27.3 21.1 193 44.7 29.0 18.0 0.0 n.a. 0.0 0.0 49.9 33.5 77.8 125.4 6.9 (3.2) (36.4) (41.6) 8.1 9.7 12.6 10.8 (23.0) (30.3) (37.6) (40.1) 13.9 12.8 21.1 33.7 (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2011 -152 577 425 -419 6 -74 104 36 112 0 0 148 2012 461 -196 264 -199 65 -198 -12 -145 -52 147 0 -49 2013 349 33 382 0 382 -205 0 177 0 0 0 177 2014E 489 -225 265 -469 -204 -109 -417 -731 342 0 0 -389 2015E 342 -2 340 -595 -255 -109 109 -255 365 0 0 110 2016E 401 -68 333 -46 287 0 0 287 -156 0 0 131 Capex/sales (%) 60.1 19.1 0.0 38.9 64.0 4.3 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2011 147 241 0 2,757 481 3,627 2012 98 500 0 2,829 481 3,908 2013 109 274 0 2,835 481 3,699 2014E -280 358 0 3,263 481 3,822 2015E -170 321 0 3,692 481 4,324 2016E -38 348 0 3,572 481 4,362 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 2,627 475 0 526 3,627 2,453 612 0 844 3,909 1,748 1,093 0 858 3,699 2,084 711 0 1,027 3,822 2,449 709 0 1,166 4,324 2,293 710 0 1,359 4,362 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 2,479 471.6 14.5 5.8 6.4 2,375 281.5 21.6 4.2 6.8 1,639 191.2 23.2 3.0 6.5 2,364 230.1 26.9 3.9 8.4 2,619 224.6 27.0 6.2 5.1 2,332 171.6 31.1 4.9 6.0 Cash flow Balance sheet Main shareholders Name Seadrill Ltd Argonaut Capital Partners Heimen Holding LTD (%) Votes 70.4 0.9 0.7 Capital 70.4 0.9 0.7 Management Title COB CEO CFO Name John Fredriksen Alf Ragnar Lovdal Ragnvald Kavli Company information Contact Internet Phone number www.nadlcorp.com (47) 5130 9000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 78 Sector Report Nordic High Yield Update NSP (B+/Negative) Key bond covenants and terms: NSP Sr. Secured bonds: Callable @ 104 (December 2017-June 2018) Callable @ 103 (June – December 2018) Callable @ 102 (December 2018 – June 2019) Callable @ 101 (June 2019 - ) Change of control put @ 101 Voluntary partial repayment of SEK 20m annually for the first three years Financial covenants: 1. Maintenance covenant: Net debt/EBITDA < 4.0x 2. Incurrence test: Net debt /EBITDA < 4.0x and interest coverage ratio of > 3.0x 3. Dividend restriction: < 60% of consolidated net profit ● Bond recommendations NSP’s senior secured Stibor +525 bond, due 27 June 2014, traded down during the summer on concerns that DKR’s bid would be successful. The price has however not recovered after the bid was withdrawn, probably reflecting perceived higher event risk. This offers a buying opportunity in our view as we believe in NSP’s underlying business and we resume coverage of the bond with an Overweight recommendation. Carve-outs: 1. SEK 120m carve-out for financial leasing 2. SEK 14m overdraft facility 3. SEK 10m general carve-out 4. Operating leases can be incurred without restrictions ● Recent financial updates NSP’s Q2 earnings showed signs of underlying improvement. Sales grew 8%, driven by both new restaurants and higher sales at comparable restaurants. The EBITDA margin improved to 7.1% from 6.4% despite higher operating costs related to the launch of KFC and TGI Friday’s. The first TGI Friday’s restaurant opened this spring and is now contributing to operating profit in Denmark. The opening of the first KFC has been delayed and is now scheduled to open later in late November. Net leverage remained unchanged over the quarter with the lease-adjusted net debt to EBITDA ratio at 5.4x. Overview chart SEK 200m sr. sec. notes NSP Holding AB publ ● Credit rating On 27 July, Danish restaurant company DKR withdrew its bid for NSP (launched on 15 April) after a prolonged and messy process. The bid was conditional upon bondholders accepting a delisting of NSP, which was rejected in a bondholder vote. Now that the situation has been resolved, NSP will continue with an unchanged strategy, focusing on the launch of KFC and TGI Friday’s. However, the bid has likely diverted management’s attention from this process and we expect the opening of new restaurants to be somewhat delayed. This is not necessarily a concern as related costs are largely flexible and arise when restaurants are established. However, NSP has estimated that the total costs related to the bid will be SEK 7m, which will more or less erase the company’s net profit for 2015, which NSP had previously guided would reach SEK 8m. We consider these costs to be one-offs and they do not impact our credit assessment. Operating subsidiaries Credit strengths Credit concerns ● Economies of scale due to position as largest restaurant company in Sweden. ● Reduced earnings visibility due to ambitious growth strategy ● Average remaining maturity of franchise contract portfolio is ~11 years ● Significant execution risks related to launch of new brands ● Relatively flexible cost base as staffing can be adjusted to peak/low demand ● Fierce competition in the fast food industry ● Strong historical and projected cash flow supported by low WC needs ● Highly leveraged on an adjusted basis due to operating leases Selected outstanding bonds Issuer NSP Sector HY Public SEB N.R./N.R. B+ Issue date 27/06/2014 Maturity date 27/06/2019 Cpn type Cpn Floating 3mS +525 Amount SEK 200m Spread 672 Recommendation Overweight Source: Bloomberg and SEB Relative value Debt maturity profile (31 December 2014) 900 800 Spread (bps) 700 600 500 400 300 200 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 Golden Heights NSP Nynas SAS Textilia Bravida Björn Borg Arise Diamorph Wallvision WestAtlantic Opus Aligera Orexo Consilium Ainmt BE Bio Energy JSM Fin SAA Lauritz.com Source: SEB and Bloomberg SEB Credit Research 300 250 200 Convertible debt Financial leasing 2019 Bond 150 100 50 0 < 1yr 1-2yr 2-5yrs >5yrs Source: SEB and company reports 15 September 2015 79 Sector Report Nordic High Yield Update Company description Founded in 2004, Nordic Service Partners is today one of Sweden’s largest restaurant companies operating around 60 Burger King restaurants in Sweden and Denmark under franchise agreements. Furthermore, the company has recently signed agreements to launch Kentucky Fried Chicken (KFC) in Sweden and TGI Friday’s in Denmark. In 2013 NSP had around 2,162 employees, sales of SEK 826m and an EBITDA margin of 7.6%. The company has been listed on Nasdaq OMX Stockholm since 2008. Credit Research Analyst Ebba Lindahl (46) 8 506 232 08 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 249 -244 4 -13 0 -9 2006 387 -364 23 -8 0 14 2007 570 -541 29 -18 0 10 2008 666 -661 5 -30 0 -25 2009 699 -663 36 -33 0 4 2010 634 -589 45 -30 0 15 2011 623 -583 40 -29 0 11 2012 725 -675 50 -34 0 16 2013 781 -724 56 -35 0 21 2014 826 -764 63 -39 0 24 2015E 864 -797 66 -42 0 24 2016E 1,005 -924 81 -46 0 35 2017E 1,152 -1,050 102 -48 0 54 Net interest expenses Value changes Other financial items 0 0 0 -4 0 0 -9 0 2 -15 0 5 -12 0 -1 -7 0 0 -9 0 -2 -11 0 -2 -10 0 -1 -12 0 0 -16 0 -7 -18 0 0 -20 0 0 Reported pre-tax profit Minority interests Total taxes -9 0 1 11 0 11 3 0 -4 -35 0 0 -10 0 1 7 0 4 0 0 2 4 0 -2 10 0 -3 11 0 -6 1 0 0 18 0 -4 34 0 -8 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -8 1.8 (3.6) 7.7 22 5.8 3.7 (105.6) -2 5.1 1.9 159.7 -35 0.8 (3.7) 0.8 -9 5.2 0.5 12.3 11 7.1 2.4 (48.8) 2 6.4 1.7 658.2 2 6.9 2.2 61.6 7 7.2 2.7 27.6 5 7.6 2.9 57.6 1 7.7 2.8 22.0 14 8.1 3.5 22.0 27 8.9 4.7 22.0 0.0 n.a. 0.0 0.0 55.4 405.8 0.0 0.0 46.5 28.2 (26.7) (74.8) 16.6 (81.2) 0.0 0.0 5.5 567.3 0.0 0.0 (9.3) 23.3 312.0 0.0 (2.4) (11.6) (29.5) 0.0 16.5 27.0 50.2 0.0 8.6 12.0 34.8 177.0 5.9 11.6 10.4 9.6 4.5 5.8 3.1 (90.8) 16.4 22.3 44.3 1,600.5 14.6 25.8 53.7 94.8 2005 5 7 11 -4 7 0 -8 -1 -2 1 0 -2 2006 18 5 23 -15 8 0 -96 -88 85 22 -11 8 2007 20 12 32 -33 -1 0 -43 -45 39 0 0 -5 2008 -15 5 -11 -37 -47 0 20 -27 21 17 -4 7 2009 30 -3 27 -23 4 0 -2 2 -49 36 3 -8 2010 35 -13 23 -26 -4 0 0 -3 -29 0 20 -12 2011 28 5 33 -34 -1 0 -1 -2 50 0 -28 20 2012 34 4 38 -18 19 0 -17 2 4 0 0 6 2013 48 4 52 -18 34 0 0 34 -35 0 -5 -6 2014 48 -7 41 -51 -10 -3 14 1 69 3 0 72 2015E 43 -5 38 -21 18 -3 0 15 0 0 0 15 2016E 60 5 64 -23 41 -4 0 37 0 0 0 37 2017E 75 5 80 -26 54 -5 0 49 0 0 0 49 1.6 3.8 5.8 5.5 3.2 4.2 5.5 2.6 2.3 6.2 2.4 2.3 2.2 2005 23 11 0 27 0 61 2006 31 22 4 81 147 284 2007 25 49 6 121 202 403 2008 32 44 6 133 220 435 2009 25 35 6 114 205 385 2010 12 28 11 103 188 342 2011 32 41 11 134 187 405 2012 38 48 10 145 203 445 2013 32 58 10 160 190 450 2014 105 58 13 178 203 557 2015E 120 58 13 173 203 566 2016E 157 59 13 183 203 615 2017E 206 61 13 217 203 699 14 41 0 5 61 100 90 0 94 284 179 122 0 102 403 218 121 0 95 435 166 106 0 114 385 140 86 0 116 342 178 103 0 125 405 200 123 0 122 445 201 113 0 136 451 284 123 0 149 556 300 119 0 147 565 334 125 0 156 615 389 131 0 178 699 -9 (170.2) 8.6 (2.0) 18.7 70 74.0 33.1 3.1 6.0 154 151.4 25.2 5.3 3.0 186 194.9 21.9 34.2 0.4 141 124.3 29.5 3.9 3.0 128 110.0 34.0 2.9 5.8 146 117.0 30.8 3.7 4.0 162 132.4 27.5 3.2 4.6 169 123.9 30.2 3.0 5.3 179 120.6 26.7 2.9 5.1 181 123.2 25.9 2.7 3.8 177 113.2 25.4 2.2 4.3 184 103.2 25.5 1.8 4.7 (%) Votes 21.7 18.4 11.1 Capital 21.7 18.4 11.1 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Danske Koncept Restauranger Holding Bohus Enskilda Abrinvest AB Management Title COB CEO CFO Name Jaan Kaber Morgan Jallinder Johan Wedin Company information Contact Internet www.nordicservicepartners.com Phone number +46 8 410 189 50 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 80 Sector Report Nordic High Yield Update Nynas (B+/Stable) ● Credit rating We rate Nynas B+ with a stable outlook. We rate the senior unsecured bond in line with the corporate rating. Rating-supportive factors include: strong market positions; potential for long-term growth in NSP through: industrialisation in emerging markets; long-term relationships with its main customers; and secured access to raw materials through one of the company’s owners. The acquisition of a refinery in Harburg will increase Nynas’s capacity in the higher margin NSP business. The weaknesses in the business profile include high volatility in the industry, cyclical demand and high operating leverage. Key bond covenants and terms: Nynas Sr. Unsecured bonds: Change of control with put @ 101 Incurrence test for dividends or additional debt (pari passu or subordinated) other than permitted debt: 1. Adj EBITDA/net int payables >3.0x 2. Net debt/adj EBITDA <4.0x ● Bond recommendations From our viewpoint, the current owners should have an incentive to divest their holding. Moreover, considering the high IPO activity in the market as well as the quality of Nynas´ reporting, and that the company is, arguably, seeing something of a turnaround, we argue that Nynas will consider listing its shares. Although, obviously, timing is difficult to comment on, were this to happen, we would expect a further tightening. Hence, we have raised our recommendation from Marketweight to Overweight. Overview chart PDV Europé B.V. Neste Oil AB 49.999% 50.001% RCF EUR 750m Bond SEK 650m Nynäs AB USPP USD 50m 50% 100% Subsidiares Joint ventures Subsidiares Subsidiares ● Recent financial updates The Q2 report (reported on 28 August) was decent in our view in spite of revenues contracting significantly, due to the fall in the oil price. Volumes actually grew for both NSP and Bitumen and when adjusting for unrealized hedging activities and the mark-tomarket impact, group margins improved. According to management the market continues to be strong, although certain geographies (such as Brazil, Russia and the Ukraine) remain challenging. On the supply side there are no disruptions in terms of PdVSA sourcing. Positively, Nynas will introduce hedge accounting as of Q3 2015, which will make the quarters more comparable, especially as of next year (there are still some contracts that need to run out). We predicate our B+ rating on the company leverage staying below 4.0x, which we expect the company to achieve. Credit strengths Credit concerns ● Market leader in growing niche segment. ● Subject to oil price movements. ● Longstanding customer relationships. ● High dependency on single raw material supplier. ● Capital intensive industry creating high entry barriers. ● Expected negative cash generation on the back of heavy investments. ● Increasing focus on growing and profitable niche. ● High leverage levels post transaction. Selected outstanding bonds Issuer Nynas Public N.R./ SEB B+ Issue date 26/06/2014 Maturity date 26/06/2018 Cpn 3mS+750 Amount SEK 650m Z-sprd mid 620 Recommendation Overweight Source: Bloomberg and SEB Relative value Debt maturity profile 900 8,000 Golden Heights NSP 7,000 Nynas 800 SAS Textilia 6,000 Bravida 700 Björn Borg 5,000 600 Diamorph Wallvision WestAtlantic 500 SEKm Spread (bps) Arise RCF 4,000 Opus Aligera 3,000 Orexo 400 Consilium Ainmt 2,000 BE Bio Energy 300 JSM Fin SAA 1,000 SEK bond Lauritz.com 200 EG Gruppen 0.0 1.0 2.0 3.0 Years to maturity 4.0 5.0 6.0 2015 2016 2017 Bond Source: SEB and Bloomberg SEB Credit Research USPP 0 2018 2019 RCF Source: SEB. Assumed SEK/USD: 8.0. Assumed SEK/EUR: 9.5. 15 September 2015 81 Sector Report Nordic High Yield Update Company description Nynas is a leader in the relatively narrow NSP/Bitumen niche within the oil industry. Nynas sells naphthenic specialty oils in large parts of the world and the company has sales offices in some 30 countries, from the US and Mexico to Australia, and a global distributor network. In Western Europe, Nynas is also one of the leading suppliers of bitumen for production of asphalt. In 2013, sales amounted to SEK 19.5bn and Nynäs employed some 860 people. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2007 18,644 -17,054 1,590 -316 0 1,275 2008 23,307 -22,351 956 -295 0 662 2009 20,150 -19,068 1,082 -271 0 811 2010 20,579 -19,502 1,077 -396 0 681 2011 23,223 -22,191 1,032 -446 0 586 2012 24,471 -23,816 655 -419 0 236 2013 19,527 -18,995 532 -554 0 -22 2014 22,522 -21,187 1,335 -561 0 774 2015E 19,300 -18,429 871 -432 0 439 2016E 20,800 -19,621 1,179 -495 0 684 2017E 20,800 -19,598 1,202 -506 0 696 -127 0 0 -184 0 0 -158 0 0 -71 0 0 -132 0 8 -275 0 -14 -264 0 0 -308 0 0 -279 0 0 -279 0 0 -279 0 0 Reported pre-tax profit Minority interests Total taxes 1,148 0 -368 477 0 -122 653 0 -178 610 0 -189 461 0 -141 -53 0 18 -286 0 -20 466 0 -187 160 0 -64 405 0 -162 417 0 -167 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 780 8.5 6.8 32.0 355 4.1 2.8 25.5 475 5.4 4.0 27.3 421 5.2 3.3 31.0 320 4.4 2.5 30.6 -35 2.7 1.0 34.2 -306 2.7 (0.1) (7.0) 279 5.9 3.4 40.1 96 4.5 2.3 40.0 243 5.7 3.3 40.0 250 5.8 3.3 40.0 0.0 n.a. 0.0 0.0 25.0 (39.9) (48.1) (58.4) (13.5) 13.2 22.6 36.9 2.1 (0.4) (16.0) (6.6) 12.8 (4.2) (14.0) (24.4) 5.4 (36.5) (59.7) 0.0 (20.2) (18.8) 0.0 0.0 15.3 150.8 0.0 0.0 (14.3) (34.8) (43.3) (65.7) 7.8 35.4 56.0 153.4 0.0 2.0 1.7 2.9 2007 1,106 -644 462 -389 73 -308 0 -235 268 0 0 33 2008 627 -1,575 -948 -488 -1,436 -371 0 -1,807 1,919 0 0 112 2009 954 1,454 2,408 -724 1,684 -363 0 1,321 -1,370 0 0 -49 2010 798 -490 308 -540 -232 0 0 -232 313 0 0 81 2011 672 -989 -317 -907 -1,224 0 0 -1,224 1,362 0 0 138 2012 402 376 778 -344 434 0 0 434 157 0 0 590 2013 153 124 277 -206 71 0 0 71 176 0 0 247 2014 864 -158 706 -545 161 0 0 161 -147 0 0 14 2015E 528 460 988 -850 138 0 0 138 0 0 0 138 2016E 738 -214 524 -600 -76 0 0 -76 0 0 0 -76 2017E 756 0 756 -300 456 0 0 456 0 0 0 456 2.1 2.1 3.6 2.6 3.9 1.4 1.1 2.4 4.4 2.9 1.4 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2007 244 4,965 0 2,305 113 7,627 2008 323 5,933 0 2,711 110 9,077 2009 269 5,188 0 3,167 0 8,624 2010 243 5,373 0 3,297 0 8,913 2011 250 6,567 322 3,453 124 10,716 2012 739 5,468 96 3,645 93 10,040 2013 937 4,965 0 3,652 0 9,554 2014 898 6,375 426 3,783 56 11,538 2015E 1,036 5,463 426 4,201 56 11,181 2016E 960 5,888 426 4,306 56 11,635 2017E 1,416 5,888 426 4,100 56 11,885 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 1,768 2,894 0 2,966 7,627 3,726 2,444 0 2,907 9,076 2,338 3,246 0 3,042 8,626 2,591 2,885 0 3,438 8,914 3,942 3,050 0 3,724 10,716 4,010 2,379 0 3,652 10,041 4,169 2,167 0 3,218 9,555 3,951 4,162 0 3,425 11,538 3,951 3,710 0 3,521 11,182 3,951 3,920 0 3,764 11,636 3,951 3,920 0 4,014 11,886 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 1,524 51.4 38.9 1.0 12.5 3,403 117.1 32.0 3.6 5.2 2,069 68.0 35.3 1.9 6.8 2,348 68.3 38.6 2.2 15.2 3,692 99.1 34.8 3.6 7.8 3,333 91.3 36.4 5.1 2.4 3,410 106.0 33.7 6.4 2.0 3,421 99.9 29.7 2.6 4.3 3,283 93.2 31.5 3.8 3.1 3,359 89.2 32.4 2.9 4.2 2,903 72.3 33.8 2.4 4.3 Net interest expenses Value changes Other financial items Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name PDV Europa B.V. Neste Oil (%) Votes 50.0 50.0 Capital 50.0 50.0 Management Title COB CEO CFO Name Matti Lievonen Gert Wendroth Bo Askvik Company information Contact Internet Phone number www.nynas.com +46-8-602 12 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 82 Sector Report Nordic High Yield Update Ocean Yield (BB/Stable) Key bond covenants and terms: Ocean Yield unsecured bonds: Dividend restriction (liquidity must exceed USD 40m and 3% of its net interest-bearing debt after the payment) Liquidity > the higher of USD 25m or 3% of net interest-bearing debt Financial covenants: Equity ratio > 25 Interest coverage ratio > 2.0x Overview Chart ● Credit rating Ocean Yield’s credit rating was upgraded following its acquisition of four product tankers. The rating is supported primarily by its business risk profile – where long-term bareboat charter contracts give limited operational risk and strong cash flow visibility. Furthermore, the company’s assets are well diversified across sectors and counterparties, with no individual counterparty nor asset class representing more than 15% of the total EBITDA backlog (however, some 40% of the backlog is related to oil services). We find further support in Ocean Yield’s credit rating in the company’s modern assets and diversification across asset types and counterparties, which have improved significantly since the company’s inception. In terms of financial risk, the biggest rating constraint is high leverage, the company’s ambitious capex plans and its aggressive dividend policy. ● Bond recommendations OCY02 and OCY03 are currently indicated around +409bp and +448bp respectively. We find OCY02 attractive against peers such as SNI04 (+414bp) and TLG01 (+381bp), as it has underperformed, we expect, due to its oil service exposure. OCY03 (+448bp) looks attractive against SNI06 (+431bp) but also relative to where OCY02 is trading. We feel that the 51 basis point uplift for taking one year longer risk is attractive when taking into consideration that there is limited refinancing and no contracts maturing between the two bonds. ● Recent financial updates In July, Ocean Yield announced that it had acquired four 115,000 DWT LR2 product tankers for a total consideration of USD 198m, including a USD 10m seller’s credit. The deal will be funded with cash at hand and USD 148m in secured bank financing. The company reported EBITDA of USD 56m compared to our estimate of USD 56m. We estimate that the four acquired product tankers will increase peak leverage (which we estimate to be in Q3 2016) by 0.5x to 5.5x, while boosting annual EBITDA by an expected USD 20m annually. Credit strengths Credit concerns ● Strong order backlog giving cash flow visibility. ● High concentration risk in counterparties. ● Access to both credit and equity markets giving a diversified funding source. ● Small current fleet. ● Strong ownership through its majority owner, Aker Asa. ● Capital-intensive industry with embedded cyclicality. ● Young and modern vessel fleet. ● High leverage and aggressive dividend strategy. Selected outstanding bonds Issuer Ocean Yield Asa Ocean Yield Asa Ticker Our view Sector OCY02 OCY03 BB/BBBB/BB- Shipping Shipping Issue date Maturity date 26.03.2014 29.04.2015 26.03.2019 29.04.2020 Coupon Outst. Amount ASW Recommendation Nibor + 390 Nibor + 400 NOK 1000m NOK 1000m 457 500 Markedweight Overweight Source: Bloomberg and SEB Indicative spreads Debt maturity profile (NOKm) 700 DOFSUB07 NAVIG01 650 FAR03 PRS09 FOE05 600 GLOG01 550 AKER09 PRS10 DOFSUB05 PRS08 FOE04 500 SOFF03 PRS07 450 AKER08 400 0.0 2.0 AKSO02 BWO03 AKER10 KSH01 AKER07 OCY02 GOLP01 AKSO01BWO02 BWO02 AKER11 BWO01 4.0 6.0 8.0 10.0 Source: SEB SEB Credit Research Source: SEB 15 September 2015 83 Sector Report Nordic High Yield Update Company description Ocean Yield is a maritime leasing specialist. The portfolio consists of an FPSO, two offshore construction vessels, two AHTSs, six car carriers, three ethane carriers, eight chemical tankers, four product tankers and one diving support and construction vessel. Most of the contracts are hell-andhigh-water bareboat contracts and initially of 10-15 years’ duration. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2012 510 -230 280 -58 0 223 2013 524 -217 307 -62 0 245 2014 549 -236 313 -64 0 248 2015E 516 -219 296 -70 0 227 2016E 654 -308 347 -80 0 267 2017E 661 -333 328 -86 0 242 Net interest expenses Value changes Other financial items -40 0 -5 -33 0 -9 -37 0 -20 -51 0 -10 -53 0 -10 -60 0 0 Reported pre-tax profit Minority interests Total taxes 178 0 -1 204 0 -5 191 0 -13 166 0 -9 203 0 -10 182 0 -9 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 178 54.9 43.6 0.3 199 58.6 46.8 2.3 179 57.0 45.3 6.5 157 57.5 44.0 5.1 193 53.0 40.8 5.0 173 49.7 36.7 5.0 0.0 n.a. 0.0 0.0 2.6 9.4 10.2 14.4 4.8 2.0 1.3 (6.1) (6.0) (5.2) (8.7) (13.3) 26.9 16.9 17.6 22.6 1.0 (5.3) (9.1) (10.4) (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2012 235 -9 226 -168 58 0 0 58 0 0 0 58 2013 261 6 267 -243 24 -126 0 -103 0 0 0 -103 2014 243 63 306 -65 241 -144 0 97 0 0 0 97 2015E 227 -4 223 -775 -552 -99 0 -651 632 0 0 -19 2016E 273 15 288 -400 -112 -45 0 -157 176 0 0 18 2017E 259 1 260 -60 200 -39 0 160 -163 0 0 -2 Capex/sales (%) 36.8 42.8 18.8 150.3 61.1 9.1 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2012 104 103 0 1,048 232 1,487 2013 113 79 0 1,196 232 1,620 2014 122 123 0 1,339 232 1,817 2015E 104 116 0 2,044 232 2,496 2016E 122 147 0 2,364 232 2,865 2017E 120 148 0 2,338 232 2,839 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 810 161 0 516 1,487 780 101 0 740 1,620 830 238 0 749 1,817 1,463 227 0 806 2,496 1,638 273 0 954 2,865 1,476 276 0 1,088 2,839 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 707 136.9 34.7 2.5 6.9 666 90.1 45.7 2.2 9.0 708 94.5 41.2 2.3 8.4 1,359 168.5 32.3 4.6 5.8 1,516 158.9 33.3 4.4 6.5 1,356 124.6 38.3 4.1 5.4 Cash flow Balance sheet Main shareholders Name State Street Bank and Trust Folketrygdefonnet RBC Investor Service (%) Votes 23.5 6.2 4.6 Capital 23.5 6.2 4.6 Management Title COB CEO CFO Name Michael Raymond Parker Karl Ronny Klungtvedt Sven Børre Larsen Company information Contact Internet Phone number www.prosafe.com (47) 51 64 25 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 84 Sector Report Nordic High Yield Update Orc Group Holding (B/Negative) ● Credit rating We rate Orc B with a negative outlook. The rating is supported by the company´s high share of recurring revenues, the relatively high product stickiness, geographical diversification and rather predictable cash flow generation. At the same time the product and customer diversification is poor, industry challenges as well as the company´s relative small size are credit negatives. The company has for some time suffered from underlying decline in sales and increasing costs, resulting in falling margins. We positively view the acquisition of Tbricks. Although we have seen no impact of this yet, the company states that it has experienced a positive market response to acquiring Tbricks and that several clients have committed to migrating to the new Orc Tbricks platform. We await the impact of that acquisition. Key bond covenants and terms: Senior secured 8.5% 2017 bonds Change of control with put at 101 Debt incurrence covenants: 1. Net leverage <3.0x 2. Interest coverage >2.0x 3. Additional debt to mature after bonds Carve-outs: 1. SEK 145m WC facility 2. SEK 10m general annual carve-out Restricted payment basket: 50% of net income if net leverage <3.0 and interest coverage >2.0x ● Bond recommendation Orc’s senior secured 8.5% bond due 27 November 2017 is one of few bonds without energy exposure that offers close to double-digit yields. We keep our Overweight recommendation on the bond based on our positive view of the ownership support. Carve-outs: 1. Distribution to parent: SEK 70m Overview chart Nordic Capital Fund VIII ● Recent financial updates Q2 sales were SEK 117m (SEK 99m in Q2 2014), an absolute increase of SEK 18.5m or a 19% y-o-y increase. This was driven by positive FX effects of SEK 12.3m and the remaining increase was attributable to Tbricks. EBITDA was SEK 36m or SEK 47m when taking into account company adjustments (such as reversal of development costs not capitalised). EBITDA margins declined y-o-y as well as q-o-q. This was an effect of the rising cost base following the Tbricks acquisition. Net debt/adjusted EBITDA (adjusted by the company) was 2.4x (2.7x during the same period last year). Cidron De lfi Ltd Cidron Delfi S.a.r.l. Cidron Delfi Intr. Holding AB Cidron Delfi Intr. AB (publ) EUR 60m Sr. Secured bond Orc Group AB (publ) SEK 145m super senior WC f acility Credit strengths Credit concerns ● High degree of recurring revenue (98%). ● Weak product diversification and high technology risk. ● High degree of stickiness of contracts. ● ● Wide geographical diversification. Weak customer diversification as all customers operate within the same industry. ● Stable and predictable cash flow cover expected capex and interest payments. ● Challenging outlook for the software industry for financial institutions. Selected outstanding bonds Issuer Orc Public N/R SEB B Issue date 27/11/2012 Maturity date 27/11/2017 Cpn type Fixed Cpn 8.5% Amount EUR 60m Z-sprd mid 918 Recommendation Overweight Source: Bloomberg and SEB Relative value chart Debt maturity profile 1,200 Orc 70 Ahlstrom Outokumpu 1,000 Etrion 60 Troax Lindorff Ewos Spread (bps) 800 50 Verisure Ovako Perstorp 600 40 YIT Senvion LM Wind 400 30 Elematic Unilabs Stockmann 20 Selecta 200 Kraussmaffei Pfleiderer 10 Polygon 0 0.0 1.0 2.0 3.0 4.0 5.0 Years to maturity 6.0 7.0 8.0 Source: SEB and Bloomberg SEB Credit Research 0 2014 2015 2016 2017 2018 2019 Source: SEB 15 September 2015 85 Sector Report Nordic High Yield Update Company description Cidron Delfi Intr. AB is a holding company. Operations at the group consist only of Orc Group AB of which it owns 100%. Orc supplies third party software solutions to the global financial industry. Customers include investment banks, market making firms, hedge funds, brokerage houses and proprietary trading firms. Orc operates within the trade focused market segment, providing solutions for listed derivatives (mainly options) and connectivity. Orc's main products are Orc Trader and Orc Liquidator. Credit Research Analyst Fredrik Hössjer (46) 8 506 232 59 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2011 574 -350 224 -22 0 202 2012 511 -376 135 -23 -88 24 2013 427 -298 129 -31 -81 17 2014 396 -237 159 0 -121 38 2015E 464 -342 122 -148 -142 -168 2016E 448 -313 135 0 -137 -2 2017E 437 -301 135 0 -133 2 1 0 0 -104 0 0 -103 0 26 -95 0 7 -46 0 0 -46 0 0 -46 0 0 Reported pre-tax profit Minority interests Total taxes 203 0 -36 -80 0 81 -60 0 13 -50 0 10 -214 0 47 -48 0 11 -44 0 10 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 167 39.0 35.5 17.8 1 26.4 4.7 100.9 -47 30.2 4.1 21.7 -40 40.2 9.9 20.0 -167 26.3 (36.2) 22.0 -38 30.2 (0.4) 22.0 -35 31.0 0.5 22.0 0.0 n.a. 0.0 0.0 (10.9) (39.8) (88.3) 0.0 (17.3) (4.2) (28.3) 0.0 (8.4) 23.3 123.5 0.0 21.2 (23.3) 0.0 0.0 (3.4) 10.9 0.0 0.0 (2.6) 0.2 0.0 0.0 2011 0 184 184 0 184 0 0 184 0 0 0 184 2012 0 -1,008 -1,008 0 -1,008 0 0 -1,008 0 0 0 -1,008 2013 122 -11 111 -63 48 0 0 48 -60 0 0 -12 2014 98 19 117 -87 30 0 0 30 0 0 0 30 2015E 123 -6 117 -402 -286 0 0 -286 0 308 0 22 2016E 99 1 101 -100 1 0 0 1 0 0 0 1 2017E 99 1 100 -105 -5 0 0 -5 0 0 0 -5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2011 106 247 0 37 111 501 2012 128 140 0 28 1,948 2,244 2013 69 133 2 19 1,905 2,128 2014 100 147 2 12 1,879 2,140 2015E 122 156 2 12 1,992 2,284 2016E 123 154 2 12 1,955 2,246 2017E 118 153 2 12 1,926 2,211 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 0 375 0 127 502 1,342 415 0 486 2,243 1,130 352 0 646 2,128 560 323 0 1,257 2,140 560 326 0 1,398 2,284 560 326 0 1,360 2,246 560 325 0 1,326 2,211 -106 (83.5) 25.3 (0.5) 56.0 1,214 249.8 21.7 9.0 1.2 1,061 164.2 30.4 8.2 1.2 460 36.6 58.7 2.9 1.7 438 31.3 61.2 3.6 2.6 437 32.1 60.6 3.2 2.8 442 33.4 60.0 3.3 2.8 Net interest expenses Value changes Other financial items Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Nordic Capital Fund VII (%) Votes 100.0 Capital 100.0 Management Title COB CEO CFO Name Per Larsson Torben Munch Tony Falck Company information Contact Internet Phone number www.orc-group.com +46 8 506 477 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 86 Sector Report Nordic High Yield Update Outokumpu (B/Stable) ● Credit rating Outokumpu’s Q2 results and guidance for Q3 were weaker than we expected: the trend of year-on-year improvements in profitability took a pause with an underlying EBIT margin of -1.5%. This was mainly because high Asian imports resulted in a sharp decline in prices in the Americas, and while Outokumpu’s new mill in Calvert is running well, it suffers from low volumes. Therefore, losses in the Americas widened. In EMEA, import pressure eased and Outokumpu’s performance improved, driven by restructuring and savings benefits, together with a better mix. We expect the earnings profile to be supported by final anti-dumping duties in Europe helping the pricing environment and by cost savings and synergies. The 12-month rolling EBITDA increased by around EUR 200m y-o-y, but adjusted net debt to EBITDA of 9.6x demonstrates the still very high leverage. Key bond covenants and terms: Outokumpu senior unsecured bonds: General investment-grade documentation Overview chart Bond ● Bond recommendations Due to the headwinds in the Americas, the profit and cash flow turnaround is becoming protracted. As most of the debt will mature in 2017, profitability and cash flow will be in focus in the coming quarters. Given the poorer than expected Q2 results, the recent widening in credit spread seems justified. We think the risk is balanced and reiterate our Marketweight recommendation for the 2019 bond. Outokumpu Oyj Subsidiaries ● Recent financial update Q2 underlying EBIT was minus EUR 25m, which was weaker than Q1 (EUR 2m) and a year ago (EUR 6m). In the Americas, underlying EBIT was minus EUR 50m, below our estimate as deliveries declined 22% from last year, prices fell and operating leverage was negative. Performance in EMEA was the positive part of the earnings report, with underlying EBIT improving from EUR 15m in Q2 2014 to EUR 42m. Outokumpu guided for underlying EBIT to improve in Q3 from Q2, but to remain negative. It expects delivery volumes to be lower in Q3 (seasonality in Europe), and Americas deliveries for the full year were guided to be down y-o-y (previously flat volume guidance). Credit strengths Credit concerns ● Size, significant market positions. ● Overcapacity in stainless steel industry. ● Product and customer diversification. ● Poor profitability and cash flow generation, although improving. ● Relatively modern assets. ● High financial leverage. ● Geographic diversification. ● Cyclical demand and related earnings volatility. Selected outstanding bonds Issuer Outokumpu Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation N.R./N.R. B 30/09/2014 30/09/2019 Fixed 6.625 EUR 250m 475 Marketweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 2000 700 1800 600 1600 500 1400 1200 Bps EURm 400 300 1000 800 600 200 400 100 200 0 Source: SEB SEB Credit Research 2015 Aug-15 Jul-15 Aug-15 Jul-15 Jun-15 Jun-15 Jun-15 May-15 Apr-15 May-15 Apr-15 Mar-15 Mar-15 Feb-15 Jan-15 Feb-15 Jan-15 Dec-14 Dec-14 Dec-14 Nov-14 Oct-14 Nov-14 Oct-14 Sep-14 0 2016 Bonds 2017 2018 Bank loans and other liabilities 2019 2020 2021 2022 Unused revolving facilities Source: SEB 15 September 2015 87 Sector Report Nordic High Yield Update Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Company description Outokumpu is a global leader in stainless steel manufacturing. In 2013, Outokumpu’s sales amounted to EUR 6.7bn and it delivered 2.6m tonnes of stainless steel. Outokumpu employs some 12,500 professionals in more than 30 countries, and has production assets in China, Finland, Germany, Mexico, Sweden, the UK and the US. Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 5,636 -5,338 299 -216 0 83 2 -62 0 -1 2006 6,198 -5,153 1,045 -221 0 824 8 -62 0 14 2007 6,995 -6,202 793 -204 0 589 4 -57 0 262 2008 5,474 -5,331 143 -206 0 -63 -2 -54 0 -15 2009 2,611 -2,839 -228 -211 0 -438 -12 -21 0 -3 2010 4,229 -4,077 152 -235 0 -83 -10 -38 0 -12 2011 5,009 -4,901 108 -360 0 -252 -5 -65 -50 128 2012 4,538 -4,586 -48 -336 0 -384 0 -66 -11 -62 2013 6,745 -6,910 -165 -345 0 -510 -2 -197 -37 -76 2014 6,844 -6,740 104 -347 0 -243 7 -138 -13 -72 2015E 6,633 -6,309 325 -314 0 11 2 -122 0 -23 2016E 6,934 -6,257 678 -312 0 366 0 -112 0 0 2017E 7,124 -6,271 853 -312 0 542 0 -91 0 0 Reported pre-tax profit Minority interests Total taxes 22 -1 -24 784 -2 -178 798 -4 -138 -134 0 24 -474 -1 142 -143 1 19 -244 5 65 -523 3 -13 -822 6 -10 -459 6 8 -132 2 9 254 0 -59 450 0 -104 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -363 5.3 1.5 109.6 961 16.9 13.4 22.7 638 11.3 8.5 17.3 -188 2.6 (1.2) 17.9 -336 (8.7) (16.8) 30.0 -123 3.6 (2.0) 13.3 -174 2.2 (5.0) 26.6 -533 (1.1) (8.5) (2.5) -997 (2.4) (7.6) (1.2) -434 1.5 (3.6) 1.7 -121 4.9 0.2 6.6 196 9.8 5.3 23.0 347 12.0 7.6 23.0 8.4 n.a. (82.7) (95.5) 10.8 249.6 894.0 3,479.9 12.3 (24.1) (28.5) 1.8 (20.8) (82.0) 0.0 0.0 (52.3) (259.1) 0.0 0.0 62.0 166.8 0.0 0.0 18.4 (28.9) 0.0 0.0 (9.4) (144.4) 0.0 0.0 48.6 (243.8) 0.0 0.0 1.5 163.0 0.0 0.0 (3.1) 212.4 0.0 0.0 4.5 108.6 3,210.5 0.0 2.7 25.9 47.9 77.0 2005 -103 202 99 -174 -75 -91 739 573 -918 0 -21 -366 2006 1,091 -1,126 -35 -183 -218 -81 381 82 -206 0 1 -123 2007 495 181 676 -197 479 -199 0 280 -417 0 139 2 2008 235 421 656 -280 376 -216 -169 -9 147 0 0 138 2009 -319 453 135 -216 -82 -90 0 -172 -220 0 217 -175 2010 19 -404 -385 -173 -558 -64 25 -597 507 10 224 144 2011 84 310 394 -204 190 -45 90 235 -323 0 163 75 2012 -284 147 -137 -350 -487 0 22 -465 750 1,006 0 1,291 2013 -263 296 33 -287 -254 0 179 -75 406 0 53 384 2014 -76 -50 -126 -144 -270 0 -19 -289 -483 640 -272 -404 2015E 40 -47 -7 -160 -167 0 23 -144 -183 0 0 -327 2016E 458 -33 424 -160 264 0 0 264 -287 0 0 -23 2017E 658 -21 637 -150 487 0 0 487 -539 0 0 -52 3.1 3.0 2.8 5.1 8.3 4.1 4.1 7.7 4.3 2.1 2.4 2.3 2.1 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 212 2,064 45 2,608 578 5,507 2006 85 3,079 77 2,679 493 6,414 2007 86 2,655 77 2,617 475 5,910 2008 224 2,050 223 2,260 584 5,341 2009 112 1,578 2 2,592 566 4,850 2010 150 2,233 2 2,659 589 5,633 2011 168 2,025 0 2,500 554 5,247 2012 222 3,535 331 4,992 607 9,687 2013 607 2,072 66 5,508 570 8,823 2014 191 2,316 78 3,259 567 6,411 2015E -136 2,108 80 3,082 567 5,701 2016E -159 2,204 80 2,931 567 5,623 2017E -210 2,264 80 2,769 567 5,470 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 2,180 1,265 15 2,047 5,507 1,978 1,365 17 3,054 6,414 1,510 1,063 0 3,337 5,910 1,697 849 1 2,794 5,341 1,741 658 0 2,451 4,850 2,509 748 2 2,374 5,633 2,257 906 14 2,070 5,247 3,653 3,082 26 2,926 9,687 4,163 2,769 4 1,887 8,823 2,166 2,113 0 2,132 6,411 1,983 1,710 -2 2,011 5,701 1,696 1,722 -2 2,207 5,623 1,157 1,761 -2 2,553 5,470 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 1,706 82.7 37.4 5.7 4.8 1,518 49.4 47.9 1.5 16.9 971 29.1 56.5 1.2 9.7 1,341 48.0 52.3 9.4 1.9 1,230 50.2 50.5 (5.4) (6.0) 1,837 77.3 42.2 12.1 2.9 1,720 82.5 39.7 15.9 1.1 3,865 130.9 30.5 (80.5) (0.5) 3,873 204.8 21.4 (23.5) (0.8) 2,347 110.1 33.3 22.6 0.7 2,491 124.0 35.2 7.7 2.7 2,227 101.0 39.2 3.3 6.1 1,739 68.2 46.6 2.0 9.5 (%) Votes 29.9 5.0 4.4 Capital 29.9 5.0 4.4 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Solidium Oy Ac Invest Four B.v. Varma Mutual Pension IC Management Title COB CEO CFO Name Jorma Ollila Mika Seitovirta Reinhard Florey Company information Contact Internet Phone number www.outokumpu.com (358) 9 42 11 .Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 88 Sector Report Nordic High Yield Update Outotec (BB+/Stable) ● Credit rating The sharp decline in metal and energy prices and uncertainties in global economic growth have led to a significant reduction in investments of mining and metal companies’ capital expenditure as well as operating expenses. This has resulted in a significant drop in demand for Outotec’s products and solutions, especially on capexrelated business, while its aftermarket business has been more resilient. The company’s focus remains on utilizing the pockets of customer demand, maintaining service growth momentum, and improving operational efficiencies and cash flow. In Q2, profitability improved from Q2 2014 mainly due to better project execution, and order intake was on the same level. Although 12M EBITDA grew from Q1, adjusted net debt to EBITDA at 3.2x was up from 3.0x in Q1 and 1.7x in Q2 2014 due to higher net debt. We reiterate our BB+ rating and stable outlook. Key bond covenants and terms: Senior unsecured bond: Standard investment grade documentation Overview chart Bond Outotec Oyj Subsidiaries ● Bond recommendations We keep our Marketweight rating for Outotec’s 2020 bond. While order activity and profitability now seem to have stabilized, we would also prefer a similar trend in cash flow before becoming more positive on the bonds. The z-spread, indicated at +291bps, has moved sideways in recent months. ● Recent financial update Outotec’s Q2 sales and EBITA were in line with our forecasts. EBITA improved from a year ago, largely because of better project execution without material cost overruns, while fixed costs increased y-o-y. Net debt increased from Q1 by EUR 55m to EUR 99m due to dividends and increased working capital. The company’s 2015 guidance is for EUR 1.4-1.5bn in sales, with an EBITA margin of 4-6. Outotec announced a new EUR 45m cost savings programme in connection with Q3 on top of the previous EUR 50m programme. The new programme will involve maximum costs of EUR 40m, of which up to two-thirds are cash costs, with savings expected to contribute in full to 2015 profitability. Credit strengths Credit concerns ● Leading market positions in several key products, technological expertise, project execution experience and long customer relationships. ● High exposure to mining and metals industries where investments are cyclical, partly due to volatile metal prices and time lags. ● Asset-light business model. ● ● Relatively low operational leverage, flexible business. Limited industry diversification and low share of service business, although adjacent industries and service is growing. ● Conservative, albeit weakened capital structure, leverage and adequate liquidity. ● Relatively small revenue terms compared with some clients and peers. Selected outstanding bonds Issuer Outotec Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation N.R./N.R. BB+ 16/09/2013 16/09/2020 250m 3.75 EUR 150m 292 Marketweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 160 350 140 300 120 250 EURm 100 Bps 200 80 60 150 40 100 20 50 0 Jul-15 Aug-15 Jun-15 Apr-15 May-15 Mar-15 Jan-15 Feb-15 Dec-14 Oct-14 Nov-14 Sep-14 Jul-14 Aug-14 Jun-14 Apr-14 May-14 Mar-14 Jan-14 Feb-14 Dec-13 Oct-13 Nov-13 Sep-13 0 Source: SEB, Bloomberg SEB Credit Research Bond LT loans from financial institutions ST debt Source: SEB 15 September 2015 89 Sector Report Nordic High Yield Update Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Company description Outotec is a metallurgical engineering company that provides equipment, process solutions, technologies and services for the metal and mining industries. Outotec seeks further growth in adjacent industries by expanding into energy and industrial water treatment as well as in services. Outotec provides plant equipment and services based mainly on proprietary technologies and does not have substantial in-house manufacturing. Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 556 -522 34 -9 0 24 0 2 0 -1 2006 740 -679 62 -10 0 52 0 9 0 -4 2007 1,000 -893 107 -11 0 96 0 12 0 -4 2008 1,218 -1,087 131 -11 0 120 0 16 0 0 2009 878 -807 71 -12 0 59 0 5 0 -3 2010 970 -909 61 -19 0 42 0 2 0 -6 2011 1,386 -1,254 132 -19 0 112 0 2 0 0 2012 2,087 -1,872 216 -31 0 184 0 -2 0 -3 2013 1,912 -1,733 178 -36 0 142 0 -4 0 -5 2014 1,403 -1,359 43 -33 0 11 0 -7 0 -3 2015E 1,300 -1,208 92 -34 0 58 0 -9 0 -1 2016E 1,280 -1,159 121 -33 0 88 0 -9 0 0 2017E 1,280 -1,152 128 -32 0 96 0 -9 0 0 Reported pre-tax profit Minority interests Total taxes 26 0 -9 57 0 -20 105 0 -27 136 0 -42 61 0 -19 37 0 -10 113 0 -34 179 0 -52 132 0 -40 0 0 0 49 0 -14 79 0 -23 87 0 -25 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 17 6.1 4.4 35.8 37 8.3 7.0 34.6 78 10.7 9.6 26.0 94 10.8 9.9 31.1 42 8.1 6.7 30.7 27 6.3 4.3 28.2 79 9.5 8.1 30.0 128 10.3 8.8 28.9 92 9.3 7.4 30.4 0 3.1 0.8 52.8 35 7.1 4.5 28.5 57 9.5 6.9 28.5 62 10.0 7.5 28.5 30.7 n.a. 128.0 116.0 33.1 82.5 111.4 120.4 35.1 74.1 86.3 85.0 21.8 22.2 25.1 30.2 (27.9) (46.0) (51.1) (55.5) 10.5 (14.2) (28.9) (39.2) 42.9 116.3 168.2 207.3 50.6 64.0 64.4 58.2 (8.4) (17.3) (22.8) (26.2) (26.6) (75.7) (92.5) (99.9) (7.3) 112.5 442.1 25,750.1 (1.5) 31.5 51.7 61.9 0.0 5.8 9.1 10.0 2005 31 49 80 -9 71 0 -1 70 -4 0 5 72 2006 58 10 68 -8 60 0 0 60 -5 0 0 54 2007 92 45 137 -12 125 -15 0 110 8 0 0 118 2008 116 -10 106 -15 91 -40 -7 44 1 0 -8 37 2009 88 -117 -29 -17 -46 -42 -13 -100 31 0 28 -41 2010 46 41 87 -17 70 -32 -35 3 13 0 -4 12 2011 99 148 247 -34 212 -34 -33 145 -12 0 -5 129 2012 159 -73 86 -48 39 -39 -36 -36 31 0 -26 -31 2013 128 -190 -61 -46 -107 -55 -11 -173 135 0 -2 -41 2014 33 -14 19 -57 -38 -37 -8 -83 31 0 -2 -54 2015E 69 -60 9 -55 -46 -18 0 -64 0 0 0 -64 2016E 90 -62 28 -55 -27 -22 0 -49 0 0 0 -49 2017E 94 -28 66 -55 11 -31 0 -20 0 0 0 -20 1.6 1.1 1.2 1.2 1.9 1.7 2.5 2.3 2.4 4.1 4.2 4.3 4.3 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 126 161 16 31 75 409 2006 171 300 14 27 73 585 2007 291 342 21 25 75 753 2008 318 411 22 30 81 862 2009 259 387 64 52 168 929 2010 280 469 43 53 224 1,068 2011 403 617 52 63 287 1,421 2012 359 801 59 75 335 1,629 2013 324 749 58 79 321 1,530 2014 282 648 83 78 351 1,442 2015E 218 605 83 99 351 1,357 2016E 169 645 83 121 351 1,369 2017E 149 645 83 144 351 1,373 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 11 288 0 111 409 3 438 0 144 585 2 536 0 215 753 4 631 0 226 862 73 514 27 315 930 82 628 1 357 1,068 67 955 1 398 1,421 98 1,049 1 481 1,629 238 816 0 477 1,530 273 724 0 445 1,442 273 621 0 462 1,356 273 599 0 497 1,369 273 571 0 528 1,372 -97 (87.8) 27.1 (2.9) 33.8 -150 (103.9) 24.6 (2.4) 154.2 -271 (126.0) 28.5 (2.5) 179.0 -314 (138.6) 26.3 (2.4) -185 (54.1) 36.8 (2.6) 288.2 -198 (55.4) 33.5 (3.3) 40.5 -336 (84.1) 28.1 (2.6) 19.9 -261 (54.1) 29.6 (1.2) 23.4 -86 (18.1) 31.2 (0.5) 17.8 -9 (2.0) 30.9 (0.2) 5.4 55 11.9 34.1 0.6 9.9 104 20.9 36.3 0.9 13.0 124 23.4 38.5 1.0 13.8 (%) Votes 12.3 7.0 5.7 Capital 12.3 7.0 5.7 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Solidium Varma Mutual Pension Insurance Company Ilmarinen Mutual Pension Insurance Company Management Title COB CEO CFO Name Matti Alahuhta Pertti Korhonen Mikko Puolakka Company information Contact Internet Phone number www.outotec.com +358 205 292004 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 90 Sector Report Nordic High Yield Update Polarcus (CCC+/Negative) Key bond covenants and terms PLCS02: Change of control with put at 101 Call from 7/6/2016 at 104,102,101 Min equity ratio 25% Min liquidity USD 25m Min WC positive Min Interest cover (EBITDA/ net interest) 2.5x Cross default (USD 10m) PLCS03: Change of control with put at 101 Min equity ratio 25% Min liquidity USD 25m Min WC positive Cross default (USD 10m) PLCS 04/18 USD secured convertible: Call (formula) Put (formula) Overview chart Bond issuer owning companies Polarcus Ltd. (Cayman Islands) Operating companies Holding companies Contract companies ● Credit rating Polarcus has a stretched balance sheet with USD 629m in net debt and a market cap of USD 19m – based on our estimates it will breach its covenants and run out of liquidity in Q1 2016. We estimate the recovery potential to be slightly lower than 20% for the unsecured bondholders in the event of liquidation as there are few obvious buyers in the secondary market of seismic vessels as seismic companies currently are cold stacking and not buying vessels due to weak market conditions. As a result, we believe the liquidity squeeze will trigger a restructuring of the debt. In such scenario we believe all four groups of creditors will need to put something on the table as we believe more equity is not an alternative given that the option inherent in equities is currently too far out of the money to make it attractive for equity investors. We believe the next step for Polarcus is a restructuring and we keep our CCC+/Negative rating. ● Bond recommendations As we believe Polarcus will experience a liquidity squeeze in Q1 2016 and the recovery potential for the unsecured bonds (PLC02 and PLC03) based on our calculation is lower than 20% in a distressed scenario, we maintain our Underweight recommendation. If one expects the oil price and the seismic market to recover quickly, one could play the convertible as the recovery potential (50%) is more sensitive to changes in the valuation of the vessel Vyacheslav Tikhonov, which is the underlying first lien collateral. ● Recent financial updates Polarcus reported backlog at Q2 in August of USD 195m, down from USD 235m on 1 June 2015, with fleet 80% booked for H2 2015. Part of this backlog is MC prefunding, which makes it difficult to calculate the correct dayrate in the backlog; however, it seems rates have fallen further from the Q2 level to around opex. With debt service breakeven slightly above USD 170,000/d for Polarcus, cash burn is significant at dayrates of around USD 150-160,000/d and utilisation of around 75-80%. Credit strengths Credit concerns ● A modern and sophisticated fleet positioned to capitalise on the need for equipment able to service more challenging offshore areas. ● Limited track record and small scale operations. ● Industry vulnerable to political and event risk. ● Improved short-term liquidity from sale of MC library to TGS for USD 27.5m. ● Ongoing pressure on industry margins and utilisation due to the current weak seismic market. Selected outstanding bonds Issuer Ticker Our view Sector Issue date Maturity date Polarcus Ltd na CCC Oilservice 27.04.2011 27.04.2018 Polarcus Ltd PLCS02 CCC Oilservice 07.06.2013 07.06.2018 Polarcus Ltd PLCS03 CCC Oilservice 08.07.2014 08.07.2019 Coupon 5.600% 8.000% Nibor + 725 Outst. Amount USD 104m USD 95m NOK 350m mid price 35.00 22.67 22.75 Z-Spread 3099 3498 6086 Recommendation Underweight Underweight Source: Bloomberg and SEB Bond spreads Debt maturity profile Source: SEB and Bloomberg SEB Credit Research Source: SEB and Company reports 15 September 2015 91 Sector Report Nordic High Yield Update Credit Research Analyst Øystein Bogfjellmo (47) 22 82 71 28 [email protected] Company description Polarcus is a pure-play marine geophysical company with two principal business activities: Contract seismic services and multi-client projects. The company owns seven 3D seismic vessels, of which one is on a long-term bare boat charter to Sovcomflot (Vyacheslav Tikhonov) and one is currently cold stacked (Nadia). Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2008 0 -11 -11 0 0 -11 2009 0 -19 -19 -6 0 -25 2010 123 -92 30 -28 0 3 2011 299 -222 76 -61 0 16 2012 529 -339 190 -99 0 91 2013 532 -320 212 -94 0 118 2014 467 -310 157 -151 0 5 2015E 363 -209 154 -197 0 -43 2016E 293 -217 77 -102 0 -25 2017E 382 -269 113 -101 0 12 Net interest expenses Value changes Other financial items 2 0 7 -5 0 11 -24 0 -7 -54 0 7 -73 0 -6 -69 0 -5 -60 0 -17 -60 0 -5 -55 0 0 -54 0 0 Reported pre-tax profit Minority interests Total taxes -2 0 0 -19 0 0 -28 0 0 -31 0 0 12 0 -2 44 0 -1 -72 0 0 -108 0 3 -80 0 6 -43 0 3 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -2 n.a. 0.0 0.0 -19 n.a. 0.0 0.0 -28 24.8 2.1 0.0 -32 25.6 5.2 (0.1) 10 35.9 17.3 16.0 44 39.8 22.2 1.4 -72 33.6 1.1 (0.3) -106 42.4 (11.9) 2.5 -74 26.1 (8.5) 7.5 -39 29.5 3.1 7.5 0.0 n.a. 0.0 0.0 0.0 (73.7) 0.0 0.0 0.0 257.3 0.0 0.0 143.3 150.6 494.4 0.0 77.3 149.3 488.9 0.0 0.6 11.4 29.3 280.7 (12.3) (26.1) (95.6) 0.0 (22.3) (1.8) 0.0 0.0 (19.1) (50.1) 0.0 0.0 30.1 46.8 0.0 0.0 2008 -2 84 81 -185 -104 0 0 -104 87 190 0 173 2009 -13 -67 -80 -290 -370 0 0 -370 276 125 0 31 2010 0 -20 -20 -257 -277 0 0 -277 224 130 0 77 2011 29 -60 -31 -220 -251 0 0 -251 97 40 0 -114 2012 109 7 116 -359 -244 0 0 -244 195 40 0 -9 2013 138 -9 128 3 131 0 0 131 -126 0 0 5 2014 80 3 83 -116 -33 0 0 -33 -15 35 0 -13 2015E 91 -16 76 -105 -29 0 0 -29 30 0 0 1 2016E 27 7 34 -88 -53 0 0 -53 3 0 0 -51 2017E 61 -4 57 -93 -36 0 0 -36 35 0 0 -1 0.0 0.0 209.4 73.7 67.9 -0.6 24.8 29.0 29.8 24.3 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2008 189 1 0 182 0 372 2009 150 15 0 473 0 639 2010 198 47 0 730 0 974 2011 84 112 0 911 0 1,107 2012 52 140 0 1,180 0 1,372 2013 81 133 0 1,101 0 1,315 2014 74 121 0 1,051 0 1,246 2015E 75 152 0 1,084 -125 1,186 2016E 24 159 0 1,094 -150 1,128 2017E 23 181 0 1,108 -171 1,141 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 87 96 0 190 372 307 37 0 295 639 531 51 0 392 974 628 50 0 430 1,107 807 84 0 481 1,372 719 68 0 528 1,315 695 59 0 491 1,246 725 75 0 386 1,186 728 89 0 311 1,128 763 106 0 272 1,141 -102 (53.7) 50.9 9.1 157 53.2 46.1 (8.1) (3.9) 334 85.2 40.2 11.0 1.1 544 126.6 38.8 7.1 1.3 755 156.8 35.1 4.0 2.6 638 120.9 40.2 3.0 3.1 621 126.4 39.4 4.0 2.6 650 168.6 32.5 4.2 2.5 704 225.9 27.6 9.2 1.3 739 271.7 23.8 6.6 2.0 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name One Equity Partners Zickerman Holding Limited DNB ASA (%) Votes 15.1 8.0 6.0 Capital 15.1 8.0 6.0 Management Title COB CEO CFO Name Peter Rigg Rod Starr Tom Henrik Sundby Company information Contact Internet Phone number www.polarcus.com (971) 44360800 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 92 Sector Report Nordic High Yield Update Prosafe (BB+/Negative) ● Credit rating Prosafe’s credit rating is primarily supported by its dominant market position in the semi-submersible accommodation market, which allows it to control the market to a large degree. The negative outlook reflects the current downturn within the oil service space, where E&P spending has been cut heavily as oil companies are focusing on improving free cash flow, which has put certain projects on hold. As the accommodation market is exposed to maintenance work (which is necessary to continue production) we expect Prosafe to handle the downturn better than most peers. From a financial risk perspective Prosafe has historically had low leverage, but this has been increasing as the company has been through a fleet renewal process. Key bond covenants and terms Prosafe senior unsecured bonds: NIBD/EBITDA < 5.0x Value adjusted equity ratio > 30% Financial covenants on bank debt: NIBD/EBITDA < 4.5x Minimum liquidity < USD 65m Value adjusted equity ratio > 35% Market value of vessels/ total commitments > 150% ● Bond recommendations We no longer view PRS07 and PRS08 as tightening candidates outside of pull to par and the bonds are trading in line with the credit curve of credit peer BW Offshore. As a result, we have changed our recommendation from Overweight to Marketweight. Meanwhile the longer dated PRS09, PRS10 and PRS11 has widened to trade in line with the credit curve for BW Offshore. We have therefore switched our recommendations from Underweight to Marketweight. ● Recent financial updates Prosafe reported Q2 EBITDA of USD 42m against Bloomberg consensus of USD 50m. The difference mainly relates to lower utilization. During Q2 the company signed a three-year contract for the newbuild Safe Eurus worth USD 164m (or roughly USD 149,000 per day in dayrate). Overview chart Bond issuer Prosafe SE Rig companies Holding companies Operating companies Consafe companies Credit strengths Credit concerns ● Dominant market position. ● Cyclical and capital intensive industry with relatively short-term contracts. ● Extensive operational track record with profitable operations and relatively low financial gearing. ● Somewhat old asset base with the majority operating for one client in GoM. ● Strong supply growth expected towards 2016. ● Perceived strong support from banks at attractive financing terms and good access to capital markets. Selected outstanding bonds Issuer Prosafe Se Prosafe Se Prosafe Se Prosafe Se Prosafe Se Ticker Our view PRS07 BB+/BB PRS08 BB+/BB PRS09 BB+/BB PRS10 BB+/BB PRS11 BB+/BB Sector Oilservice Oilservice Oilservice Oilservice Oilservice Issue date Maturity date 25.02.2011 25.02.2016 08.02.2012 08.02.2017 17.01.2013 17.01.2020 22.10.2013 22.10.2018 09.09.2014 09.09.2019 Coupon Outst. Amount mid price Nibor + 350 NOK 500m 99.97 Nibor + 375 NOK 500m 98.46 Nibor + 375 NOK 500m 93.07 Nibor + 295 NOK 700m 93.86 Nibor + 310 NOK 700m 89.19 ASW Recommendation 358 Marketweight 488 Marketweight 557 Marketweight 510 Marketweight 620 Marketweight Source: Bloomberg and SEB Bond spreads Debt maturity profile 650 BWO02 (BB) TOP04 (BB) BON04 (BB) 550 TOP02 (BB) 450 BWO01 (BB) PRS08 (BB) PRS09 (BB) AKSO02 (BB) TOP03 (BB) AKSO01 (BB) PRS07 (BB) 350 TKLNG02 (BB) TKLNG01 (BB) 250 DFDS02 (BB) 150 50 -50 PRS11 (BB) BON03 (BB) PRS10 (BB) DFDS01 (BB) 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Series1 Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 93 Sector Report Nordic High Yield Update Company description Prosafe is the world's leading owner and operator of semi-submersible accommodation/service rigs. The company controls a fleet of 15 semi-submersible accommodation rigs (four are under construction). It operates globally, but is mainly concentrated in the North Sea and the Gulf of Mexico. The company has over 30 years’ of operational experience and is domiciled in Cyprus with offices in Singapore, Norway and the UK. Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2012 510 -230 280 -58 0 223 2013 524 -217 307 -62 0 245 2014 549 -236 313 -64 0 248 2015E 516 -219 296 -70 0 227 2016E 654 -308 347 -80 0 267 2017E 661 -333 328 -86 0 242 Net interest expenses Value changes Other financial items -40 0 -5 -33 0 -9 -37 0 -20 -51 0 -10 -53 0 -10 -60 0 0 Reported pre-tax profit Minority interests Total taxes 178 0 -1 204 0 -5 191 0 -13 166 0 -9 203 0 -10 182 0 -9 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 178 54.9 43.6 0.3 199 58.6 46.8 2.3 179 57.0 45.3 6.5 157 57.5 44.0 5.1 193 53.0 40.8 5.0 173 49.7 36.7 5.0 0.0 n.a. 0.0 0.0 2.6 9.4 10.2 14.4 4.8 2.0 1.3 (6.1) (6.0) (5.2) (8.7) (13.3) 26.9 16.9 17.6 22.6 1.0 (5.3) (9.1) (10.4) (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2012 235 -9 226 -168 58 0 0 58 0 0 0 58 2013 261 6 267 -243 24 -126 0 -103 0 0 0 -103 2014 243 63 306 -65 241 -144 0 97 0 0 0 97 2015E 227 -4 223 -775 -552 -99 0 -651 632 0 0 -19 2016E 273 15 288 -400 -112 -45 0 -157 176 0 0 18 2017E 259 1 260 -60 200 -39 0 160 -163 0 0 -2 Capex/sales (%) 36.8 42.8 18.8 150.3 61.1 9.1 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2012 104 103 0 1,048 232 1,487 2013 113 79 0 1,196 232 1,620 2014 122 123 0 1,339 232 1,817 2015E 104 116 0 2,044 232 2,496 2016E 122 147 0 2,364 232 2,865 2017E 120 148 0 2,338 232 2,839 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 810 161 0 516 1,487 780 101 0 740 1,620 830 238 0 749 1,817 1,463 227 0 806 2,496 1,638 273 0 954 2,865 1,476 276 0 1,088 2,839 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 707 136.9 34.7 2.5 6.9 666 90.1 45.7 2.2 9.0 708 94.5 41.2 2.3 8.4 1,359 168.5 32.3 4.6 5.8 1,516 158.9 33.3 4.4 6.5 1,356 124.6 38.3 4.1 5.4 Cash flow Balance sheet Main shareholders Name State Street Bank and Trust Folketrygdefonnet RBC Investor Service (%) Votes 23.5 6.2 4.6 Capital 23.5 6.2 4.6 Management Title COB CEO CFO Name Michael Raymond Parker Karl Ronny Klungtvedt Sven Børre Larsen Company information Contact Internet Phone number www.prosafe.com (47) 51 64 25 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 94 Sector Report Nordic High Yield Update Ramirent (BB+/Stable) ● Credit rating maintained but manoeuvrability is limited After a weak Q1, EBIT in Q2 improved from Q2 2014 as sales growth picked up due to internal efficiency initiatives. Sales grew in all divisions except Norway, and demand was said to have improved towards the end of the quarter. Market conditions remain mixed with favourable conditions in Sweden, Denmark and Europe Central, but weaker in Finland and Norway. The guidance for stable full-year sales (in local currencies) and EBITA margin compared to 2014 was unchanged. The ongoing efficiency programme should bring support to margins in 2016 and onwards. Leverage ratios are slightly higher than a year ago, reflecting a decline in profits and a small increase in net debt, but should gradually improve in H2. Key bond covenants and terms: Senior unsecured bond: Change of control Cross-default Negative pledge ● Bond recommendations We expect Ramirent’s earnings and cash flow to remain largely stable in 2015, justifying our current rating. The credit spread is in our view interesting at current levels and we reiterate our Overweight recommendation. Overview chart Bond Ramirent Oyj ● Recent financial update Q2 EBIT ex NRI was EUR 15.0m, up from EUR 14.2m in Q2 2014 and better than the EUR 12.9m expected by us. Sales increased 7% y-o-y in constant currencies, driven especially by Sweden, an increase in service income and advancing large solutions projects. Divisionally, Sweden, Europe East, and Denmark, which has now become profitable, managed to improve profits from a year ago. In Finland and Norway, profits fell due to low demand and price pressure. Net debt increased to EUR 297m from EUR 226m in Q1 partly reflecting dividends and a decline in operating cash flow. Adjusted net debt to EBITDA was 2.1x (up from 1.7x in Q1 and 1.9x in Q2 2014). Subsidiaries Credit strengths Credit concerns ● Market share and positions in key markets, supplier concentration. ● ● Sound balance sheet. Capital-intensive business with cyclical demand and pricing power highly dependent on demand supply balance. ● Cash flow generation, ability to adjust opex and capex. ● Weak economic growth in relevant regions restraining demand. ● Narrow geographical diversification in earnings. ● High dependency on construction industry clients. ● Wide outlet coverage, sizeable fleet. Selected outstanding bonds Issuer Ramirent Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid Recommendation N.R./N.R. BB+ 21/03/2013 21/03/2019 Fixed 4.375 EUR 100m 243 Overweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 160 350 140 300 120 250 100 Bps EURm 200 80 150 60 100 40 Source: SEB, Bloomberg SEB Credit Research 2015 Jun-15 Mar-15 Dec-14 Sep-14 Jun-14 Mar-14 Dec-13 0 Sep-13 0 Jun-13 20 Mar-13 50 2016 Bond 2017 2018 Other loans Committed loans 2019 2020 Source: SEB 15 September 2015 95 Sector Report Nordic High Yield Update Company description Ramirent is a general equipment rental company whose extensive network of customer centres puts it in close proximity to its customers. The company is the leading equipment rental solution provider in the Nordic region and in central and eastern Europe. The company serves more than 200,000 customers in different market segments such as construction, other industrial customers, the public sector and consumers. Ramirent’s equipment fleets consist of lifts, heavy machinery, tower cranes and hoists, scaffolding, SAFE, modules, light machinery and power and heating, with 200,000 units in total. Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 389 -282 107 -51 0 56 2006 498 -332 166 -61 0 105 2007 634 -397 237 -79 0 158 2008 703 -514 189 -104 -5 80 2009 503 -373 130 -101 0 29 2010 531 -404 127 -98 0 30 2011 650 -468 182 -108 0 74 2012 714 -504 210 -118 0 92 2013 647 -452 195 -113 0 82 2014 614 -446 168 -110 0 58 2015E 640 -463 177 -101 -8 68 2016E 662 -479 183 -102 -8 73 2017E 684 -494 190 -102 -8 80 -7 0 0 -7 0 0 -12 0 0 -29 0 0 -16 0 0 -9 0 0 -13 0 0 -9 0 0 -14 0 -4 -12 0 -4 -10 0 0 -9 0 0 -8 0 0 Reported pre-tax profit Minority interests Total taxes 49 0 -13 98 0 -24 146 0 -36 51 0 -17 13 0 -8 21 0 -6 61 0 -16 83 0 -19 64 0 -10 42 0 -10 58 0 -12 64 0 -13 72 0 -15 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 36 27.5 14.4 27.0 79 33.4 21.1 24.4 110 37.4 24.8 24.4 34 26.9 11.3 33.4 5 25.8 5.7 63.0 15 24.0 5.6 29.8 45 28.0 11.4 26.4 64 29.4 12.9 23.2 54 30.1 12.7 15.4 32 27.4 9.5 24.5 46 27.6 10.6 21.0 51 27.7 11.1 21.0 57 27.8 11.7 21.0 23.0 n.a. 69.6 110.1 28.0 55.1 87.5 100.5 27.4 42.6 50.2 49.4 10.8 (20.3) (49.4) (65.2) (28.5) (31.2) (63.9) (75.0) 5.7 (1.9) 3.3 64.5 22.3 42.6 149.3 191.4 9.9 15.7 24.5 36.4 (9.4) (7.2) (10.8) (22.9) (5.2) (13.9) (29.4) (33.5) 4.2 5.2 16.3 35.7 3.5 3.7 8.2 11.0 3.4 3.8 9.6 12.2 (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2005 87 1 87 -97 -10 -6 7 -8 5 2 0 -2 2006 142 -8 134 -165 -32 -16 25 -23 20 3 0 0 2007 190 -17 173 -218 -45 -33 25 -53 51 1 1 0 2008 146 23 168 -165 3 -54 4 -47 48 0 0 1 2009 106 2 108 -16 92 0 -4 88 -88 0 0 0 2010 112 -8 104 -56 48 -16 0 31 -36 -3 7 0 2011 156 5 161 -118 43 -27 -111 -96 84 0 0 -12 2012 182 -8 174 -120 54 -30 0 24 -22 -3 0 -1 2013 166 16 182 -123 59 -37 15 37 0 0 -36 1 2014 156 -16 140 -129 12 -40 10 -18 19 0 0 1 2015E 155 -3 152 -100 52 -43 0 9 -17 0 0 -8 2016E 161 -1 159 -105 54 -43 0 11 -17 0 0 -6 2017E 167 -1 166 -105 61 -48 0 12 -17 0 0 -5 Capex/sales (%) 24.9 33.2 34.3 23.5 3.2 10.6 18.2 16.8 19.1 21.0 15.6 15.9 15.3 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 1 88 2 299 75 464 2006 1 115 2 389 78 584 2007 1 148 0 508 80 737 2008 2 121 0 535 94 753 2009 2 97 0 464 93 656 2010 1 115 0 441 104 661 2011 2 138 0 501 160 801 2012 1 151 0 504 174 831 2013 2 122 0 472 163 759 2014 3 125 0 430 187 744 2015E -5 131 0 428 179 733 2016E -11 136 0 431 171 727 2017E -16 140 0 433 164 722 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 167 100 0 197 464 187 132 0 265 584 237 159 0 341 737 305 167 0 281 753 209 141 0 306 656 178 166 0 318 661 265 210 0 326 801 241 222 0 368 831 209 180 0 371 759 230 189 1 324 744 213 193 1 327 733 196 196 1 334 727 179 199 1 342 722 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 166 84.3 42.4 1.6 9.5 186 70.3 45.3 1.1 14.1 244 71.5 46.3 1.0 13.5 303 107.8 37.3 1.6 3.7 217 71.0 46.6 1.7 3.8 183 57.7 48.0 1.4 14.4 263 80.6 40.7 1.4 13.6 239 65.1 44.3 1.1 7.1 207 55.8 48.8 1.1 13.8 227 69.9 43.7 1.4 14.0 218 66.7 44.7 1.2 17.7 207 61.9 46.1 1.1 19.9 195 56.9 47.5 1.0 22.5 (%) Votes 29.1 11.2 6.2 Capital 29.1 11.2 6.2 Net interest expenses Value changes Other financial items Cash flow Balance sheet Main shareholders Name Nordstjernan AB Oy Julius Tallberg Ab Varma Mutual Pension Insurance Company Management Title COB CEO CFO Name Peter Hofvenstam Magnus Rosén Jonas Söderqvist Company information Contact Internet Phone number www.ramirent.com (358) 20 750 200 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 96 Sector Report Nordic High Yield Update REC Silicon (B/Stable) ● Credit rating Following the announcement in July that REC had successfully completed a NOK 256m private placement, sold bonds held at treasury, halted its expansion plans and was shutting down half of its FBR productions in Moses Lake, we maintained our B/Stable rating. With these announcements, the company is taking important steps to increase financial flexibility and preserve cash, which were needed as the company has now effectively no access to the Chinese market (Process-in-Trade “PiT” will end on 1 September), and has been exposed to lower prices and inventory build-up that are hurting its cash flow. Key bond covenants and terms REC senior NOK bonds: Upstream guarantees Change of control with put @ 100 No financial covenants REC 2018 6.5% USD convertible bond: Strike at NOK 3.60 Subordinated ● Bond recommendations With recent trade levels for REC02 and REC03 at par and 94/95, respectively, the credit curve in REC is still relatively steep. This reflects our view that we are much more positive on the 2016 bond (our base case assumes it is repaid), while REC03 could easily see more price pressure if management sells more of this to free up liquidity. Due to the unquantifiable political risk in the trade war, we retain our Marketweight recommendation. Note that we could reduce our base case forecast if the US/China trade war is not largely resolved before the end of 2015. Overview chart ● Financial forecast update In our revised forecast, we expect some polysilicon price increases in the long-term, but have reduced volumes. With these changes we expect the company to handle its debt maturities in 2016 and take steps to fulfil its final equity contribution (USD 154m) into the Yulin JV establishment. However, should market conditions become even worse, management said it has the ability to put in less equity and thus reduce its planned ownership. Credit strengths Credit concerns ● REC is a global low-cost player in the production of high purity silicon materials. ● ● Historical support from its main banks and has issued equity when needed. Failure to succeed with its cost reduction and optimisation goals, as selling prices drop rapidly. ● Strong cost position in polysilicon, which is the least volatile segment and has the highest barriers to entry ● Trade war between the US and China. ● Capex plans, both in the new JV and Moses Lake in order to increase capacity. Selected outstanding bonds Issue REC 3 May 2016 N3M+435 REC 3 May 2018 9.75 REC 11 Sep 2018 6.5% Ticker Our view REC02 B REC03 B Sector Rewewable Energy Rewewable Energy Rewewable Energy Issue date 03/05/2011 03/05/2011 11/09/2013 Maturity date 03/05/2016 03/05/2018 11/09/2018 Coupon Nibor + 435 9.750% 6.500% Outst. Amount NOK 179.5m NOK 456m USD 110m Recommendation Conv.price Marketweight Marketweight n/a NOK 3.6 Source: Bloomberg and SEB Bond spreads 1200 1100 1000 900 800 700 600 500 400 300 200 Apr-14 Debt maturity profile 200 150 100 50 Jul-14 Oct-14 REC03 Jan-15 May-15 Aug-15 2015 Bank/other REC02 Source: SEB and Bloomberg SEB Credit Research 0 2016 2017 Convertible bonds 2018 NOK Bonds Source: SEB 15 September 2015 97 Sector Report Nordic High Yield Update Company description REC Silicon is manufacturer of silane gas and polysilicon for the PV solar and semiconductor industry. With its plants and operations in the US, REC Silicon is one of the world's leading and lowest cash cost producers of polysilicon. REC's proprietary Fluid Bed Reactor (FBR) process has the lowest production cash cost within solar grade polysilicon manufacturing. In February 2014, REC Silicon entered into a JV with Chinese company Shaanxi Non-Ferrous Tian Hong New Energy Co., Ltd., for a new FBR plant with capacity of 18,000 tonnes. This JV demonstrated the value of its FBR technology and allowed the company to increase its production capacity with limited investments. The company has also adding 3,000MT capacity expansion of its FBR operations in the US (currently on hold), and has signed an agreement to investigate the development of a polysilicon manufacturing facility in Saudi Arabia. Credit Research Analyst Henrik Blymke (47) 22 82 71 91 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2013 436 -385 51 -125 -12 -86 0 -50 -148 40 2014 594 -361 233 -132 -7 94 -1 -20 13 132 2015E 381 -325 56 -120 0 -64 0 -11 0 0 2016E 415 -330 85 -115 0 -30 0 -9 0 0 2017E 449 -335 114 -110 0 4 0 -8 0 0 Reported pre-tax profit Minority interests Total taxes -245 0 85 219 0 -5 -75 0 23 -39 0 12 -4 0 1 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -353 11.6 (20.6) 34.7 213 39.2 19.1 2.5 -53 14.7 (16.8) 30.0 -27 20.5 (7.2) 30.0 -3 25.4 0.9 30.0 0.0 n.a. 0.0 0.0 18.1 358.7 0.0 0.0 (22.7) (76.0) 0.0 0.0 8.9 51.8 0.0 0.0 8.2 34.1 0.0 0.0 2013 34 -175 -140 -37 -178 0 106 -72 -390 63 -22 -420 2014 127 -40 88 -36 52 0 129 181 -143 0 -3 35 2015E 45 -24 21 -55 -34 0 0 -34 0 44 0 10 2016E 76 6 82 -15 67 0 -15 52 -55 0 0 -3 2017E 106 4 109 -30 79 0 -154 -75 0 0 0 -75 9.0 7.3 14.4 3.6 6.7 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2013 62 223 31 1,191 18 1,525 2014 96 253 13 1,087 24 1,474 2015E 106 261 13 1,022 24 1,427 2016E 103 256 13 937 24 1,333 2017E 28 252 13 1,011 24 1,329 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 368 200 0 956 1,525 190 230 0 1,054 1,474 190 191 0 1,046 1,427 135 180 0 1,018 1,333 135 178 0 1,015 1,329 321 33.6 62.7 6.3 0.9 112 10.6 71.5 0.5 9.6 102 9.8 73.3 1.8 3.8 50 4.9 76.4 0.6 6.7 125 12.3 76.4 1.1 10.6 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Umoe AS Folketrygdfondet Skagen Funds (%) Votes 22.1 6.8 6.7 Capital 22.1 6.8 6.7 Management Title COB CEO CFO Name Jens Ulltveit-Moe Tore Torvund James May Company information Contact Internet Phone number www.recsilicon.com +1 509 793 9000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 98 Sector Report Nordic High Yield Update SAS (B-/Stable) ● Credit rating The Q2 results and comments from SAS published on 18 June did not alter our B/Stable rating. On the positive side, management is now more confident about delivering positive EBT (before non-recurring items) and will benefit from lower fuel prices in Q3 and Q4. Moreover, the new collective pilot agreement signed in April/May is important for the flexibility. On the negative side, we note that unit cost increased in the quarter and that management is not willing to put in place new financial target ratios (citing the extensive changes to the European airline industry, greater competition and higher market capacity from 2016 onwards as reasons). Key bond covenants and terms CHF Perpetual bond: Subordinated CB and 2017 bond guaranteed by consortium SEK 2019 convertible bond: Change of control @100 if any one >50% Conversion price: SEK 24.02 SEK 2017 senior unsecured bond: CoC with put @ 101, if any one owner has >50 or if one of the three Nordic governments has <25% Call @102.25% after September 2016 Make whole before Year 3 at SGB+50 bps ● Bond recommendations Given the current bond price, we do not believe there is any excess tightening and, therefore, maintain our Marketweight recommendation on the bond and note that the estimated yield on the preference shares is higher (trading at SEK 477 at the end of August). ● Recent financial updates In terms of costs, we were disappointed in Q2 to see that unit cost increased 3.4% (excluding fuel). We also noted that due to fuel hedging and the US dollar, the company did not benefit from any lower fuel cost in the quarter. However, with a prevailing low oil price environment, SAS will benefit more. Interestingly, the reported unadjusted net financial debt figure (SEK 0.3bn) is at its lowest since 2008. However, with the current investment programme ahead, we do not expect it to remain this low. With SEK 7.4bn in cash and liquid funds at the end of the quarter, the company stated that the financing of maturing debt and delivery of new aircraft is in place until Q2 2016. The equity/assets and adjusted debt to equity ratios are weak at 14% and 3.75x, respectively. Overview chart Credit strengths Credit concerns ● Good liquidity position after refinancing and asset sales. ● ● Strong and supportive owners when needed. SAS’ ability to implement the restructuring programme before new investment programme starts. ● Improved cost structure if the current 4XNG plan is implemented. ● Pressure on yields and lower premium bookings. ● Still relatively high cost base versus low-cost carriers. Selected outstanding bonds Name SAS Perpetual 2.38% CHF SAS 15 Nov 2017 9% SAS 1 Apr 2019 3.63% Convertible Our view CCC+ Issue date 14/01/1986 26/09/2013 05/03/2014 Maturity date Perpetual 15/11/2017 01/04/2019 Coupon 2.375% 9.000% 3.625% Outst. Amount CHF 127.195m SEK 1500m SEK 1600m Rank Subordinated Sr Unsecured Sr Unsecured Recommendation Conversion price Marketweight 24.0 Source: Bloomberg and SEB Yield of the SAS 2017 bond Debt maturity profile 11.0 3,000 10.0 9.0 2,000 8.0 7.0 1,000 6.0 5.0 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 0 Oct'15 SASSS 9 11/15/2017 Corp Source: SEB and Bloomberg SEB Credit Research Oct'16 Oct'17 Oct'18 Oct'19 Oct'20-> Source: SEB 15 September 2015 99 Sector Report Nordic High Yield Update Company description SAS is a Nordic focused airline company, with a history dating back to 1918. The company has a share of 30-50% in its home market. SAS transports around 27m passengers to 128 destinations per year. Through the partnership in Star Alliance, SAS Group offers a worldwide network covering a total of 1,160 destinations in over 180 countries. The governments of Sweden, Denmark and Norway share a 50% stake in SAS Group; Sweden has three-sevenths, Denmark two-sevenths and Norway two-sevenths. Credit Research Analyst Henrik Blymke (47) 22 82 71 91 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 04/05 55,501 -52,953 2,548 -2,170 0 378 117 -973 182 50 05/06 60,777 -57,687 3,090 -1,964 0 1,126 12 -934 88 0 06/07 52,251 -49,518 2,733 -1,478 0 1,255 14 -258 41 0 07/08 52,870 -51,873 997 -1,550 0 -553 -147 -273 4 0 08/09 44,918 -46,296 -1,378 -1,695 -150 -3,223 -258 -362 332 20 09/10 40,723 -40,498 225 -1,638 -229 -1,642 -300 -503 -352 -263 10/11 41,412 -38,379 3,033 -2,413 0 620 -1,429 -806 0 3 11/12 35,986 -35,031 955 -1,426 0 -471 185 -959 0 0 12/13 42,182 -38,679 3,503 -1,658 0 1,845 -463 -949 0 0 13/14 38,006 -36,430 1,576 -1,443 0 133 36 -1,028 0 -59 14/15E 38,766 -36,440 2,326 -1,441 0 885 40 -807 0 0 15/16E 40,084 -37,278 2,806 -1,613 0 1,193 40 -744 0 0 16/17E 41,447 -38,131 3,316 -1,754 0 1,562 40 -712 0 0 Reported pre-tax profit Minority interests Total taxes -246 -81 -76 292 -118 -128 1,052 1 -286 -969 0 4 -3,490 0 803 -3,060 0 799 -1,612 0 -58 -1,245 0 260 433 0 -254 -918 0 199 117 0 -29 489 0 -122 890 0 -223 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 174 4.6 0.7 (30.9) 4,622 5.1 1.9 43.8 637 5.2 2.4 27.2 -6,360 1.9 (1.0) 0.4 -3,014 (3.1) (7.2) 23.0 -2,218 0.6 (4.0) 26.1 -1,670 7.3 1.5 (3.6) -985 2.7 (1.3) 20.9 179 8.3 4.4 58.7 -719 4.1 0.3 21.7 88 6.0 2.3 25.0 367 7.0 3.0 25.0 668 8.0 3.8 25.0 (4.4) n.a. 0.0 0.0 9.5 21.3 197.9 0.0 (14.0) (11.6) 11.5 260.3 1.2 (63.5) 0.0 0.0 (15.0) (238.2) 0.0 0.0 (9.3) 116.3 0.0 0.0 1.7 1,248.0 0.0 0.0 (13.1) (68.5) 0.0 0.0 17.2 266.8 0.0 0.0 (9.9) (55.0) (92.8) 0.0 2.0 47.6 565.1 0.0 3.4 20.6 34.8 317.4 3.4 18.2 30.9 82.0 04/05 1,776 -269 1,507 -1,827 -320 0 2,797 2,477 -2,426 0 38 89 05/06 2,544 -442 2,102 -2,299 -197 0 9,784 9,587 -7,438 0 -30 2,119 06/07 2,145 689 2,834 -2,908 -74 0 2,695 2,621 -4,492 0 -41 -1,912 07/08 -1,849 -802 -2,651 -4,455 -7,106 0 1,542 -5,564 2,480 0 -24 -3,108 08/09 -2,342 -1,106 -3,448 -4,661 -8,109 0 2,084 -6,025 -1,524 5,808 147 -1,594 09/10 232 -387 -155 -2,493 -2,648 0 697 -1,951 -1,859 4,678 -14 854 10/11 734 1,111 1,845 -2,041 -196 0 517 321 870 0 -2,426 -1,235 11/12 1,319 1,243 2,562 -2,595 -33 0 1,976 1,943 -1,858 0 -1,104 -1,019 12/13 1,806 -778 1,028 -1,877 -849 0 1,644 795 1,535 0 -368 1,962 13/14 476 620 1,096 -1,426 -330 -175 945 440 -1,275 3,500 1 2,666 14/15E 1,489 -372 1,117 -1,150 -33 -350 700 317 -500 0 0 -183 15/16E 1,940 -2 1,938 -1,990 -52 -350 0 -402 -1,000 0 0 -1,402 16/17E 2,382 -58 2,323 -3,265 -941 -350 0 -1,291 0 0 0 -1,291 3.3 3.8 5.6 8.4 10.4 6.1 4.9 7.2 4.4 3.8 3.0 5.0 7.9 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 04/05 8,684 12,893 11,315 21,262 3,862 58,016 05/06 10,803 9,172 11,796 16,461 2,932 51,164 06/07 8,891 13,216 10,223 14,183 2,257 48,770 07/08 5,783 10,741 10,869 14,879 1,092 43,364 08/09 4,189 8,670 12,019 16,320 1,296 42,494 09/10 5,043 6,191 13,648 15,529 1,414 41,825 10/11 3,808 5,494 14,023 14,167 1,693 39,185 11/12 2,789 4,273 14,404 13,366 1,922 36,754 12/13 4,751 3,462 15,644 9,969 1,802 35,628 13/14 7,417 3,617 7,212 9,174 1,905 29,325 14/15E 7,234 3,335 6,552 8,883 1,905 27,909 15/16E 5,833 3,339 6,592 9,259 1,905 26,928 16/17E 4,541 3,452 6,632 10,770 1,905 27,301 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 26,176 19,759 577 11,504 58,016 16,420 18,356 22 16,366 51,164 8,744 22,877 19 17,130 48,770 17,460 18,592 0 7,312 43,364 13,901 17,205 0 11,388 42,494 10,084 17,303 0 14,438 41,825 13,313 13,439 0 12,433 39,185 10,815 14,783 0 11,156 36,754 11,399 13,126 16 11,087 35,628 10,805 13,613 0 4,907 29,325 10,305 12,959 0 4,645 27,909 9,305 12,961 0 4,662 26,928 9,305 13,016 0 4,979 27,301 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 15,743 130.3 20.8 6.2 1.7 4,154 25.3 32.0 1.3 2.2 -835 (4.9) 35.2 (0.3) 2.6 10,989 150.3 16.9 11.0 3.7 9,024 79.2 26.8 (6.6) (1.7) 4,353 30.1 34.5 19.3 0.4 9,482 76.3 31.7 3.1 2.9 8,003 71.7 30.4 8.4 0.9 6,356 57.2 31.2 1.8 3.5 3,115 63.5 16.7 2.0 1.4 2,798 60.2 16.6 1.2 2.8 3,199 68.6 17.3 1.1 3.6 4,491 90.2 18.2 1.4 4.5 (%) Votes 50.0 7.5 1.4 Capital 49.0 7.4 1.4 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Nordic states Wallenberg Foundation Unionen Management Title COB CEO CFO Name Fritz Schur Rickard Gustafson Göran Jansson Company information Contact Internet Phone number www.sasgroup.net (46) 8 797 00 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 100 Sector Report Nordic High Yield Update Seadrill (BB-/Negative) ● Credit rating Our main credit concern for Seadrill is the challenging offshore drilling market and the company’s relatively high leverage. In our view, the credit rating is supported by Seadrill’s position as the largest offshore driller in the world in addition to its modern high quality asset base and strong perceived bank support. The negative outlook reflects our expectations that credit metrics will deteriorate as rigs roll out its current contract base and start generating revenues at significantly lower dayrates. As a result of low activity in the rig market, over the past year Seadrill has seen its backlog reduced by 26% year-on-year, currently at USD 7540bn. Key bond covenants and terms Seadrill’s NO-ISIN senior unsecured bonds: Change of control put at 100 Equity ratio (market value adjusted) > 30% Seadrill’s US-ISIN senior unsecured bonds Leverage cannot exceed the greater of 75% of asset value or newbuild value Dividend restriction: EBITDA – 1.5x net interest + cash proceeds from securities & sale of investments Bank covenants USD 150m minimum liquidity (NADL USD 75m) Interest Cover (EBITDA/interest expense >2.5x) Current ratio >1 Equity ratio > 30% Leverage ratio (NIBD/EBITDA) < 4.5x ● Bond recommendations We think that Seadrill is attractive on a relative basis compared with peers such as Fred Olsen Energy and Transocean. This is because we believe that the market is not factoring in the importance of high quality modern assets, Seadrill’s financial flexibility and its stronger backlog than, in particular, Transocean. On a relative basis we would prefer to go long Seadrill, particularly the longer dated bonds. However, our grim 2016 outlook for offshore drillers overshadows this and reflects the marked-to-market risk, and we retain our Underweight recommendation on all bonds but SDRL 2020s. We have a Marketweight recommendation on the SDRL 2020s to indicate two things. Firstly, our belief that Seadrill on a relative basis to peers is mispriced. Secondly the fact that if you believe Seadrill will prevail through the ongoing rig crisis, the only bond that makes sense to buy is the furthest out on the curve. It has among the lowest cash prices in the event of a restructuring, an attractive coupon (6.125%) and, if all goes well, it offers the highest upside. If a default occurs (most likely in 2017) then it represents have the lowest cash entry point in a restructuring. Equity and total assets are adjusted for the difference between book and market value of drilling untis. Overview chart Bond issuer Drilling unit owning cmpanies Sadrill Ltd. Contract and management companies Drilling units under sale leaseback Holding companies ● Recent financial updates Seadrill reported EBITDA of USD 652m in Q2 2015 versus our estimate of USD 651m. The quarter was in many respects credit positive as the company successfully amended bank covenants and deferred a large proportion of its newbuilds into the future, preventing the company from taking delivery of rigs in a poor market. Credit strengths ● ● ● Credit concerns Large and modern fleet, which suits future industry demands in deeper waters and harsher environments and established presence in all offshore basins Financially strong and committed long-term owner. Large contract backlog, backed by oil companies. ● ● ● ● Highly cyclical and capital-intensive industry. A highly leveraged balance sheet. Strong appetite for acquisitions and opportunistic ordering of new vessels. Significant contracting risk related to newbuilds. Selected outstanding bonds Issuer Seadrill Ltd Seadrill Ltd Seadrill Ltd Seadrill Ltd Seadrill Ltd Ticker Our view SDRL05 BB-/B+ BB-/B+ SDRL07 BB-/B+ BB-/B+ BB-/B+ Sector Oilservice Oilservice Oilservice Oilservice Oilservice Issue date 05.10.2010 25.09.2013 12.03.2013 14.09.2012 18.03.2014 Maturity date 05.10.2015 15.09.2020 12.03.2018 15.09.2017 18.03.2019 Coupon Outst. Amount 6.500% USD 350m 6.625% USD 500m Nibor + 375 NOK 1800m 6.125% USD 1000m Stibor + 325 SEK 1500m mid price 99.91 70.18 74.48 80.63 70.18 ASW Recommendation 772 Overweight 1105 Markedweight 1649 Underweight 1483 Underweight 1105 Underweight Source: Bloomberg and SEB Bond spreads Debt maturity profile per Q2 2015 1200 SDRLNO 5 5/8 09/15/17 1100 ATW 6 1/2 02/01/20 SDRL08 AWDR01 PACD 8 1/4 02/23/15 SDRL07 SDRLNO 6 1/8 09/15/20 PACD 5 3/8 06/01/20 1000 900 800 SDRL05 700 AWDR01 FOE05 600 500 PACD 7 1/4 12/01/17 FOE04 400 Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 101 Sector Report Nordic High Yield Update Company description Since being established in 2005, Seadrill has carried out a series of rig acquisitions, the most important of which was Smedvig in 2006. Through an extensive newbuilding programme, Seadrill has become the second largest global ultra-deepwater driller, with the most modern fleet among large drilling contractors. Seadrill controls a fleet of 30 floaters and 33 jackups, with 24 units under construction with scheduled deliveries in 2013-16. Seadrill holds stakes in other drilling contractors: North Atlantic Drilling (74%), Asia Offshore Drilling (66%), Sevan Drilling (50%), Seadrill Partners (75%), oil services company SapuraKencana (12%) and the well service company Archer (40%). Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2011 4,214 -1,877 2,337 -563 0 1,774 -420 -291 591 0 2012 4,478 -2,071 2,407 -614 0 1,793 -219 -316 0 180 2013 5,343 -2,534 2,809 -711 0 2,098 -223 -387 0 1,486 2014 5,437 -2,425 3,012 -925 0 2,087 0 -411 0 2,434 2015E 4,485 -1,830 2,654 -750 0 1,904 0 -411 0 -10 2016E 4,074 -1,887 2,187 -782 0 1,405 0 -432 0 137 2017E 4,355 -2,002 2,354 -847 0 1,507 0 -457 0 147 Reported pre-tax profit Minority interests Total taxes 1,654 -87 -146 1,438 -111 -179 2,974 -133 -200 4,110 -108 -19 1,484 -60 -189 1,110 -35 -167 1,197 -78 -200 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 1,420 55.5 42.1 8.9 1,148 53.8 41.8 12.4 2,641 52.6 42.9 6.7 3,983 55.4 44.3 0.5 1,234 59.2 45.2 12.8 907 53.7 36.6 15.0 919 54.0 36.6 16.7 3.6 n.a. 9.2 24.3 1.7 3.0 1.1 (13.0) 14.1 16.7 17.0 106.8 (3.8) 7.2 (0.5) 38.2 (10.6) (11.9) (8.7) (63.9) (8.9) (17.6) (26.2) (25.2) 7.3 7.6 7.3 7.8 2011 2,431 694 3,125 -2,633 492 -1,440 0 -948 1,813 465 0 1,330 2012 2,048 -589 1,459 -1,557 -98 -1,925 197 -1,826 1,251 0 279 -296 2013 2,042 1,251 3,293 -4,168 -875 -1,253 1,002 -1,126 2,390 0 0 1,264 2014 5,035 -3,461 1,574 -2,873 -1,299 -1,866 3,338 173 -86 0 0 87 2015E 2,234 -304 1,930 -1,936 -6 -938 1,881 936 -966 0 0 -29 2016E 1,892 -283 1,609 -3,017 -1,408 0 284 -1,124 675 0 0 -449 2017E 2,044 -635 1,408 -844 564 0 193 757 -414 0 0 343 62.5 36.3 85.2 61.0 46.0 78.7 20.5 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2011 715 1,252 721 14,296 1,320 18,304 2012 502 1,853 509 15,449 1,320 19,633 2013 744 2,090 1,340 21,976 150 26,300 2014 831 2,584 30 22,880 181 26,506 2015E 802 1,961 27 23,319 161 26,269 2016E 353 1,914 27 25,406 161 27,860 2017E 696 2,091 27 25,239 161 28,214 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 10,428 1,574 325 5,977 18,304 11,827 1,729 693 5,384 19,633 14,881 3,217 690 7,512 26,300 13,035 3,081 626 9,764 26,506 11,991 2,609 681 10,988 26,269 12,666 2,604 716 11,873 27,860 12,252 2,620 795 12,548 28,214 9,463 150.2 34.4 4.0 8.0 11,107 182.8 31.0 4.6 7.1 13,995 170.6 31.2 5.0 7.3 12,204 117.5 39.2 4.1 6.7 11,190 95.9 44.4 4.2 5.9 12,313 97.8 45.2 5.6 4.9 11,556 86.6 47.3 4.9 5.0 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Hemen Holding Morgan Stanley Barrow Hanley Mwhinney & Straus (%) Votes 24.5 5.1 4.3 Capital 24.5 5.1 4.3 Management Title COB CEO CFO Name John Fredriksen Per Wullf Rune Magnus Lundetræ Company information Contact Internet Phone number www.seadrill.com (47) 51 30 90 00 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 102 Sector Report Nordic High Yield Update Key bond covenants and terms Songa Offshore (B-/Negative) Senior unsecured bonds CoC @ 101 Negative pledge and indebtness restrictions Book equity > 25% until Q1 2016 27% until Q2 2017 thereafter 30% EBITDA/Net interest > 2x between 2015-2016 thereafter 2.25x NIBD/EBITDA < 4.75x until Q4 2017 thereafter 4.5x (excluding convertible bond) Dividends: max 50% of net income (6m after CAT-D start-up) Liquidity > USD 50m ● Credit rating Songa Offshore’s credit rating is supported primarily by the strongest backlog per rig among all offshore drillers. Four CAT-Ds are scheduled for delivery between Q2 2015 and Q2 2016. All are on firm eight-year contracts with Statoil. Songa has taken many important steps to reduce its risk over the last years, in a worsening rig market. The company managed to divest two of its older units at prices which in hindsight look to be favourable, has secured committed financing for its newbuilds and has gone through its latest special periodic survey, on the Songa Dee, within budget. They key credit risks are a potential liquidity squeeze related to pre-commencement working capital ramp-up on Songa Offshore’s Cat-d rigs. Overview chart ● Bond recommendations The cash flow after debt service from the Cat-D facilities is currently too low to support service for the remainder of the debt. While the banks may accept a temporary postponement in amortisation of the Cat-D ring-fence (USD 194m a year) which would go a long way to resolve liquidity issues, the main owner could decide simply to bridge any shortfall with cash at hand. As it is very difficult to know how bondholders could get squeezed in such a process, we believe there are too many unknowns to justify a spread of around +1500bp versus Seadrill at +1350bp. ● Recent updates Songa Offshore beat our and consensus Q2 estimates with EBITDA of USD 60m compared to the Bloomberg consensus of USD 51m. Net debt to EBITDA increased from 3.6x to 6.2x as the company took delivery of its first CAT-D newbuild and drew down cash. On our estimates we project a possible liquidity squeeze of USD 125m, which is the reason for our Negative outlook. Credit strengths Credit concerns ● Secured financing for newbuilds. ● Highly cyclical and capital-intensive industry. ● Strong backlog with Statoil. ● Highly leveraged balance sheet. ● Strong financial owner. ● Thin liquidity buffer during the delivery of newbuilds. Selected outstanding bonds Source: Bloomberg and SEB Bond spreads Maturity profile (USDm) Source: SEB and Bloomberg SEB Credit Research Source: SEB 15 September 2015 103 Sector Report Nordic High Yield Update Credit Research Analyst Alexander Jost (47) 22 82 67 12 [email protected] Company description: Songa Offshore owns a fleet of seven midwater floaters, four of which are the new Cat-D midwater units under construction with scheduled deliveries in 2014-15. These four units carry eight-year fixed charters with Statoil. Following the completion of the sale of its two international midwater units in 2014, Songa will be a pure play on the Norwegian continental shelf with Statoil as its sole customer. Profit & loss statement (USDm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2005 1 -6 -5 0 0 -5 2006 31 -40 -9 -14 0 -23 2007 305 -130 175 -55 0 121 2008 387 -243 143 -61 0 83 2009 785 -361 424 -87 0 337 2010 650 -306 344 -102 0 242 2011 522 -326 196 -93 0 104 2012 585 -386 198 -454 0 -256 2013 562 -350 213 -232 0 -19 2014 495 -300 195 -179 0 16 2015E 486 -286 200 -131 0 68 2016E 839 -449 391 -165 0 226 2017E 873 -428 445 -165 0 280 Net interest expenses Value changes Other financial items -24 0 0 -25 19 0 -59 0 0 -60 0 0 -53 0 0 -36 0 0 -29 0 0 -39 0 0 -83 0 0 -31 0 0 -76 0 0 -85 0 0 -78 0 0 Reported pre-tax profit Minority interests Total taxes -29 0 3 -29 0 8 62 0 -14 22 0 -5 284 0 -25 206 0 -14 75 0 43 -295 0 -11 -102 0 -57 -15 0 3 -8 0 -15 141 0 -34 202 0 -35 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -25 (373.2) 0.0 12.0 -21 (29.8) (74.3) 27.5 48 57.5 39.6 22.1 18 37.1 21.3 21.3 260 54.1 43.0 8.7 192 52.9 37.2 6.8 117 37.6 19.9 (57.0) -317 33.9 (45.5) 0.0 -216 37.8 (3.8) 0.0 -9 39.5 3.8 0.0 -22 41.1 16.6 (184.8) 107 46.6 29.0 23.8 167 51.0 34.4 17.3 0.0 n.a. 0.0 0.0 0.0 (105.1) 0.0 0.0 882.9 1,997.5 0.0 0.0 26.8 (18.2) (31.6) (64.0) 103.0 195.8 308.5 1,176.2 (17.2) (19.0) (28.3) (27.4) (19.7) (42.8) (57.1) (63.8) 7.7 0.9 0.0 0.0 (10.0) 7.3 0.0 0.0 (17.3) (8.2) 0.0 0.0 (1.8) 2.4 326.6 0.0 89.4 95.6 230.3 0.0 4.4 13.9 24.1 43.6 2005 -25 29 4 -261 -257 0 0 -257 188 86 -14 2 2006 -26 -1 -27 -459 -485 0 0 -485 452 122 1 89 2007 103 -49 54 -320 -266 0 0 -266 178 63 -1 -26 2008 78 11 89 -463 -373 0 0 -373 102 48 217 -6 2009 352 -64 288 -95 193 0 0 193 -227 113 -49 30 2010 199 41 240 151 391 0 0 391 -475 146 0 62 2011 144 30 174 -947 -773 0 0 -773 707 14 0 -52 2012 148 237 386 -810 -424 0 0 -424 273 108 0 -43 2013 73 -34 39 -207 -168 0 590 422 -398 236 143 403 2014 167 -125 42 -238 -195 0 -161 -357 -138 25 0 -470 2015E 109 -36 73 -2,033 -1,960 0 11 -1,949 1,761 0 0 -188 2016E 272 21 294 -80 214 0 0 214 -268 0 0 -54 2017E 332 55 388 -70 318 0 0 318 -259 0 0 59 0.0 0.0 0.0 0.0 0.0 -35.7 17.4 144.0 40.9 56.8 494.0 10.3 8.6 (USDm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 2 2 0 261 0 265 2006 91 50 0 725 0 866 2007 65 74 0 996 0 1,135 2008 59 78 0 1,417 0 1,553 2009 88 180 0 1,457 0 1,725 2010 169 142 0 1,475 0 1,786 2011 79 175 0 2,181 0 2,435 2012 38 710 0 1,889 103 2,739 2013 440 303 0 1,640 56 2,439 2014 246 86 0 1,921 65 2,318 2015E 58 90 0 3,811 65 4,025 2016E 4 171 0 3,726 65 3,966 2017E 63 201 0 3,631 65 3,960 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 174 31 0 60 265 625 79 0 162 866 804 53 0 277 1,135 1,153 68 0 332 1,553 890 127 0 708 1,725 716 38 0 1,032 1,786 1,105 171 0 1,160 2,435 1,091 699 0 949 2,739 931 428 0 1,081 2,439 827 443 0 1,048 2,318 2,589 411 0 1,025 4,025 2,321 513 0 1,133 3,966 2,062 598 0 1,300 3,960 172 285.9 22.7 (38.2) (0.2) 535 330.9 18.7 (57.9) (0.4) 739 266.6 24.4 4.2 2.9 1,094 329.2 21.4 7.6 2.4 712 100.5 41.1 1.7 8.0 547 53.0 57.8 1.6 9.7 757 65.2 47.6 3.9 6.8 1,054 111.0 34.6 5.3 5.1 490 45.4 44.3 2.3 2.6 581 55.5 45.2 3.0 5.8 2,530 246.8 25.5 12.7 2.6 2,317 204.6 28.6 5.9 4.5 1,999 153.8 32.8 4.5 5.6 (%) Votes 49.4 7.4 3.1 Capital 49.4 7.4 3.1 Cash flow (USDm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Perestroika AS Skandinaviska Enskilda Banken Oslo Fidelity Funds-Nordi Management Title COB CEO CFO Name Fredrik Wilhem Mohn Bjørnar Iversen Jan Rune Steinsland Company information Contact Internet Phone number www.songaoffshore.no (47) 23 01 14 20 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 104 Sector Report Nordic High Yield Update SSAB (BB-/Stable) ● Credit rating SSAB’s Q2 earnings and profit margins were flat compared with Q2 2014 and down from Q1. The decline in selling prices had a negative effect of SEK 1bn compared with last year, which was offset by lower costs, including realised synergies from the Rautaruukki deal. In Europe, the underlying demand outlook seems rather stable, while in the Americas we expect destocking to continue in Q3. We expect a minor earnings improvement in 2015 compared with 2014, while further cost savings should support earnings further in 2016. We also assume some recovery in Americas’ margins in 2016. Credit metrics continued to improve from Q1 as net debt declined, but in general, financial leverage remains high. Key bond covenants and terms: SSAB senior unsecured bonds: Negative pledge Change of control Cross default ● Bond recommendations The credit spreads of SSAB’s EUR bonds have widened in recent weeks, whereas spreads of SEK bonds have moved more or less sideways. We consider 2019 EUR bonds (Overweight) attractively valued at current levels, but think the SEK bonds (Marketweight) are fairly priced. Overview chart Bond SSAB AB ● Recent financial update The shortfall to our Q2 earnings estimates came from Europe and the Americas, where profits declined more than expected from Q1. In Europe, production problems, together with lower prices, plagued quarterly earnings, while in the Americas the profit decline from Q1 was mainly explained by lower prices (shipments were 1% lower than in Q1 but 10% lower than last year). The P&L impact of Rautaruukki synergies during Q2 was around SEK 125m. Lower inventory helped to generate strong quarterly cash flow, and net debt on an adjusted basis declined to SEK 26.1bn from SEK 27.7bn in Q1. Net debt to EBITDA, on an adjusted basis, was 5.2x, down from 6.0x in Q1 and 8.9x a year ago. Subsidiaries Credit strengths Credit concerns ● Significant market shares in its specific product areas and good geographical diversification. ● Industry is characterized by high demand cyclicality, price volatility and overcapacity. Market conditions are especially difficult in Europe. ● Forecast for moderately improving earnings in 2014-16 and a solid positive free cash flow. ● Key credit ratios are currently very weak. ● ● Strong liquidity supported by substantial committed unutilized credit facilities. Working capital swings can be substantial and pose a threat to our forecast for positive free operating cash flow. Selected outstanding bonds Issuer Public SEB Issue date Maturity date Cpn type Cpn Amount Z-sprd mid SSAB N.R./BB- BB- 10/04/2014 10/04/2019 Fixed SSAB N.R./BB- BB- 25/02/2014 25/02/2019 Floating SSAB N.R./BB- BB- 25/02/2014 25/02/2019 Fixed SSAB N.R./BB- BB- 13/12/2012 13/12/2017 Floating SSAB N.R./BB- BB- 13/12/2012 13/12/2017 Fixed 4.875 Recommendation 3.875 EUR 350m 366 Overweight 3m Stibor +3.4 SEK 1000m 295 Marketweight 4.625 SEK 500m 301 Marketweight 3m Stibor +2.8 SEK 475m 210 Marketweight SEK 525m 229 Marketweight Source: Bloomberg and SEB Debt maturity profile 400 9000 350 8000 300 7000 250 6000 200 5000 SEKm Bps Bond spread development 150 4000 Jul-15 Aug-15 Jun-15 Apr-15 May-15 Mar-15 Jan-15 Feb-15 Dec-14 Oct-14 2019 SEK Nov-14 Sep-14 Jul-14 2017 SEK Aug-14 Jun-14 Apr-14 May-14 Mar-14 1000 Jan-14 2000 0 Feb-14 3000 50 Dec-13 100 2019 EUR 2015 Source: SEB, Bloomberg SEB Credit Research 0 2016 2017 2018 2019 2020=> Source: SEB 15 September 2015 105 Sector Report Nordic High Yield Update Company description SSAB manufactures carbon steel in Sweden and the United States. SSAB’s total crude steel production capacity of 6.6mt a year is about 2.5% of the total combined European and North American crude steel industry’s capacity. The company’s product range is more specialised than that of most other carbon steel producers. In particular, the company specialises in very strong but light steel plates, which are used to make heavy equipment and other mobile applications. These are sold in relatively small volumes to OEMs and their sub-suppliers all over the world. Standard steel is also offered to Nordic, North European and North American industrial customers. Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 27,804 -21,213 6,591 -951 0 5,640 95 -64 0 0 2006 31,054 -24,276 6,778 -963 0 5,815 239 -2 0 0 2007 47,651 -37,644 10,007 -2,046 0 7,961 100 -1,662 0 0 2008 54,329 -42,744 11,585 -2,164 0 9,421 95 -563 0 0 2009 29,838 -28,934 904 -2,503 0 -1,599 7 -469 0 0 2010 39,883 -36,348 3,535 -2,451 0 1,084 0 -402 0 0 2011 44,640 -39,827 4,813 -2,345 0 2,468 44 -514 0 0 2012 38,923 -36,465 2,458 -2,586 0 -128 32 -597 0 0 2013 35,022 -33,705 1,317 -2,464 0 -1,147 16 -597 0 0 2014 47,752 -44,448 3,304 -3,412 0 -108 1 -882 0 -600 2015E 60,054 -55,183 4,870 -3,881 0 989 0 -846 0 0 2016E 62,868 -56,576 6,292 -3,986 0 2,307 0 -759 0 0 2017E 66,550 -59,127 7,423 -3,987 0 3,436 0 -658 0 0 Reported pre-tax profit Minority interests Total taxes 5,671 -47 -1,603 6,052 -88 -1,711 6,399 -98 -1,714 8,953 -63 -2,445 -2,061 8 1,182 682 -48 82 1,998 0 -438 -693 0 708 -1,728 0 662 -1,589 -5 195 143 0 -29 1,547 0 -309 2,778 0 -556 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 4,021 23.7 20.3 28.3 4,253 21.8 18.7 28.3 4,587 21.0 16.7 26.8 6,935 21.3 17.3 27.3 -1,002 3.0 (5.4) 57.4 552 8.9 2.7 (12.0) 1,560 10.8 5.5 21.9 15 6.3 (0.3) 102.2 -1,066 3.8 (3.3) 38.3 -1,399 6.9 (0.2) 12.3 114 8.1 1.6 20.0 1,238 10.0 3.7 20.0 2,223 11.2 5.2 20.0 12.9 n.a. 16.7 18.5 11.7 2.8 3.1 6.7 53.4 47.6 36.9 5.7 14.0 15.8 18.3 39.9 (45.1) (92.2) 0.0 0.0 33.7 290.8 0.0 0.0 11.9 36.2 127.7 193.0 (12.8) (48.9) 0.0 0.0 (10.0) (46.4) 0.0 0.0 36.3 150.9 0.0 0.0 25.8 47.4 0.0 0.0 4.7 29.2 133.1 981.7 5.9 18.0 49.0 79.6 2005 4,864 -1,281 3,583 -778 2,805 -731 1,425 3,499 -300 -2,119 -1,772 -692 2006 5,065 -230 4,835 -1,257 3,578 -818 248 3,008 -314 -2,205 0 489 2007 5,396 -715 4,681 -2,901 1,780 -1,166 -54,459 -53,845 44,217 9,962 0 334 2008 9,820 -2,759 7,061 -2,455 4,606 -1,620 24,918 27,904 -26,898 0 0 1,006 2009 1,486 3,098 4,584 -1,920 2,664 -1,295 240 1,609 0 0 -230 1,379 2010 2,904 -2,852 52 -1,954 -1,902 -324 -559 -2,785 1,428 0 -981 -2,338 2011 4,335 -827 3,508 -3,210 298 -648 -99 -449 518 0 265 334 2012 1,678 3,235 4,913 -1,431 3,482 -648 -49 2,785 -1,429 0 0 1,356 2013 366 1,367 1,733 -807 926 -324 91 693 -1,573 0 0 -880 2014 2,273 -2,721 -448 -1,672 -2,120 0 -13,979 -16,099 -2,236 14,381 -49 -4,003 2015E 3,888 558 4,447 -2,100 2,347 0 0 2,347 -3,000 0 0 -653 2016E 5,123 -329 4,794 -2,100 2,694 -275 0 2,420 -3,000 0 0 -580 2017E 6,209 -281 5,928 -2,200 3,728 -549 0 3,179 -4,000 0 0 -821 2.8 4.0 6.1 4.5 6.4 4.9 7.2 3.7 2.3 3.5 3.5 3.3 3.3 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 884 12,768 505 7,651 12 21,820 2006 1,373 13,082 368 7,962 10 22,795 2007 1,707 23,882 1,650 22,818 40,648 90,705 2008 2,713 20,453 737 17,584 27,768 69,255 2009 3,652 13,988 567 17,137 25,075 60,419 2010 1,314 19,093 631 17,063 22,952 61,053 2011 1,648 19,392 1,157 18,693 22,549 63,439 2012 3,004 15,359 2,030 17,610 20,616 58,619 2013 2,124 14,898 2,536 16,467 19,911 55,936 2014 3,014 26,514 3,244 26,570 30,385 89,727 2015E 2,361 29,548 3,244 24,789 30,385 90,327 2016E 1,780 30,571 3,244 22,903 30,385 88,884 2017E 960 31,760 3,244 21,117 30,385 87,465 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 1,755 5,701 180 14,184 21,820 1,156 6,088 216 15,335 22,795 44,823 16,737 229 28,916 90,705 19,704 14,358 199 34,994 69,255 18,876 10,541 161 30,841 60,419 19,763 11,214 0 30,076 61,053 20,547 12,124 0 30,768 63,439 18,502 11,348 0 28,769 58,619 18,661 10,126 23 27,126 55,936 29,667 16,181 62 43,817 89,727 26,667 19,667 62 43,931 90,327 23,667 20,261 62 44,894 88,884 19,667 21,168 62 46,568 87,465 871 6.1 65.8 0.1 103.0 -217 (1.4) 68.2 (0.0) 69.2 43,116 147.9 32.1 4.3 5.2 16,991 48.3 50.8 1.5 12.0 15,314 49.4 51.3 16.9 1.7 17,587 58.5 49.3 5.0 8.2 18,475 60.0 48.5 3.8 8.8 15,498 53.9 49.1 6.3 3.7 16,537 60.9 48.5 12.6 2.0 24,674 56.2 48.9 7.5 3.0 24,306 55.2 48.7 5.0 5.6 21,887 48.7 50.6 3.5 8.1 18,707 40.1 53.3 2.5 11.1 (%) Votes 17.7 10.1 3.9 Capital 10.2 17.1 3.7 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name Industrivärden Solidium Oy Swedbank Robur Funds Management Title COB CEO CFO Name Sverker Martin-Löf Martin Lindqvist Håkan Folin Company information Contact Internet Phone number www.ssab.se (46) 8 454 5700 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 106 Sector Report Nordic High Yield Update Stena Metall (BB+/positive) ● Credit rating Following the second tertial report for Stena Metall in June, we revised our outlook to Positive from Stable on our BB+ rating. The rationale behind this outlook change was the strong profitability improvement and deleveraging, which we believe will continue in the short to medium-term, and thus could justify an upgrade of our rating by one notch. We now expect the company to exceed its EBITDA target of SEK 1bn in fiscal 2014/15, helped by further efficiency improvements and short-term pick-up in ferrous prices. The stable and prudent long-term ownership and management’s ambition to maintain financial metrics in line with investment grade ratios are other supporting factors, and we expect the dividend to stay relatively low. Key bond covenants and terms -Guarantor: Stena Metall AB -CoC: If guarantor ceases to own 100% put @100 or; ultimate parent (Sten Olsson family) owns less than 51% ● Bond recommendations For a long time, our credit story on Stena Metall has been that we prefer the NOK bonds over the SEK bonds due to the previous spread pick-up. Now, we have seen a tightening of the NOK bonds while SEK bonds have stayed flat, i.e. the Stena Metall curve is more similar between the two currencies. Moreover, with a positive rating migration expected, we are now Overweight on five Stena Metall bonds. Simplified overview chart The Olsson Family 100% 100% Stena AB 100% Stena Sessan AB Stena Metal AB Bond guarantor 100% Stena Metal Finans ● Recent financial updates The second tertial 2014/2015 results showed further positive overall profitability trends, with improvements in most segments without any clear help from the market (mainly internal efficiency improvement). Helped by lower net debt and improved EBITDA, unadjusted net leverage declined to 1.3x from 2.0x (adjusting for operating leases, we estimate that leverage was close to 2.2x). The company commented that scrap inflow volume was largely unchanged from last year, but that it saw some short-term rebound in ferrous prices (still too early to change our view of the longer term negative trend). bond issuer Credit strengths Credit concerns ● Diversified business operations with solid market positions. ● Exposure to business cycles and commodity prices. ● Strong underlying long-term business drivers fuelled by greater awareness of climate change and evolving regulatory environment. ● Traditional low margin business with high working capital requirements. ● ● Stable and prudent long-term ownership with conservative financial policy. Private ownership and with limited transparency and lower access to information Selected outstanding bonds Issuer Stena Metal Finans AB Stena Metal Finans AB Stena Metal Finans AB Stena Metal Finans AB Stena Metal Finans AB Stena Metal Finans AB Bond rating BB+/Stable BB+/Stable BB+/Stable BB+/Stable BB+/Stable BB+/Stable Sector Waste & Environment Service Waste & Environment Service Waste & Environment Service Waste & Environment Service Waste & Environment Service Waste & Environment Service Issue date 18/04/2011 08/06/2011 18/04/2011 09/05/2011 12/06/2013 29/05/2015 Maturity date 18/04/2016 08/06/2016 18/04/2017 09/05/2017 12/06/2018 29/10/2019 Coupon Stibor + 300 Nibor + 300 Stibor + 320 Stibor + 320 Nibor + 350 Stibor + 285 Outst. Amount SEK 425m NOK 690m SEK 300m SEK 200m NOK 300m SEK 500m Ind. price Ind. spread Recommendation 101.0 152 n.a. 101.1 166 Overweight 101.9 210 Overweight 101.9 210 Overweight 102.5 258 Overweight 100.5 300 Overweight Source: Bloomberg and SEB Bond spreads 400 350 300 250 200 150 100 May-13 Bond maturity profile Jan-14 SMF01 Oct-14 Jun-15 2015 SMF02 2016 2017 2018 2019 2020 Bonds Source: SEB and Bloomberg SEB Credit Research 1400 1200 1000 800 600 400 200 0 Source: SEB 15 September 2015 107 Sector Report Nordic High Yield Update Company description The Stena Metall Group is a leading, innovative recycling company that collects, processes and recycles all types of waste. The group includes the production of recycled aluminium, the supply of steel products, financial operations and international trading in ferrous and non-ferrous metals and oil. At the end of the fiscal year 2013/2014 the group had operations in around 220 locations in Sweden, Norway, Denmark, Finland, Poland, Switzerland, Germany, Italy and the US. Credit Research Analyst Henrik Blymke (47) 22 82 71 91 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 20,879 -19,751 1,128 -340 -43 745 0 -59 0 0 2006 23,929 -22,522 1,407 -390 -51 966 0 -105 0 0 2007 25,403 -23,938 1,465 -477 -94 894 0 -62 0 0 2008 31,781 -30,133 1,648 -596 -104 948 0 -194 0 0 2009 20,465 -20,107 358 -577 -119 -338 0 -200 0 0 2010 23,161 -21,913 1,248 -519 -124 605 0 -152 6 0 2011 28,977 -27,640 1,337 -491 -123 722 0 -197 1 0 2012 35,193 -34,049 1,144 -566 -154 424 0 -231 -1 0 2013 25,404 -24,685 719 -607 -143 -31 0 -182 0 0 2014 23,724 -22,919 805 -532 -140 133 2 -174 0 0 2015E 22,198 -21,145 1,053 -550 -140 363 0 -171 0 0 2016E 22,642 -21,527 1,115 -555 -140 420 0 -167 0 0 2017E 23,095 -21,917 1,179 -559 -140 480 0 -162 0 0 Reported pre-tax profit Minority interests Total taxes 686 0 -250 861 0 -259 832 0 -278 754 0 -294 -538 0 23 458 0 -39 526 0 -190 192 0 -100 -213 0 -36 -39 0 -1 193 0 0 253 0 0 318 0 0 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 436 5.4 3.6 36.4 602 5.9 4.0 30.1 554 5.8 3.5 33.4 460 5.2 3.0 39.0 -515 1.7 (1.7) 4.3 420 5.4 2.6 8.4 337 4.6 2.5 36.1 92 3.2 1.2 52.1 -249 2.8 (0.1) (16.9) -40 3.4 0.6 (1.8) 193 4.7 1.6 0.0 253 4.9 1.9 0.0 318 5.1 2.1 0.0 21.3 n.a. 15.7 12.5 14.6 24.7 29.7 25.5 6.2 4.1 (7.5) (3.4) 25.1 12.5 6.0 (9.4) (35.6) (78.3) 0.0 0.0 13.2 248.5 0.0 0.0 25.1 7.1 19.5 14.8 21.5 (14.4) (41.3) (63.6) (27.8) (37.1) 0.0 0.0 (6.6) 11.9 0.0 0.0 (6.4) 30.8 172.9 0.0 2.0 5.9 15.6 31.5 2.0 5.7 14.1 25.4 2005 842 -305 537 -830 -293 0 0 -293 67 0 0 -226 2006 1,257 143 1,400 -1,129 271 0 0 271 -274 0 0 -3 2007 1,012 -1,373 -361 -1,862 -2,223 0 0 -2,223 2,357 0 0 134 2008 944 -507 437 -881 -444 0 0 -444 152 0 0 -292 2009 -407 2,725 2,318 -545 1,773 0 0 1,773 -1,317 0 0 456 2010 1,288 390 1,678 542 2,220 0 0 2,220 -1,172 0 0 1,048 2011 1,288 -1,041 247 -751 -504 -45 0 -549 1,440 0 -5 887 2012 703 873 1,576 -2,030 -455 -53 0 -507 -313 0 -5 -825 2013 466 638 1,103 -242 862 -20 0 842 -390 0 0 452 2014 494 -15 479 -442 37 0 44 81 -674 0 0 -593 2015E 829 -88 740 -500 240 -20 0 220 0 0 0 220 2016E 877 -39 839 -510 329 -20 0 309 0 0 0 309 2017E 928 -40 888 -520 368 -20 0 348 0 0 0 348 4.0 4.7 7.3 2.8 2.7 -2.3 2.6 5.8 1.0 1.9 2.3 2.3 2.3 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 708 4,979 69 2,988 259 9,003 2006 969 5,147 86 3,338 501 10,041 2007 729 7,553 109 4,396 770 13,557 2008 839 8,616 112 4,754 713 15,034 2009 1,167 5,156 840 3,597 685 11,445 2010 2,242 4,686 108 3,215 586 10,837 2011 3,457 5,848 184 3,253 604 13,346 2012 2,788 4,923 231 3,896 1,040 12,877 2013 3,012 4,222 235 3,934 904 12,307 2014 2,432 4,060 201 4,168 749 11,610 2015E 2,652 3,802 201 4,118 609 11,382 2016E 2,961 3,864 201 4,073 469 11,567 2017E 3,309 3,927 201 4,034 329 11,800 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 3,932 2,177 -1 2,895 9,003 3,772 2,863 0 3,406 10,041 6,198 3,494 6 3,859 13,557 6,425 4,404 3 4,202 15,034 4,744 2,984 1 3,716 11,445 3,665 3,054 3 4,115 10,837 5,070 3,860 9 4,407 13,346 5,050 3,395 1 4,432 12,877 4,782 3,345 7 4,173 12,307 4,156 3,331 7 4,115 11,610 4,156 2,930 7 4,288 11,382 4,156 2,882 7 4,521 11,567 4,156 2,817 7 4,819 11,800 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 3,353 115.9 32.1 3.0 7.6 2,953 86.7 33.9 2.1 6.4 5,660 146.4 28.5 3.9 5.9 5,663 134.7 28.0 3.4 3.8 3,597 96.8 32.5 10.0 1.0 1,443 35.1 38.0 1.2 4.9 1,638 37.1 33.1 1.2 4.4 2,290 51.7 34.4 2.0 3.0 1,791 42.8 34.0 2.5 2.6 1,746 42.4 35.5 2.2 3.2 1,526 35.5 37.7 1.4 5.0 1,217 26.9 39.1 1.1 5.3 869 18.0 40.9 0.7 5.6 (%) Votes 100.0 Capital 100.0 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Stena Sphere Management Title COB CEO CFO Name Dan Sten Olsson Anders Jansson Jonas Höglund Company information Contact Internet http://corporate.stenametall.com/ Phone number +46 10 445 2012 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 108 Sector Report Nordic High Yield Update Stora Enso (BB/Stable) ● Credit rating Q2 profits were somewhat lower than we had expected, mainly due to Paper, and Q3 guidance was also softer than we had assumed, partly due to maintenance projects, but also fading support from currencies, among other things. Although we expect the group’s profitability to remain stable in 2015, the sizeable investments will consume cash this year (2016 investments are likely to be lower, though) and we expect credit metrics to remain broadly stable. The large investment projects that aim to increase the share of growth businesses in the mix – supporting longer-term cash flow outlook – progressed as planned. In Q2, FFO/net debt was 23% and net debt/EBITDA was 3.4x on an adjusted basis, more or less unchanged from Q1. Key bond covenants and terms: Senior unsecured bonds: General investment-grade documentation Overview chart ● Bond recommendation Credit spreads of Stora Enso’s EUR bonds have widened over the recent weeks, while SEK spreads have been more stable. We have Marketweight recommendations for both the EUR and the SEK bonds. ● Recent financial update Q2 operational EBIT of EUR 207m was in line with Q2 2014 and down from EUR 220m in Q1. Compared with our forecast, Paper EBIT was clearly weaker than expected, while operational challenges in certain mills also burdened Consumer Board. Lower sales prices especially in paper grades and higher maintenance costs burdened earnings compared to last year, which was offset by foreign exchange rates, lower variable costs and higher volumes. Quarterly operating cash flow was strong, which helped to keep net debt and credit metrics unchanged from Q1 despite a dividend payout. For Q3, Stora Enso guided EBIT to be in line with the Q2 level. Credit strengths Credit concerns ● Diversified earnings including relatively stable packaging business. ● Paper exposure, which is facing structural challenges. ● Sizeable market positions. ● Cyclical and competitive industry with commoditised products. ● High self-sufficiency in pulp, wood supply and partly also in energy. ● Cash generation is expected to remain tight. ● Continued execution to keep operations cost competitive. ● Volatile raw material costs and limited pricing power. Selected outstanding bonds Issuer Public SEB Issue date Maturity date Cpn type Cpn Amount Spread Recommendation Stora Enso Ba2/BB BB 07/03/2012 07/03/2019 Fixed 5.5 EUR 500m 184 Marketweight Stora Enso Ba2/BB BB 19/09/2012 19/03/2018 Fixed 5 EUR 500m 136 Marketweight Stora Enso Ba2/BB BB 26/06/2012 26/06/2017 Fixed 5.75 SEK 500m 145 Marketweight Stora Enso Ba2/BB BB 26/06/2012 26/06/2017 Floating 3m Stibor +3.9 SEK 2200m 135 Marketweight Source: Bloomberg and SEB Bond spread development Debt maturity profile 900 300 800 250 700 600 150 EURm Bps 200 100 500 400 300 200 50 100 0 0 2015 SEK 2017 EUR 2018 EUR 2019 Bonds Source: SEB, Bloomberg SEB Credit Research 2016 2017 2018 Other loans and liabilitites 2019 2020 2021 2022-> Commercial paper Source: SEB 15 September 2015 109 Sector Report Nordic High Yield Update Company description Stora Enso is one of the world's largest forest industry companies, operating in paper, biomaterials, wood products and packaging manufacturing. The group has some 29,000 employees in more than 35 countries worldwide, and is a publicly traded company listed in Helsinki and Stockholm. Customers include publishers, printing houses and paper merchants, as well as the packaging, joinery and construction industries. The company’s aim is to transform into a value-creating, growth markets renewable materials company, with more focus on growth markets in China and Latin America, and fibre-based packaging, plantation-based pulp and competitive paper grades. Credit Research Analyst Lasse Rimpi (358) 9 6162 8716 [email protected] Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2005 13,188 -11,854 1,334 -1,428 0 -94 67 -165 0 13 2006 14,594 -12,712 1,882 -1,258 0 624 87 -225 0 145 2007 13,374 -11,577 1,797 -1,551 0 246 0 -168 0 -1 2008 11,029 -10,333 696 -1,422 0 -727 0 -162 0 -5 2009 9,118 -8,573 545 -1,153 0 -608 0 -279 0 0 2010 10,456 -9,147 1,310 -283 0 1,027 0 -101 0 0 2011 11,174 -9,842 1,332 -573 0 759 0 -238 0 -100 2012 11,034 -9,813 1,221 -532 0 689 0 -207 0 0 2013 10,666 -9,482 1,184 -1,150 0 34 0 -223 0 0 2014 10,381 -9,215 1,166 -766 0 400 0 -280 0 0 2015E 10,093 -8,722 1,371 -540 0 831 0 -215 0 -6 2016E 10,522 -9,121 1,402 -555 0 847 0 -212 0 0 2017E 10,670 -9,209 1,462 -574 0 888 0 -198 0 0 Reported pre-tax profit Minority interests Total taxes -178 0 52 632 0 -43 77 0 -6 -894 0 215 -887 0 9 926 0 -157 421 0 -79 482 0 9 -189 0 118 120 0 -30 610 0 -118 635 0 -146 690 0 -159 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -126 10.1 (0.7) 29.2 589 12.9 4.3 6.7 -212 13.4 1.8 7.5 -675 6.3 (6.6) 24.0 -878 6.0 (6.8) 1.0 769 12.5 10.0 16.9 342 11.9 6.9 18.7 490 11.1 6.4 (1.8) -71 11.1 0.3 62.4 90 11.2 3.9 25.0 493 13.6 8.2 19.3 489 13.3 8.1 23.0 532 13.7 8.3 23.0 6.4 n.a. 0.0 0.0 10.7 41.1 0.0 0.0 (8.4) (4.5) (60.5) (87.8) (17.5) (61.3) 0.0 0.0 (18.9) (21.6) 0.0 0.0 15.1 140.1 0.0 0.0 6.5 1.7 (26.1) (54.5) (1.4) (8.4) (9.3) 14.4 (2.5) (3.0) (95.1) 0.0 (3.1) (1.5) 1,076.5 0.0 (1.2) 17.6 107.8 408.7 4.3 2.2 1.9 4.1 1.4 4.3 4.8 8.7 2005 1,029 -289 740 -1,145 -406 -365 -176 -948 1,346 -345 84 138 2006 1,258 198 1,456 -583 873 -355 330 848 -644 0 5 209 2007 1,572 -331 1,241 -820 421 -355 270 336 -511 0 1,150 976 2008 531 82 613 -707 -94 -355 156 -293 -331 0 0 -624 2009 664 860 1,524 -424 1,100 -158 -63 880 -135 0 -8 736 2010 1,084 -272 812 -400 412 -158 38 292 -70 0 -1 220 2011 870 -173 697 -538 159 -197 -7 -46 106 0 0 61 2012 881 55 936 -675 260 -237 -9 15 901 0 -182 734 2013 703 285 988 -490 498 -237 177 438 -220 0 13 231 2014 944 -56 888 -787 101 -237 41 -95 -756 -4 118 -737 2015E 983 0 983 -850 133 -237 0 -104 104 0 0 0 2016E 994 -49 944 -450 494 -260 0 234 -234 0 0 0 2017E 1,055 -17 1,038 -450 588 -260 0 328 -328 0 0 0 8.7 4.0 6.1 6.4 4.7 3.9 4.9 6.2 4.6 7.7 8.4 4.3 4.2 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2005 661 4,417 1,124 10,738 1,156 18,095 2006 823 4,272 1,600 9,668 1,077 17,440 2007 971 4,318 2,415 6,945 662 15,311 2008 416 3,553 1,997 5,990 285 12,241 2009 890 2,647 2,260 5,796 0 11,593 2010 1,396 3,098 2,623 5,919 0 13,037 2011 1,420 3,190 2,553 5,836 0 12,999 2012 2,147 3,164 2,416 5,967 0 13,694 2013 2,314 2,910 2,322 5,208 0 12,754 2014 1,520 2,895 1,500 6,533 399 12,847 2015E 1,520 2,873 1,500 6,843 399 13,135 2016E 1,520 2,994 1,500 6,739 399 13,152 2017E 1,520 3,036 1,500 6,615 399 13,070 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 6,084 4,272 94 7,645 18,095 5,248 4,290 104 7,800 17,440 4,214 3,548 72 7,476 15,311 3,825 2,765 57 5,594 12,241 3,937 2,474 58 5,124 11,593 4,011 2,771 52 6,203 13,037 4,373 2,666 87 5,873 12,999 5,134 2,684 92 5,785 13,694 4,838 2,643 60 5,213 12,754 4,894 2,716 167 5,070 12,847 4,998 2,644 167 5,326 13,135 4,764 2,666 167 5,555 13,152 4,436 2,641 167 5,827 13,070 5,084 65.7 42.8 3.8 7.0 4,234 53.6 45.3 2.3 7.6 2,955 39.2 49.3 1.6 9.5 3,124 55.3 46.2 4.5 3.6 2,594 50.0 44.7 4.8 1.8 2,410 38.5 48.0 1.8 13.0 2,746 46.1 45.8 2.1 5.0 2,757 46.9 42.9 2.3 5.1 2,434 46.2 41.3 2.1 4.4 3,274 62.5 40.8 2.8 3.6 3,378 61.5 41.8 2.5 5.5 3,144 54.9 43.5 2.2 5.7 2,816 47.0 45.9 1.9 6.4 (%) Votes 27.2 25.1 10.1 Capital 10.1 12.3 3.4 Cash flow (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover Main shareholders Name FAM Finnish State Social Insurance Institution of Finland Management Title COB CEO CFO Name Gunnar Brock Karl-Henrik Sundström Seppo Parvi Company information Contact Internet Phone number www.storaenso.com (44) 20 7121 0880 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 110 Sector Report Nordic High Yield Update Swedish Orphan Biovitrum (BB-/Stable) ● Credit rating Sobi lifted its FY 2015 guidance after a strong Q2 report and now expects sales of SEK 3.0-3.2bn (previously 2.8-3.0bn), a gross margin of 59-61% (previously 58-60%) and EBITA of SEK 325-400m (previously SEK 300-400m). If anything, we believe Sobi’s guidance is still cautious. Sobi has now reported EBITA for H1 of SEK 247m, so the full year guidance leaves only SEK 75-150m for H2. We also note that guidance excludes any impact from the potential first commercial deliveries in Sobi’s commercial territories of Elocta. Our EBITA estimate for 2015 is considerably higher at SEK 648m. Sobi’s balance sheet is also very strong with the company nearing a net cash position in Q2. On an unadjusted basis net debt to EBITDA was 0.1x, and 0.9x adjusted for operating leases. All in all, we have a very positive view of Sobi, even if this type of company can be a bit unpredictable with regards to both acquisitions and product writedowns. Key bond covenants and terms: Sobi Sr. Unsecured bonds: Change of control with put at 101 Debt incurrence covenants: 1. Net leverage < 2.5x 2. Additional debt to mature after bonds Carve-outs: 1. SEK 135m WC facility 2. SEK 100m general carve-out Negative pledge: Carve-outs: 1. SEK 135m WC facility 2. SEK 250 general carve-out ● Bond recommendations The first call date on Sobi’s senior unsecured 26 June 2017 FRN was 26 June 2015 and in light of the improved operational performance and strong balance sheet we had expected the bond to be called, which it was not. We still believe a call is a possibility but with the bond now trading 103, which is the call price, this is not an issue. While the bond is unlikely to tighten due to the risk of a call we believe the bonds are attractive at these levels and have revised our recommendation to Overweight from Underweight. Overview chart SEK 135m sr sec. WC facility + SEK 100m f acility/rental Swedish Orphan Biovitrum AB (publ) SEK 800m sr. unsec. bond Arexis AB ● Recent financial updates Sobi’s Q2 sales exceeded our expectations by 13% and EBITA of SEK 74m was much better than our expected SEK 44m despite increasing costs related to the planned launch of Elocta. Several of Sobi’s base business products continue to perform well, with the orphan drug Orfadin now being Sobi’s biggest product following a recent increase in marketing presence. Compare with a level of SEK 2.2bn two years ago, Sobi’s non-haemophilia products today have a yearly run rate of above SEK 3bn. Sobi Middle East F2LLC (Dubai) Sobi Inc. (Delaware, US) Swedish Orphan Biovitrum International (AB) Credit strengths ● Credit concerns Relatively resilient market and orphan drugs enjoy additional protection from competition through legislation. ● Limited diversification with two drugs accounting for 44% of sales. ● Increasing pricing pressure in the healthcare sector. ● Long-term manufacturing agreement with Pfizer, high patient loyalty and patents provide earnings stability. ● Weak bottom-line profitability and clouded earnings visibility. ● Small size of market makes it unattractive to generic manufacturers. ● Regulatory changes in healthcare regimes and subsidy schemes. Selected outstanding bonds Issuer Sobi Sector Pharma Public SEB N.R./N.R. BB- Issue date 26/06/2012 Maturity date 26/06/2017 Cpn type Cpn FRN 3mS +500 Amount SEK 800m Spread 246 Recommendation Overweight Source: Bloomberg and SEB Relative value Debt maturity profile (31 December 2014) Spread (bps) 400 Sobi 350 SSAB 300 Stora Enso Stena Metall Meda 250 200 600 500 150 100 Husqvarna NCC BillerudKorsnäs Sefyr Värme Aker 0.0 1.0 2.0 3.0 4.0 Years to maturity 5.0 Opus Comhem Source: SEB and Bloomberg SEB Credit Research 700 Getinge Cloetta 0 800 Millicom Elekta 50 900 400 300 200 100 0 2015 2016 2017 2018 Source: SEB 15 September 2015 111 Sector Report Nordic High Yield Update Company description Swedish Orphan Biovitrum (Sobi) was founded in 2001 as a spin-off from Pharmacia and listed on the Stockholm Stock Exchange in 2006. It then merged with Swedish Orphan in 2010 through a SEK 3.5bn acquisition announced in November 2009. A SEK 1.5bn share issue was part of the financing for the acquisition. Pro forma sales at that time were SEK 2bn with an EBITDA margin of 15%. By 2010, revenues reached SEK 1.9bn with a 12% EBITDA margin. A SEK 100m cost cutting programme and SEK 600m share issue were announced in March 2010 and the 2015 sales target of SEK 5bn was later abandoned. Sobi is a niche company that focuses on drugs for haemophilia (bleeding disorders) as well as a broad portfolio of drugs with orphan drug designation. It generates most of its revenues from the manufacture of bleeding disorder products marketed by Pfizer, as well as sales of Kineret and Orfadin. Credit Research Analyst Ebba Lindahl (46) 8 506 232 08 [email protected] Profit & loss statement (SEKm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT 2010 1,907 -1,560 347 -57 -300 -10 2011 1,911 -1,775 136 -85 -368 -318 2012 1,923 -1,523 400 -33 -422 -55 2013 2,177 -1,936 240 -30 -278 -67 2014 2,607 -2,618 -11 -32 -282 -325 2015E 3,398 -2,716 681 -33 -281 367 2016E 4,350 -2,986 1,364 -32 -381 951 2017E 4,906 -3,300 1,606 -32 -482 1,093 Net interest expenses Value changes Other financial items -82 0 0 -53 0 0 -51 0 0 -58 0 1 -57 0 63 -39 0 -3 -39 0 0 -35 0 0 Reported pre-tax profit Minority interests Total taxes -92 0 -12 -371 0 388 -105 0 4 -124 0 31 -319 0 51 325 0 -81 911 0 -228 1,058 0 -265 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit -104 18.2 (0.5) (13.0) 17 7.1 (16.6) 104.7 -101 20.8 (2.8) 4.0 -93 11.0 (3.1) 24.6 -268 (0.4) (12.5) 15.9 244 20.0 10.8 25.0 684 31.4 21.9 25.0 794 32.7 22.3 25.0 0.0 n.a. 0.0 0.0 0.2 (60.9) 0.0 0.0 0.6 194.9 0.0 0.0 13.2 (39.9) 0.0 0.0 19.8 (104.6) 0.0 0.0 30.3 6,292.2 0.0 0.0 28.0 100.2 159.0 180.6 12.8 17.8 14.9 16.1 2010 253 -468 -215 -42 -257 0 -1,842 -2,099 468 1,415 -2 -218 2011 471 -367 103 -8 95 0 -38 57 -473 594 0 178 2012 354 53 406 -5 401 0 -62 339 -100 0 0 239 2013 165 19 185 -26 159 0 -379 -220 200 7 2 -11 2014 299 -65 234 -23 211 0 -160 51 20 0 3 74 2015E 287 -183 104 -30 74 0 -85 -11 0 0 0 -11 2016E 591 -80 512 -30 482 0 0 482 0 0 0 482 2017E 1,132 -74 1,058 -30 1,028 -270 0 758 0 0 0 758 2.2 0.4 0.3 1.2 0.9 0.9 0.7 0.6 (SEKm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2010 38 1,534 23 251 5,224 7,070 2011 219 1,429 11 156 4,885 6,700 2012 456 1,186 4 126 4,534 6,306 2013 445 1,285 26 126 4,637 6,519 2014 519 1,416 73 115 4,247 6,370 2015E 508 1,726 73 112 5,921 8,340 2016E 990 1,950 73 110 7,265 10,388 2017E 1,747 2,125 73 108 6,784 10,837 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 1,187 1,541 0 4,343 7,070 700 1,036 0 4,964 6,700 610 858 0 4,838 6,306 796 955 0 4,768 6,519 818 1,030 0 4,522 6,370 818 2,756 0 4,766 8,340 818 4,121 0 5,449 10,388 818 4,047 0 5,973 10,837 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 1,148 26.4 61.4 3.3 4.5 481 9.7 74.1 3.5 2.2 135 2.8 76.7 0.3 7.9 353 7.4 73.1 1.5 3.9 298 6.6 71.0 (27.1) (0.2) 319 6.7 57.1 0.5 15.0 -163 (3.0) 52.5 (0.1) 30.0 -920 (15.4) 55.1 (0.6) 35.3 Cash flow (SEKm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet Main shareholders Name Investor AB AMF Insurance & Funds Robur funds (%) Votes 39.8 3.4 3.3 Capital 39.7 3.4 3.3 Management Title COB CEO CFO Name Bo Jesper Hansen Geoffrey McDonough Mats-Olof Wallin Company information Contact Internet Phone number www.sobi.com +46-8-6972000 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 112 Sector Report Nordic High Yield Update Tallink (BB/Stable) ● Credit rating Our BB/Stable rating on Tallink reflects the company’s strong market position in the Baltic Sea and management’s relatively comfortable financial target ratios. Profitability in 2015 has been and will continue to be helped by re-routing, selected product development enhancements and an average lower oil price this year compared with last year. The main risks are relatively high competition, a muted Finnish economy and lower travel volumes from Russia. The balance sheet remains solid in our view, and the group continues its deleveraging strategy ahead of the new vessel delivery in 2017. Key bond covenants and terms -Min equity 30% -Change of control put @ 100 ● Bond recommendations In July, the 2018 Tallink FRN had seen steadily tightening over the last six months and had reached our spread target. Therefore, we moved to Marketweight from Overweight on the bond. However, we hold a positive view of the bond and the company, which benefits from the lower oil price environment and still yields around 5% at current prices. The spread on the bond is slightly below the COLG spread curve, which we find fair and thus have a Marketweight recommendation. Simplified overview chart Bond issuer Ship owning companies AS Tallink Grupp Sales and operatiions ● Recent financial updates Tallink’s Q2 profitability was above our expectation, where the improvement was mainly related to the various changes to the operations during the year and Tallink’s focus on improving profitability. We also note that the current low oil price environment should be positive for the company. Interestingly, Tallink said in August that it had agreed with its main fuel supplier to fix the price of approximately 30% of its fuel purchasing volume until the end of 2015. Reported net leverage fell significantly from 4.1x to 3.4x during Q2, and is expected to remain at 3.4-3.7x in the medium-term. Service companies Credit strengths Credit concerns ● Strong market position within the Baltic Sea. ● Exposure to a cyclical and capital intensive industry with volatile fuel prices. ● Diversified funding base supported by presence in equity markets; anticipated solid backing from banks and entry into debt capital markets. ● Event risk related to acquisitions and volatile fuel prices. ● ● Acceptable credit metrics and relatively comfortable financial target ratios. Fierce competition from peers and other related transport modes and leisure activities. Selected outstanding bonds Issuer Ticker Bond rating Sector Issue date Maturity date Coupon Outst. Amount Recommendation Tallink TLG01 BB- Shipping 18/06/2013 18/10/2018 Nibor + 500 NOK 900m Marketweight Source: Bloomberg and SEB Bond spread Maturity profile 550 600 spread (bps) 500 500 450 400 400 300 350 200 100 300 250 Mar-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Source: SEB and Bloomberg SEB Credit Research 0 <1yr 1-10yrs Source: SEB 15 September 2015 113 Sector Report Nordic High Yield Update Company description Tallink is the dominant ro-pax ferry operator on the northern Baltic Sea. The company operates a modern fleet of 18 vessels between Finland and Sweden, Finland and Estonia, Sweden and Estonia, and Sweden and Latvia. In addition, the company operates four hotels in Tallinn and one in Riga. Tallink has 6,900 employees. According to Generation Research 2014 data, Tallink is the world's largest non-airport duty free and travel retailer as well as the largest ferry operator by number of beds. Credit Research Analyst Henrik Blymke (47) 22 82 71 91 [email protected] Profit & loss statement (EURm) Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Associated companies Net interest expenses Value changes Other financial items 2007 761 -602 159 -59 0 99 0 -50 0 12 2008 787 -660 127 -62 0 65 0 -51 0 0 2009 792 -658 134 -70 0 64 0 -52 0 -20 2010 814 -670 144 -72 0 72 0 -40 0 -8 2011 892 -698 195 -95 0 100 0 -43 0 -10 2012 948 -783 165 -71 0 94 0 -40 0 -1 2013 944 -793 151 -68 0 83 0 -36 0 0 2014 923 -778 145 -74 0 71 0 -41 0 0 2015E 924 -761 162 -75 0 87 0 -39 0 0 2016E 933 -773 160 -77 0 83 0 -33 0 0 2017E 969 -799 171 -81 0 90 0 -33 0 0 Reported pre-tax profit Minority interests Total taxes 62 0 5 15 0 6 -10 0 1 24 0 -3 47 0 -1 54 0 3 47 0 -4 30 0 -3 48 0 -2 50 0 -5 57 0 -5 Net profit EBITDA margin EBIT margin (%) Tax rate (%) Growth rates y-o-y (%) Total revenues EBITDA EBIT Pre-tax profit 67 20.8 13.1 (8.7) 20 16.1 8.3 (39.2) -8 16.9 8.0 15.2 22 17.7 8.9 10.8 38 21.8 11.2 2.8 56 17.4 9.9 (5.2) 43 16.0 8.8 8.0 28 15.7 7.7 9.1 45 17.6 9.4 5.0 45 17.2 8.9 10.0 52 17.6 9.3 8.9 88.0 n.a. (11.5) (35.0) 3.4 (19.9) (34.3) (76.3) 0.6 5.3 (2.4) 0.0 2.8 7.7 13.4 0.0 9.5 35.5 37.9 92.3 5.9 (15.5) (6.0) 13.7 (0.2) (8.3) (11.4) (12.0) (2.2) (4.0) (14.9) (36.3) 0.0 11.9 23.1 59.5 1.1 (1.3) (4.1) 5.2 3.9 6.6 8.0 13.2 (EURm) FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash 2007 147 -11 135 -141 -5 0 57 51 -10 0 -48 -7 2008 126 -17 109 -271 -162 0 33 -129 170 -4 -54 -17 2009 132 14 146 -163 -17 0 -3 -20 60 0 -56 -17 2010 149 15 164 -6 158 0 2 160 -106 0 -46 8 2011 189 15 203 -13 190 0 -7 184 -165 0 0 18 2012 164 -1 163 -9 154 0 -2 152 -155 0 -6 -10 2013 147 21 168 -43 125 -33 -3 89 -73 0 -9 6 2014 152 -1 151 -49 102 -20 0 82 -83 0 -5 -7 2015E 167 -33 134 -67 67 -13 20 74 -60 0 0 14 2016E 158 0 158 -67 91 -20 0 71 -60 0 0 11 2017E 158 1 158 -228 -70 -20 0 -90 94 0 0 4 Capex/sales (%) 18.5 34.4 20.6 0.8 1.5 1.0 4.6 5.3 7.3 7.2 23.5 (EURm) Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets Intangibles Total assets 2007 83 78 1 1,454 82 1,698 2008 67 109 1 1,644 78 1,898 2009 50 82 0 1,742 73 1,947 2010 57 73 1 1,674 67 1,871 2011 75 67 12 1,583 61 1,800 2012 66 77 13 1,527 59 1,742 2013 72 78 18 1,496 58 1,722 2014 65 75 22 1,468 55 1,686 2015E 79 75 22 1,440 55 1,671 2016E 90 75 22 1,430 55 1,673 2017E 95 78 22 1,577 55 1,827 Interest bearing debt Other liabilities Minority interests Shareholders' equity Total liabilities and equity 948 103 0 648 1,698 1,120 127 0 651 1,898 1,181 123 0 643 1,947 1,068 136 0 668 1,871 960 135 0 705 1,800 840 141 0 761 1,742 794 157 0 771 1,722 743 164 0 778 1,686 683 177 0 810 1,671 623 214 0 836 1,673 717 243 0 867 1,827 Net debt (m) Net debt/equity (%) Equity/total assets (%) Net debt/EBITDA (x) EBITDA Interest cover 865 133.5 38.1 5.5 3.2 1,053 161.8 34.3 8.3 2.1 1,131 176.0 33.0 8.5 2.5 1,010 151.3 35.7 7.0 3.6 884 125.4 39.2 4.5 4.5 775 101.8 43.7 4.7 4.1 722 93.7 44.8 4.8 2.6 678 87.1 46.2 4.7 2.8 604 74.6 48.5 3.7 3.2 533 63.8 49.9 3.3 3.5 623 71.8 47.5 3.6 3.6 Cash flow Balance sheet Main shareholders Name Infortar AS Baltic Cruises Holding L.P. Nordea Bank Finland Clients Account (%) Votes 35.8 17.4 8.7 Capital 35.8 17.4 8.7 Management Title COB CEO CFO Name Enn Pant Janek Stalmeister Company information Contact Internet Phone number www.tallink.com +372 6 409 800 Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 15 September 2015 114 Sector Report Nordic High Yield Update Credit Research Disclaimer Authors' statement of independence (Analyst Certification) We, the authors of this report, hereby confirm that notwithstanding the existence of any such potential conflicts of interest referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. None of the authors of this research report are registered or qualified as a research analyst, representative or associated person under the rules of the FINRA, the New York Stock Exchange any other US regulatory organization or the laws, rules or regulations of any State in the USA. 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SEB acted as Structuring Advisor and Sole Lead Manager on Länsförsäkringar Bank AB’s SEK 1.2bn Floating Rate Perpetual Non-Call June 2020 Temporary Write-Down Additional Tier 1 Capital Notes, as completed on 2nd June 2015. This report has been produced by SEB’s Research department, which is separated from its Investment Banking division by information barriers; as such, it is independent and based solely on publicly available information. SEB acted as Co-Lead Manager of the convertible bond issue of Outokumpu on 18th February 2015. It also acted as Joint Lead Manager of the Company's bond issue in September 2014. This report has been produced by SEB’s Research department, which is separated from its Investment Banking division by information barriers; as a result, it is independent and based solely on publicly available information. A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) is represented on the board of or similar supervisory entity of Ericsson, Meda, Meda 2, Nobina, SAS and Stora Enso, has been represented on the board of or similar supervisory entity of NCC but has never been represented on the board of or similar supervisory entity of the remaining companies mentioned in the report, (b) has from time to time bought or sold the securities issued by the companies referred to in this report or options relating to these companies, (c) SEB or its affiliates beneficially own , between 1 and 5 of a class of common equity securities of Öresund and less than 1 of a class of common equity securities of the remaining companies mentioned in the report, as of 9 Sep 2015, and (d) SEB or its affiliates beneficially own debt securities of Ahlstrom, Aker ASA, Aker Solutions, BW Offshore, Ericsson, Fred Olsen Energy, Meda, Millicom, NCC, Nokia, Outokumpu, Prosafe, Stora Enso and Volvo but not of the remaining companies mentioned in this report, as of 9 Sep 2015. SEB or its affiliates is, or has within the last 12 months been or expects in the next 3 months to be, party to an agreement relating to the provision of investment banking services to BillerudKorsnäs, Det norske oljeselskap, Hoist Finance, Länsförsäkringar Bank, Meda, NSP, Outokumpu, SBAB, Stora Enso and Volvo or an affiliate, or has received from it fees or the promise of fees in respect of such services. Within the past 12 months, SEB or its affiliates acted as Lead or Co-Lead Manager in a public offering of securities of Det norske oljeselskap, Hoist Finance, Länsförsäkringar Bank, Meda, Outokumpu, SBAB and Volvo. SEB or its affililiates is a market maker or liquidity provider for the financial instruments of: J. Lauritzen and Tallink Grupp. The analysts responsible for this report (jointly with their closely related persons) may hold shares or other instruments related to the companies mentioned in this report. Please refer to published reports on the individual companies for details. The information can also be found on our website, at the following address: www.sebenskilda.se. Explanation of Credit Research recommendations: SEB derives its Recommendations from its appraisal of the Credit Rating of the issuer (itself derived from business risk profile and financial risk profile and from other factors). SEB uses the following recommendation system for the corporate bond market: Overweight – over the next six months we expect a position in this instrument to exceed the relevant index, sector or benchmark. Marketweight – over the next six months we expect a position in this instrument to perform in line with the relevant index, sector or benchmark. Underweight – over the next six months we expect a position in this instrument to underperform the relevant index, sector or benchmark. SEB uses the following recommendation system for CDS spreadsheets: Buy – we expect the CDS to outperform the sector performance Neutral – we take a neutral view on the CDS, and do not recommend either a buy or sell Sell – we expect the CDS spreads to underperform the sector performance. Credit Watch Negative – When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a negative rating change. Credit Watch Positive - When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a positive rating change. Credit Watch Developing – When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating and the likely outcome is uncertain SEB also assigns credit ratings, definitions of which can be found on our website: https://taz.vv.sebank.se/cgi-bin/pts3/mc6/MB/research.nsf?opendatabase&login Methodology SEB’s Credit Research assigns its credit rating to an issuer based on the assessment of an issuer’s business risk profile as well as its financial risk profile. The business risk profile includes country risk, industry risk, competitive position, and profitability. The financial risk profile includes financial policies, accounting, cash flow adequacy, capital structure and liquidity. The outcome of the assessment of the two risk profiles is weighed together for a final overall rating. In addition to SEB’s credit rating assessment, other factors considered in a particular issuer include the credit ratings assigned to a specific issuer by independent agencies, the value and market price of its securities, macroeconomic factors such as interest rates, promised coupon or yield of the specific instruments, and historical spread developments. Credit Research Distribution (as of 1 Sep 2015) A* Overweight 21.8% Marketweight 59.8% Underweight 18.4% B* 8.4% 13.0% 4.8% A* denotes recommendations for all companies covered B* denotes recommendation for companies to which SEB has provided investment banking services in the last 12 months. Recommendation History Please refer to individual published reports for recommendation history of the companies covered within this report. 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