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Market Wrap

ETC’s uneasy ride

Kat Hidalgo's avatar
Sasha Padbidri's avatar
  1. Kat Hidalgo
  2. +Sasha Padbidri
5 min read

Sellsiders on the debt financing for French telecom equipment distributor ETC Group are looking across the Atlantic to fund the company’s buyout by Cinven. They are tapping the deeper US market and have juiced up amortization to reduce duration, but will US buysiders take a chance on the credit?

ETC is issuing a €972.4m ($989.8m-equiv.) term loan to back Cinven’s LBO, while Carlyle is the vendor and Permira Debt Managers and Pemberton are the outgoing unitranche providers.

The tranche is rated B2/B (Moody’s/S&P), and pricing looks punchy at S+575-600 bps. No European loans have priced with a six-handle since the Russian invasion of Ukraine, according to 9fin data. In the US, just 12 of the 124 loans issued since 24 February were issued with a six-handle or higher.

The loan is guided at a 92 OID, significantly below the 97.2 average for B2-rated tranches issued during the same period. Nevertheless, the first buysider is unimpressed: “92 feels a bit high to me. We’re mainly just committing to deals in the 80s, though we did just do one BB at 97.”

The loan will amortize at a rate of 2.5% per annum in the first and second years of its tenor, and 5% thereafter — a second buysider told 9fin that some borrowers do this to entice lenders to participate in the transaction. With money coming into coffers over the life of the loan, investors will have slightly less duration risk on this credit.

“It’s all about getting back your money sooner. If the company can give more amortization, then I want it because it’s better than waiting,” said the second buysider.

S&P also expects the company will generate enough cash to meet increasing amortization from 2025. Moody’s expects €60m in free cash flow annually. While ETC’s cash position at closing is low, at €5m, the company does have a fully undrawn €185m RCF, according to the Moody’s report.

Dreaming of dollars

The fact that the company is issuing in dollars is notable, and a reflection of the difficult market in euros. As a third buysider said: “The US market is a lot more liquid and it’s easier to price deals here, even right now. The market isn’t much better in Europe - and they can get dollars.”

ETC’s revenue comes mainly from the US, UK and France, with the US contributing 65% of revenue, according to an S&P report.

Currency diversification is very much on the cards for issuers concerned about the lack of movement in the European market.

A sellside source told 9fin that borrowers and bankers are looking more at Swiss francs, Aussie dollars and Singaporean dollars, but the most obvious example of this is issuers using the relatively strong dollar market significantly more.

Among recent examples of this is Kofax, which dropped a €300m euro tranche in June and rolled it into the dollar tranche.

But for a European issuer, tapping the US market is a double-edge sword, as local buysiders can be dissuaded by little known European issuers coming to market.

The first buysider said: “The fact that it’s European makes it more difficult for us. We feel more comfortable with the US economy given the oil and gas situation.”

ETC has grown its revenue by double-digits for several years, according to its website, which is was €1.1bn pro forma for acquisitions in 2021, according to Moody’s.

The Paris-headquartered group distributes a variety of cables, passive components, connectors, hardware and miscellaneous parts to the telecommunications industry and offers ancillary services such as consulting, training for operators and contractors and refurbishment and repairs.

It sells to a diverse client base of more than 13,000 operators, contractors and civil engineering firms and has a 750-strong supplier base, according to ETC’s website. Nevertheless, 54% of revenue in 2021 came from its fourteen largest customers, while, overall, a whopping 45% of revenue was generated by Altice-owned subsidiaries.

Altice International, another LevFin issuer, has had several of its bonds push downwards, like most HY bond issuers this year.

Altice International bond pricing

ETC’s leverage could be as high as 7.7x following the buyout, but revenue and EBITDA growth could spur a leverage decline below 7x in 2023, S&P said.

TelecommuniGreat

Telecommunications companies are often obligated to spend on building and maintaining networks and are thus highly capex-intensive businesses. Typical capex margins fall into the 10-20% range, according to Allianz research, which chimes with 9fin’s repository of telco names, which have an average capex margin of 17.1%.

McKinsey also notes that returns have decreased steadily in the last decade, in part due to regulators limiting the number of price increases telcos can implement.

1 ROIC (Return on Invested Capital) excluding Goodwill minus WASS (Weighted Average Cost of Capital) would show a -9% p,a. decline from 25% in 2010 to 10% in 2020 Per McKinsey & Company

Though telcos traditionally enjoy high EBITDA margins, Bain suggested in a recent article that those margins could decrease by more than 3-5% for businesses in the sector because of inflation.

In an effort to cut costs, telcos have been using outsourcers extensively since the 2000s, and are likely to continue to do so in the recessionary environment.

The fact that the company sells into the telecommunications sector was the bright light on this deal for the first buysider: “I think we’re okay with the space in general. We have quite a bit of exposure to it as it’s not as cyclical as some of the other sectors. People still have to communicate in a recession.”

Credit Suisse, Barclays, BNP Paribas, BOI, Credit Agricole CIB, Mizhuo, MUFG and SC are bookrunners on the deal. Commitments are due 3 August 2022.

Cinven and Credit Suisse declined to comment, while ETC Group, BNP Paribas and Barclays did not respond to requests for comment.

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