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Global Credit Insights

Sebastian Ashton, CFA

SAA Advisors

Event-Driven

The UK retail clothing sector has been under pressure due to multiple factors – Brexit and the associated economic implications, labour costs, changing consumer behaviour (competition from online), GBP weakness, and increased cotton prices - New Look and House of Frazer are two examples of issuers in the UK high yield market suffering from the structural changes impacting their industry.However, in every industry experiencing structural change as well as losers there are often winners, after many years of underperformance could Matalan now be positioned to benefit from their competitor's misfortunes?Matalan’s positive fundamental performance has been gaining momentum despite a negative industry backdrop and FX headwinds. We expect the positive operational performance to continue if management can avoid the strategic and operation mistakes of the prior years.At a yield to worst of c. 8.6% and a yield to the next call date on January 2020 of c. 14.4% for an investment in the 1stLien with 2.3x EBITDA of equity below you using a conservative EV/EBITDA valuation of 5.0x.  We think investors looking to ‘bottom fish’ within the UK retail sector should take a look at the MTNLN 6.75% 01/23 GBP high yield bond.Given our expectation of c. 1.0x deleveraging over the next two years, we believe these bonds can trade to their first call in 2020 delivering and IRR of c. 14% which we consider good risk-reward for an event-driven trade.

The UK retail clothing sector has been under pressure due to multiple factors – Brexit and the associated economic implications, labour costs, changing consumer behaviour (competition from online), GBP weakness, and increased cotton prices - New Look and House of Frazer are two examples of issuers in the UK high yield market suffering from the structural changes impacting their industry.However, in every industry experiencing structural change as well as losers there are often winners, after many years of underperformance could Matalan now be positioned to benefit from their competitor's misfortunes?Matalan’s positive fundamental performance has been gaining momentum despite a negative industry backdrop and FX headwinds. We expect the positive operational performance to continue if management can avoid the strategic and operation mistakes of the prior years.At a yield to worst of c. 8.6% and a yield to the next call date on January 2020 of c. 14.4% for an investment in the 1stLien with 2.3x EBITDA of equity below you using a conservative EV/EBITDA valuation of 5.0x.  We think investors looking to ‘bottom fish’ within the UK retail sector should take a look at the MTNLN 6.75% 01/23 GBP high yield bond.Given our expectation of c. 1.0x deleveraging over the next two years, we believe these bonds can trade to their first call in 2020 delivering and IRR of c. 14% which we consider good risk-reward for an event-driven trade.

Matalan - A Winner in a Sector Under Pressure?

Matalan Ltd

Matalan - A Winner in a Sector Under Pressure?