MARKET SIGNALS 04.08.2020

Among the international issues that have lagged behind the market in their dynamics, we would like to highlight the Eurobond of the American corporation L Brands, which is part of our portfolio Rentier-Global, with maturity in 2035. I must say that both L Brands shares and the LF98TRUU index (tracking American corporate high-yield Eurobonds) fully won back all the losses of the current crisis, while the price of the issue with maturity in 2035 is still about 10 figures lower than its dock-like February values. In our opinion, this discount has every chance of narrowing.

Like most retailers, L Brands is in the forefront of the hit in the current crisis. For the first time in a long time, quarterly operating profit (from February to April) went into negative territory, analysts worsened their forecasts for the company (see table below). Worse, because of the crisis, the deal to separate the unprofitable Victoria's Secret segment from the company fell through: the deal announced at the end of February 2020 to sell 55% in Victoria's Secret to the investment fund Sycamore Partners for $ 525 million was canceled on May 4. However, L Brands management confirms plans to spin Victoria's Secret into a separate company. The spin-off of the unprofitable Victoria's Secret will allow L Brands to focus on developing its other brands, notably Bath & Body Works and PINK.

However, the current crisis has stimulated the company to engage in a long-overdue restructuring. Last week, L Brands announced a cost-cutting plan to lay off 850 people, which should result in $ 400 million in savings (including $ 175 million this year). In addition, L Brands is set to close 250 Victoria's Secret stores, which is about a quarter of its US volume. The announced plan was greeted with enthusiasm by the market - quotations of both L Brands shares and bonds rose to their local highs.

The market now expects the company to be able to generate $ 570 million of EBIT this year, while L Brands' annual interest payments are just under $ 400 million. Note that according to the company, the amount of cash on its balance sheet as of 24.07 .2020 amounted to $ 2.5 billion. As for the principal amount, in general, the debt repayment schedule of L Brands looks balanced, the weighted average maturity is about 8 years. Note that this year the company has no repayments, while in 2021 it has to repay a Eurobond in the amount of $ 450 million.This task looks feasible, given, for example, that the volume of undrawn credit lines opened by L Brands is about $ 1 billion.

The cost of insurance against default (5-year CDS) is gradually normalizing to its ancestral values ​​(see graph above). The probability of the company's default over the next 5 years, according to the Bloomberg risk model, is about 6%.

The senior guaranteed unsecured issue with maturity in 2035 was placed on the global market in February 2016. The largest holders of the Eurobond, according to Bloomberg, are Alliance Bernstein (5.0%) and Blackrock (3.5%).

There are no options for revising the coupon level (6.875% per annum). The coupon is paid twice a year: May 1 and November 1. The issue is rated by the agencies Moody's and S&P at B2 and B +, respectively.

The par value and the minimum lot for the issue are $ 1,000 and $ 2,000, respectively. The paper is serviced by NSD and is available only to qualified investors.

Alexey Shternshis

Joint Managing Director

Capital Pi