07 Juin 2015

About 25 years ago in France, a singer of the name of Patrick Bruel released a new album which was an instant and huge hit. He sold millions of records, became immensely popular and went on tours across the entire country and abroad. Not only were all his concerts completely sold out and the lyrics of his songs sung from the start to the end by his audience, but his fans couldn’t help screaming “Patriiiiick!” any time he appeared on stage.

25 years on, you may wonder what this story has to do with the current state of European credit markets. Not much at first glance unless you’ve noted that another French man of the forename of Patrick has been the largest seller of European HY bonds since 2014 and has built a huge investor fan base. Mr. Patrick Drahi is the Chairman, founder and main shareholder of Luxembourg-based cable and telecom group Altice. Out of a relatively small France-based cable operator and a few other assets, he has built over the past couple of years a group with an enterprise value north of €60bn. Since 2014, he acquired the second largest telecom operator in France – SFR – from Vivendi, the Portuguese incumbent operator Portugal Telecom and he just signed the purchase of 70% of US-based cable operator Suddenlink after being rumored to have approached Time Warner Cable. In total, the combined Altice group entities now have ca. €35bn of leveraged finance debt outstanding in the euro and US dollar-denominated bond and loan markets.

Being one of the largest providers of assets to hungry credit markets, it’s little wonder that Mr. Drahi has achieved cult status with many credit investors worldwide. And if investors are not shouting his name during the roadshows, new bonds issued by Mr. Drahi’s group are sold out with order books multiple times oversubscribed and investors adding more risk on the name any time a new acquisition has to be financed. Witness the following funny comment written by one bank analyst covering the TMT sector:

US Investor: Who is this Patrick guy?
Your favourite Telco specialist: Well, he’s a bit of a magician.
US Investor: He does magic?
Your favourite Telco specialist: Yeah, sort of…financial magic. He buys businesses and then turns out the lights, stops paying people and fires pretty much everyone to get the EBITDA margin to 60%. We think he’s so good that, when he buys a business, we give him over 100% of the synergies on day 1 because he’s just awesome.
US Investor: That’s crazy – the guys over here are not going to take that. What’s his background?
Your favourite Telco specialist: He worked for John Malone for a bit.
US Investor: Hang on buddy, back up the truck…why didn’t you say that before? Where can I buy some shares?

Beyond the jokes, the buzz and the staggering numbers, we believe that the Altice story provides access to some great businesses, interesting lessons and attractive investment opportunities. Here are four key rules that we use in combination to make investment decisions in such complex and multifaceted situations:

  1. Focus on the quality of the underlying business. It starts and ends there, whatever the balance sheet structure. In the case of Altice businesses, some enjoy revenue growth and predictability but some don’t. Most of them generate free cash flow consistently, one of the cornerstones of our credit selection process. And all of the group’s divisions are asset rich.
  2. Dig deep into the balance sheet. Special attention needs to be given to the analysis of leverage across the various layers of debt and instruments; debt maturity schedules, available liquidity and funding diversification are other key considerations, as well as off balance sheet commitments. The vast majority of Altice’s financings are recent and the company has tapped a wide range of capital markets (loans, bonds, public equity, private equity) in several currencies.
  3. Watch the group structure and the language of credit protection. With 4 different credit pools, assets and entities located in more than 8 countries, significant minority interests in some issuing groups, the analysis of the cash flow circulation across the Altice group is both particularly complex and paramount for creditors. This complexity is compounded by the various languages used in the different credit pools to limit such circulation of cash flow between the different restricted groups and to protect each of their creditors from the others. But how strong are those protections in the case of Altice? How indifferent should a creditor of, say, Portugal Telecom – via Altice International – be to the parent company’s leverage or to the credit profile of US-based Suddenlink? Not at all, in our view.
  4. Take a view on management and corporate strategy. Whatever diligence and analysis one might have conducted on the three points above, no investment decision can be made without making an assessment of management’s capabilities and intentions. This is particularly true for Altice: it has an aggressive acquisition strategy which requires skillful financial policies and 24/7-opened capital markets, it makes ample use of leverage which demands strong execution capabilities and it is controlled by one person – Mr. Drahi – who sets the strategy, decides on acquisition targets and ultimately decides how to balance the interests of Altice’s shareholders and creditors. So far, we have been in the camp of Mr. Drahi’s fans in several occasions; however, with telecom credit and equity valuations being increasingly stretched we are conscious that his room for maneuver may become more limited and that credit investors may experience a tougher ride for Altice than in the past couple of years.

In the end, Altice is a prime example of the current risks and opportunities which investors can find in European credit markets. Rather than being blind-sided and unconditional fans of Patrick we have opted for a more rational and selective support, going long a number of instruments issued by certain credit pools where we consider that valuations are consistent with our assessment of the four rules mentioned above, and carefully staying away from the others.


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