Deutsche Bank Markets Research
Emerging Markets Company Date Bosnia-Herzegovina 15 January 2018 Serbia United Group
Slovenia Vivek Khanna
HY Corporate Credit Research Analyst Media, Cable & Satellite (+44) 20 754-72905
Telecommunications [email protected]
Chaitanya Terala, CFA Initiating with CreditSell on Fixed Rate Research Associate [email protected]
Notes, relative value not attractive
Recommendation Summary We initiate on the €4.375% Sr. Sec ’22 and € 4.875% Sr Sec '24 with a CreditSell recommendation and on the € Sr Sec FRN ’23 with a CreditHold recommendation, on valuation grounds as we don’t believe a 3-4% return is attractive considering the acquisitive nature and FCF profile. We recognize that management has successfully integrated a number of acquisitions and has delivered on the identified synergies and we are confident they will deliver on Figure 1: Outstanding Issues the CME acquisition savings. While we recognize the asset cover, we don’t Instrument Px YTW Z-sprd Rec. believe the current price levels reflect the limited de-leveraging and see a few (ask) points of downside. €4.375% Sr Sec '22 104.5 2.7% 289 C-S Leverage levels higher on M&A and PIK push-down € Sr Sec FRN's '23 101.9 0.2% 23 C-H Leverage levels of 5.2x net debt / LHA EBITDA including synergies and 5.8x excluding synergies increased from c. 4.0x cash-pay leverage pre the €4.875% Sr Sec '24 104.75 3.7% 349 C-S Source: Deutsche Bank, Bloomberg Finance LP recapitalization. The increase was driven by the refinancing of the outstanding PIK note at the operating entity (+0.9x) and on the back of M&A. On July 9, 2017, the company announced the acquisition of CME Croatian and Slovenian Figure 2: YTC Table - € 4.375% Sr TV Assets for a total consideration of €230m, equivalent to an EV/LTM EBITDA Sec Nts' 22 (offer price: 104.5) multiple of 13.9x, and 5.5x, when adjusting for synergies (€25m). The transaction is subject to regulatory approvals and €200m of the proceeds Call date Call price YTC spread raised from the bond deal are being held in escrow until May 2018 (par return 1-Jul-19 102.188 2.7% 326 of €200m 4.375% Sr Sec '22, if transactions don’t close). 1-Jul-20 101.094 2.9% 342 Asset cover – need to adjust accounting 1-Jul-21 100.000 3.0% 334 As a potential comparable, Digi Communications (RCS&RDS, last closing price: 1-Jul-22 100.000 3.3% 347 RON38) trades at an EV/ 2017E EBITDA of 5.6x and EV/ 2018E EBITDA 5.2x. Source: Deutsche Bank, Bloomberg Finance LP EV/OCF trading multiples are 10.5x and 8.7x, respectively. At face value this would suggest limited asset cover at our issuer. However, when adjusting Digi Communications EBITDA to align accounting for content costs, we believe Digi Figure 3: YTC Table - € 4.875% Sr trades on 6.6x 2017e and 6.2x 2018e EBITDA multiples and 24x and 17x on Sec Nts' 24 (offer price: 104.75) OCF multiples. Call date Call price YTC spread Leading TV channels in respective countries 1-Jul-20 102.438 3.8% 431 Pop TV in Slovenia and Nova TV in Croatia are leading TV Groups in their respective countries. The POP Slovenia portfolio includes five channels with 1-Jul-21 101.219 3.7% 410 POP TV being the flagship channel with a 81% TV ad market share which 1-Jul-22 100.000 3.7% 389 historically was transmitted free-to-air).The Nova Croatia portfolio includes 4 1-Jul-24 100.000 4.0% 393 channels including the flagship Nova TV with a 54% TV ad market share. Both Source: Deutsche Bank, Bloomberg Finance LP groups include numerous internet portals and VOD/subscription systems. Update on regulatory approvals In Slovenia, they have received a positive decision from the Ministry of Culture by which the transaction was de facto approved while they are still waiting Key Risks: Positive risks include greater approval from the Slovenian national competition authority which is expected pricing power and customer growth and soon. However, in Croatia, the company faced a setback as the Croatian Agency for Electronic Media blocked Nova TV takeover, citing restrictions on lower capital intensity. Negative risks include cross ownership considering its existing Total TV asset with 30K subscribers. value destructive M&A, declining margins, On the Q317 call, management mentioned that they are reviewing potential inability to increase prices, increase in options and on Jan 12, 2018, announced the disposal of Total TV. The CME assets purchase agreement is valid only if both assets receive approval. content cost and higher capex levels
______Deutsche Bank AG/London Distributed on: 15/01/2018 12:54:27 GMT DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 7T2se3r0Ot6kwoPa 15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Opportunistic vertical integration
Strengthening the asset mix + convergence
Acquisition of Media Assets in Croatia and Slovenia On July 9, 2017, United Group announced an agreement to acquire Figure 4: EBITDA split (pre/post) broadcasting operations of Central European Media Enterprises (CETV) in 35.0 Croatia and Slovenia for €230m and the transaction is expected to close by 30.0 30.0 year-end. Acquired assets include POP TV in Slovenia and Nova TV in Croatia, 25.0 the most watched channels in their respective countries (All-day audience 20.0 21.8 15.8 market share of 42% and 30%, respectively), will enhance the pay-TV channel 15.0 7.6 portfolio and help differentiate the product offering in the long-term. During 10.0 the year, other acquisitions include Fight Channel Croatia (€2.5m), and Cable 5.0 8.2 8.2
Target (€10m). 0.0 LTM Jun 17 PF LTM Jun 17* Valuation (pre and post synergies) CME - Croatian Assets CME - Slovenia Assets We estimate the assets were are acquired for 9.2x EV/EBITDA (LHA incl. IFRS Source: Deutsche Bank, Company data adj) and 5.5x when adjusting for synergies. In context, LHA EBITDA of the *PF adjustments for the incremental carriage to be added from acquired assets was €25m (incl. IFRS adj.) and management has indicated 2019 on a run rate basis at Slovenia €16.5m in synergies. The synergies are a combination of both revenue, related to the introduction of the carriage fees (€14m), and cost synergies of €2.4m, equivalent to c. 3% of operating cost base of the acquired assets. Refinancing of existing Notes, PIK Facility, and fund M&A To fund the acquisition, United Group refinanced the entire capital structure. As highlighted in our initiation report on Nov 28, 2016, the company also refinanced the existing PIK facility through debt at the operating entity. The company issued €1.35bn of new debt and redeemed the existing €775m 7.875% Sr. Sec Nts ’20, credit facilities and €230m of PIK facility. The company also part funded the CME assets acquisition (€200m) with the remaining €30m to be funded from other sources of liquidity at the time of closing (€100m RCF and €80m Serbian Facilities undrawn). Acquisition of Cable Target for €10m will also be funded from the available liquidity. Leverage We have shown leverage levels of the old and new Bonds structure with and without synergies related to UG historic acquisitions and those related to the proposed CME acquisition. It has always been our base case that a re- financing of the 2020 Notes will result in a re-leveraging event with the push down of the legacy PIK loan. M&A has led to slightly higher pro-forma leverage level.
Page 2 Deutsche Bank AG/London
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 5: Leverage Levels – Old and New Capital structure
Jun 30, 2017 PF Sep 30, 2017* Net Lev. Net Lev. Net Lev. Net Lev. LHA LHA LHA LHA (incl. Syn) (excl. Syn) (incl. Syn) (excl. Syn) New RCF '22 (€100m, Super senior) - 96 New Serbian RCF '20 (€20m and €60m, unsecured) - - Existing RCF 121 - € 7.875% Sr Sec Nts '20 775 - € 4.375% Sr Sec Nts '22 - 575 € (E+4.375%) Sr Sec FRN's '23 - 450 € 4.875% Sr Sec Nts '24 - 325 Capital leases 10 8 Other Debt 7 7 Total Debt 913 4.0 x 4.0 x 1,461 5.2 x 5.8 x PIK 175 Total Debt (incl. PIK) 1,088 4.8 x 4.8 x
LHA EBITDA (excl. Synergies) 221 248 Synergies and increase in carriage fees 3 27 LHA EBITDA (incl. Synergies) 224 275 Source: Deutsche Bank, Offering Memorandum, Company data PF adjustments for the Refinancing and the acquisition of CME’s Croatia and Slovenia assets. Also includes adjustments for the use of RCF to fund the remaining €30m of the acquisition price of CME assets, acquire Cable Target(€10m) and deferred payment for Fight Channel
In addition to United Group’s cable roll-up strategy, the recent CME TV assets not only adds vertical integration and diversifies the business further, but also leads to a significant synergy potential which we have detailed below.
Figure 6: Synergies Breakup Acquired CME Stations estimated synergies and other adjustments 25.0 of which, accounting adjustments (US GAAP to IFRS) 8.5 of which, impact of additional carriage fees 14.2 of which, estimated cost synergies on a PF basis 2.4
Acquired Cable assets 3.7 of which Cable Target acquisition estimated synergies on a PF basis 0.6 Of which Ikom expected synergies (as of Q217) 3.1 Total Synergies 28.7 Source: Deutsche Bank, Offering Memorandum, Company data
Structural considerations – largely unchanged As was also the case in the legacy notes, the subsidiaries in Serbia, Macedonia, Croatia and Montenegro will not guarantee the obligations. On an LTM basis as of Q117, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented 54.0% of Total Assets. However, Revolving Credit Facility will be guaranteed by the Guarantors and will also be guaranteed and secured by certain assets of subsidiaries located in Serbia.
Deutsche Bank AG/London Page 3
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Acquisition review
Strengthens an already strong content position
From a historical perspective, UG has already been more active in content acquisition relative to other cable operators in Western Europe (which are getting more active). The lack of competition from an entrenched and well capitalized content aggregator in the region allowed UG to strengthen its position as a leading content aggregator even before the recent acquisition.
CME Synergy review – substantial but achievable We have provided a summary of the CME related synergies below which would increase PF EBITDA to €41.5 from €25.0m on an LHA basis. While typically we would be skeptical of synergies of such magnitude, in this case as discussed below we are relatively comfortable with the communicated targets.
Figure 7: CME Synergies vs acquired EBITDA of €16.5m Acquired CME Stations estimated synergies and other adjustments 25.0 of which, accounting adjustments (US GAAP to IFRS) 8.5 of which, impact of additional carriage fees 14.2 of which, estimated cost synergies on a PF basis 2.4 Source: Deutsche Bank, Offering Memorandum, Company data
Carriage fee review – synergies achievable In January 2017, POP Slovenia shifted broadcasting Pop TV from free-to-air DTT to offering through pay-TV platforms. This move has significantly changed the financial profile of the asset, as the operators started to pay, for the first time, recurring carriage fees to transmit the channels. Slovenian market already has a relatively high pay-TV penetration at 75% (would be further higher if second homes are excluded), and this move would further help increase the penetration as PoP TV’s prime time audience share is relatively high at 52% (All day audience share of 42%). The company now expects to realize c. €15m in incremental annual revenues by 2019 compared to €2m in FY16. The revenue increase is expected to be phased as currently distributors are offered discounts. Cable operators would hope to gradually pass on the costs to the customers. Accounting review – EBITDA synergies will be delivered but no impact to FCF As CME’s financial information is prepared under U.S. GAAP, while UG’s financial information prepared under IFRS, the company could capitalize certain programming costs, which have been historically expensed by CME. This change in accounting will result in an increased annualized EBITDA of c.€8.5m. The change in accounting will have no impact on FCF as it will lead to an increase in Capex by similar amount. Other Cost Synergies In addition to the above, the company also expects €2.4m of cost savings related to news production in Croatia, and overhead costs/multiplex costs at Slovenia which are no longer needed following Pop TV’s shift to pay-TV from DTT.
Page 4 Deutsche Bank AG/London
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Market positioning - enviable
United Group is acquiring the leading TV stations in both Croatia and Slovenia. The assets command leading viewership positions across the target “prime- time” audience share in addition to a leading position on an “all day” audience basis. The market position in the commercially attractive time and demographical segments has allowed the CME assets to capture and even higher share of the TV advertising revenue in each market.
Market share Both Pop TV in Slovenia and Nova TV in Croatia are the most watched channels with an All-day audience market share of 42% and 30% at Q2 17, respectively. In the more commercially important “prime time” segment, the respective market share in the last quarter were even higher at 52% and 37%, respectively.
Television remains the most prominent advertising media in CEE markets representing c. 54% of total advertising spend vs c. 40% in developed markets. The leading audience share driven by a strong content line-up including market leading local content portfolio, has lead consistently to an even higher advertising revenue share - 81% in Slovenia and 54% in Croatia.
In Slovenia, TV ad market increased 7% in FY15 and FY16 whereas in Croatia it increased 4% in FY15 and 2% in FY16.
Figure 8: Slovenia – PoP TV audience Figure 9: Croatia – Nova TV audience Figure 10: TV Ad Revenue share market share market share
55% 52% 52% 40% 85% 38% 80% 81% 50% 37% 49% 49% 38% 80% 78% 78% 77% 50% 36% 36% 36% 76% 46% 36% 35% 73% 34% 34% 34% 75% 44% 70% 70% 71% 45% 42% 42% 34% 33% 70% 39% 32% 40% 42% 42% 65% 41% 41% 30% 31% 60% 58% 35% 37% 30% 56% 56% 56% 36% 28% 55% 55% 55% 35% 35% 29% 53% 54% 28% 28% 55% 52% 26% 30% 32% 32% 27% 27% 27% 27% 26% 24% 50% 25% 22% 45%
20% 20% 40% Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Prime Time Audience Share All Day Audience Share Prime Time Audience Share All Day Audience Share Slovenia - Ad Revenue share Croatia - Ad Revenue share Source: Deutsche Bank, Company presentation Source: Deutsche Bank, Company presentation Source: Deutsche Bank, Company presentation
Strong market position highlighted in Power ratio Both Pop TV in Slovenia and Nova TV in Croatia have high power ratios (2.0x in FY16). Power ratio is a measure to assess the relationship between advertising market share and TV audience share, with the higher the number indicates a more commercially valuable audience share. Power ratio is calculated as follows: Share of Market TV Advertising Revenue / Audience share. Strong content and leadership positions in both these markets helping generate more revenues from TV advertising. Power ratios are more relevant in the CEE due to the lesser developed advertising markets and generally lower pay-TV penetration levels.
Deutsche Bank AG/London Page 5
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 11: Power ratios
3.0x
2.5x 2.5x 2.3x 2.2x 2.2x 2.2x 2.2x 2.2x 2.1x 2.0x 1.9x 1.9x 1.9x 1.9x 2.0x 2.1x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 1.9x 1.9x 1.9x 1.8x 1.5x 1.7x 1.8x
1.0x
0.5x
0.0x Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 FY14 FY15 FY16
Slovenia - PoP TV Croatia - Nova TV
Source: Deutsche Bank, Company Presentation * Quarterly Power ratios are calculated
Historical financial review
Revenues have been growing again an annual basis since FY2015, following two years of decline. EBITDA on an LTM basis is up significantly on a YoY basis helped by the introduction of carriage fees in Q1 17, albeit on a staggered basis with the full impact back end loaded to Q1 19 on an annualized basis.
.Figure 12: Slovenia Revenues (in € m) and Growth Figure 13: Slovenia EBITDA (in € m) and Margins
60 17.4% 20%
50 15% 10.6% 9.2% 9.9% 40 8.6% 10% 6.2%6.9% 4.8% 5.4%5.3% 30 5% 3.8% 4.2% 54 55 50 52 46 49 20 -2.2% 0%
-6.4% 10 18 -5% 17 14 17 14 11 11 10 8 9 -7.5% 0 -10%
Revenue YoY Growth
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Revenues in Croatia on the other hand have been declining to flat for the last three years. EBITDA contribution on the other hand has been largely stable at a little over HRK 1m supported by margins expanding modestly from 13% to 15% over the same period.
Page 6 Deutsche Bank AG/London
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 14: Croatia Revenues (in HRK m) and Growth Figure 15: Croatia EBITDA (in HRK m) and Margins
12.0 7.0% 10% 1.6 31% 35% 5.0% 31% 27% 5% 1.4 30% 0.3% -0.5% 0.3% 10.0 -1.2% -1.8% -2.2% 0% 1.2 25% -4.0% 18% -6.5% 1.0 16% 15% 16% 20% 8.0 -5% 14% 13% 13% 13% 0.8 11% 12% 15% -13.8% -10% 10% 1.3 1.3 6.0 0.6 1.4 1.4 1.1 10% 10.8 10.8 8.1 -15% 1.4 10.1 0.4 5% 0.7 0.7 0.8 4.0 -23.0% 8.2 8.0 -20% 0.2 0.5 0% -27.3% 0.3 0.3 0.2 -5% 0.2 -24.5% -25% 0.0 -5% 2.0 -9% -32.5% -0.1 -0.1 2.4 2.5 2.5 2.5 2.4 -30% -0.2 -10% 1.8 1.5 1.7 1.5 1.6 0.0 -35% -0.4 -15%
Revenue YoY Growth EBITDA margin
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Historical GDP review
Free-to Air TV revenue trends, especially in the CEE region, have been highly correlated to GDP trends. With key /prime channels such as PoP TV in Slovenia moving to a pay-TV world would reduce the volatility and dependence on advertising revenue by the increasing and more stable “carriage fee” revenue stream.
Figure 16: Slovenia – GDP Growth (const prices) Figure 17: Croatia- GDP Growth (const prices)
4.0% 4.0% 3.1% 2.9% 2.9% 3.0% 2.5% 3.0% 2.6% 2.3% 2.5% 2.5% 2.3% 2.2% 2.1% 2.0% 2.0% 1.8% 1.8% 1.8% 2.0% 2.0% 1.6% 1.2% 1.0% 0.6% 1.0%
-0.3% 0.0% 0.0% -1.1% -0.5% -1.0% -1.1% -1.0%
-2.0% -2.0% -1.7% -2.2% -3.0% -2.7% -3.0%
Source: Deutsche Bank, IMF Source: Deutsche Bank, IMF
Deutsche Bank AG/London Page 7
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
IPO Scenarios
Exit scenarios
The current ownership structure consists of management and founding partners owning c. 30% of the equity with balance owned by KKR which bought in to the company in March 2014 for an EV of €1bn.
We don’t think a trade sale or equity listing is imminent in the short term as the business needs to close and integrate the acquired assets. As such, any potential listing would thus take place closer to the call dates of the capital structure, limiting any capital upside.
Furthermore, there is also the question of whether management would like to eventually exit through as sale to a strategic or remain invested? A desire to continue to remain invested would probably favour a share listing vs an outright sale.
We believe that any equity sales, especially if executed earlier rather than later, will largely be a primary share to de-lever the balance sheet.
Figure 18: IPO Assumptions IPO share issues Primary Secondary Size of offering Value of issue (€ m) 300 25 325 FY 2018 Net Debt 1,357 PF FY 2018 EBITDA 285 Net Leverage FY 2018 4.8x Deleveraging 1.1x Net Leverage FY 2018 post IPO 3.7x Source: Deutsche Bank
We see EV values well ahead of the valuation at the time of the KKR acquisition, adjusted for all the bolt-on acquisitions completed or about to be completed.
Figure 19: EV Valuation EV EBITDA multiple 6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 260 1,560 1,690 1,820 1,950 2,080 2,210 2,340 2,470 2,600
2018E 270 1,620 1,755 1,890 2,025 2,160 2,295 2,430 2,565 2,700 285 1,708 1,850 1,992 2,135 2,277 2,419 2,561 2,704 2,846 EBITDA 300 1,800 1,950 2,100 2,250 2,400 2,550 2,700 2,850 3,000 330 1,980 2,145 2,310 2,475 2,640 2,805 2,970 3,135 3,300 340 2,040 2,210 2,380 2,550 2,720 2,890 3,060 3,230 3,400 Source: Deutsche Bank
However, pre-money equity valuation continues to be negatively impacted by the relatively high leverage level, especially relative to other competitors.
Figure 20: Implied Pre-money Equity Value EV EBITDA multiple 6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x
2018E 260 203 333 463 593 723 853 983 1,113 1,243 270 263 398 533 668 803 938 1,073 1,208 1,343 EBITDA 285 350 493 635 777 920 1,062 1,204 1,346 1,489 300 443 593 743 893 1,043 1,193 1,343 1,493 1,643
Page 8 Deutsche Bank AG/London
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
330 623 788 953 1,118 1,283 1,448 1,613 1,778 1,943 340 683 853 1,023 1,193 1,363 1,533 1,703 1,873 2,043 Source: Deutsche Bank
Due to the leverage levels, we believe any equity raise will be largely primary shares in order to de-lever the business to better reflect leverage levels in the broader public markets and also in order to improve the FCF generation of the business.
Figure 21: Deleveraging with the Primary Share Sale
EUR (m) Primary Share Issue 150 200 250 300 350 400 450 260 -0.6x -0.8x -1.0x -1.2x -1.3x -1.5x -1.7x 270 -0.6x -0.7x -0.9x -1.1x -1.3x -1.5x -1.7x 2018E 285 -0.5x -0.7x -0.9x -1.1x -1.2x -1.4x -1.6x EBITDA 300 -0.5x -0.7x -0.8x -1.0x -1.2x -1.3x -1.5x 330 -0.5x -0.6x -0.8x -0.9x -1.1x -1.2x -1.4x 340 -0.4x -0.6x -0.7x -0.9x -1.0x -1.2x -1.3x Source: Deutsche Bank
The necessity to raise equity, to lower leverage and reduce cash interest (which could add c. €10-15m in annual FCF) is highlighted by the implied PF FCF Yield of the Group post listing, which would need to be accompanied by above average growth, for the investment case to particularly attractive.
Deutsche Bank AG/London Page 9
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 22: United Group Financial Summary
Issuer Security Size Maturity DB Rec Moody's S&P Next Call Call Price Ask Price YTW z-Spread United Group B.V. € 4.375% Sr Sec Nts '22 575 2022 C-S B2 B 01-Jul-19 102.188 104.500 2.7% 289 United Group B.V. € (E+4.375%) Sr Sec FRN's '23 450 2023 C-H B2 B 01-Jul-18 100.000 101.900 0.2% 52 United Group B.V. € 4.875% Sr Sec Nts '24 325 2024 C-S B2 B 01-Jul-20 102.438 104.375 3.8% 352
FYE Dec-31 (EUR m) 2015A Q 1 16A Q 2 16A Q 3 16A Q 4 16A 2016A Q 1 17A Q 2 17A Q 3 17A Q 4 17E 2017E 2018E 2019E Summary P&L Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Dec-17 Dec-18 Dec-19 Net Sales 377 104 118 115 123 460 121 128 133 138 521 613 696 Adj EBITDA 161 45 49 47 50 190 53 56 59 57 225 259 293 Adj EBITDA margin % 42.7 % 43.8 % 41.4 % 40.6 % 40.3 % 41.4 % 43.9 % 43.4 % 44.4 % 40.9 % 43.1 % 42.3 % 42.1 % D & A and other opex (107) (29) (30) (31) (37) (127) (34) (37) (38) (35) (144) (165) (186) Operating Profit 34 13 16 13 (2) 40 16 14 8 18 56 74 86 Operating margin % 9.1 % 13.0 % 13.6 % 11.4 % (2.0)% 8.7 % 13.0 % 10.6 % 6.3 % 13.0 % 10.7 % 12.1 % 12.4 % Interest expense, net (60) (20) (12) (17) (9) (58) (18) (48) (18) (15) (113) (61) (61) Profit/Loss before tax (25) (7) 4 (4) (11) (18) (3) (34) (9) 3 (57) 13 26 Income tax expense (2) (0) (4) (3) 8 2 (1) (2) (2) (0) (5) (1) (3) Other - (1) (0) 0 1 - (1) 2 (3) - - - - Net Profit (27) (8) 0 (7) (2) (16) (4) (34) (15) 2 (62) 12 23 Cash Flow Summary EBITDA - Adjusted 161 45 49 47 50 190 53 56 59 57 225 259 293 Capex (150) (24) (36) (37) (46) (143) (34) (35) (40) (28) (136) (144) (160) Adj. EBITDA - Capex 11 21 13 10 4 48 19 21 20 29 88 115 133 Changes in Wcap (8) (14) (15) (3) 15 (17) (2) (18) (4) 15 (9) (14) (10) Cash Taxes Paid (2) (0) (2) (1) (3) (6) (1) (1) (2) (1) (5) (4) (5) Cash Interest Paid (53) (0) (25) (2) (31) (58) (0) (32) (43) (5) (81) (61) (61) Free Cash Flow (52) 7 (28) 3 (15) (34) 15 (30) (29) 38 (6) 36 57 Acquisitions (66) (20) - (12) (5) (39) - (42) (0) (11) (52) (235) (3) Adj. Free Cash Flow (118) (13) (28) (10) (20) (73) 15 (71) (29) 27 (58) (199) 54
CFs from Operating Act. 88 30 4 41 16 91 47 2 (1) 65 113 180 217 CFs from Investing Act. (220) (25) (37) (84) (43) (189) (38) (78) (41) (38) (195) (379) (163) CFs from Financing Act. 131 1 26 68 3 98 43 33 254 (35) 295 (20) - Effect of FX/ Other - (3) 3 (0) 0 (0) (0) 0 0 - 0 - - Net change in cashflow (1) 3 (4) 24 (24) (1) 52 (43) 212 (8) 213 (219) 54 Summary Balance Sheet Items Cash and Equiv. 15 19 14 38 14 14 66 23 234 227 227 8 62
RCF 61 82 87 30 38 38 85 121 55 20 20 - - Total Cash-Pay Debt 718 741 767 832 837 837 880 913 1,420 1,385 1,385 1,365 1,365 Total Debt (incl. PIK) 918 945 976 1,045 1,055 1,055 1,103 1,141 1,420 1,385 1,385 1,365 1,365 Net Cash-Pay Debt 703 722 753 794 823 823 814 890 1,186 1,158 1,158 1,357 1,303 PF Credit Statistics (LHA) Coverage Adj. EBITDA/Cash int. 3.0 x 3.2 x 3.0 x 3.3 x 3.3 x 3.3 x 3.4 x 3.1 x 2.0 x 2.8 x 2.8 x 4.3 x 4.8 x Adj. EBITDA-Capex/Cash int. 0.2 x 0.3 x 0.3 x 0.6 x 0.8 x 0.8 x 0.8 x 0.8 x 0.6 x 1.1 x 1.1 x 1.9 x 2.2 x
Total Cash-pay Debt/LHA Adj. EBITDA 4.1 x 4.1 x 4.1 x 4.4 x 4.3 x 4.3 x 4.3 x 4.2 x 6.2 x 6.0 x 6.0 x 4.9 x 4.6 x Net Cash-Pay Debt/LHA Adj. EBITDA 4.0 x 4.0 x 4.0 x 4.2 x 4.3 x 4.3 x 4.0 x 4.1 x 5.2 x 5.0 x 5.0 x 4.9 x 4.4 x Net Cash-Pay Debt/LTM Adj. EBITDA 4.4 x 4.2 x 4.1 x 4.3 x 4.3 x 4.3 x 4.1 x 4.3 x 5.4 x 5.2 x 5.2 x 5.2 x 4.5 x
PF Leverages (Incl: Synergies) Net Cash-Pay Debt/LHA Adj. EBITDA - incl Synergies 5.2 x 5.0 x 5.0 x 4.7 x 4.4 x Net Cash-Pay Debt/LTM Adj. EBITDA - incl Synergies 5.4 x 5.1 x 5.1 x 4.9 x 4.5 x
Total Debt(incl PIK) /LHA Adj. EBITDA 5.3 x 5.3 x 5.2 x 5.5 x 5.5 x 5.5 x 5.4 x 5.2 x Net Debt(incl PIK) /LHA Adj. EBITDA 5.2 x 5.2 x 5.1 x 5.3 x 5.4 x 5.4 x 5.0 x 5.1 x Net Debt(incl PIK) /LTM Adj. EBITDA 5.6 x 5.4 x 5.3 x 5.4 x 5.5 x 5.5 x 5.2 x 5.5 x
FCF (pre dividend)/Total debt (excl PIK) -7.3% -7.5% -10.7% -6.4% -4.1% -4.1% -2.9% -2.9% -4.1% -0.4% -0.4% 2.6% 4.2% FCF (post dividend)/Total debt (excl PIK) -16.4% -19.1% -12.9% -10.3% -8.7% -8.7% -4.8% -9.4% -7.4% -4.2% -4.2% -14.6% 4.0% Capital Structure Debt Amortisation Profile PF 30 Sep '17* Book Val Net Lev. Net Lev. 800 671 LHA LHA 700 (incl. Syn)(excl. Syn) 600 450 RCF '22 (€100m, Super senior) 96 500 Serbian RCF '20 (€20m and €60m, unsecured) - 400 325 300 € 4.375% Sr Sec Nts '22 575 200 € (E+4.375%) Sr Sec FRN's '23 450 100 € 4.875% Sr Sec Nts '24 325 - - - - 0 Capital leases 8 2017 2018 2019 2020 2021 2022 2023 2024 Other Debt 7 Tota l Debt 1,461 5.2 x 5.8 x Estimated Liquidity PF Sep '17 Cash balances 34 Committed revolver available 84 Short term debt (1) * PF for (i) acquire CME's croatian and slovenia media assets for €230m Total Liquidity 118 (ii) Use of RCF to fund the remaining €30m of the acquisition price of CME assets, acquire Cable Target(€10m) and deferred payment for Fight Channel Source: Deutsche Bank, Bloomberg Finance LP, Company data
Page 10 Deutsche Bank AG/London
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HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 23: United Group - Overview
Business Description Recent Headlines or Upcoming Events United Group is a group of companies that provide cable and satellite pay-TV, broadband and fixed-line 30 May '17 United Group reports Q1 17 Results, Revenue +39.9% YoY (Organic +8%), telephony services in Slovenia, Serbia and Bosnia and Herzegovina. The company has advanced fibre EBITDA +36.2% (Organic: +23.6%) and cable network which covers across regions in Slovenia, Serbia and Bosnia and Herzegovina and as 20 Apr '17 Completes the acquisition of IKOM (93k cable customers) for €45m of June 30, 2016, provided analogue and digital cable pay-TV services, broadband, fixed-line and mobile services to approximately 2.9 million RGU's. On 1 April 2015, United Group closed the acquisition of 6 Apr '17 Completes the acquisition of Fight Channel d.o.o., Croatia, for €2.5m Tusmobil for €110m . On March 6 2014, funds affiliated with KKR completed the group's acqusition 18 Jul '16 United Group announces the launch of its offering of €150m 7.875% Sr Sec for a total enterprise value of €1bn. Nts due 2020; UOP to repay RCF, planned acquisitions and GCP Q1 16 Signed an SPA for acquisition of Maxtel, a Dark fibre B2B operator in Slovenia, for a total consideration of €4m 14 Oct '15 United Group acquires Mkabl, a cable operator in Montenegro with close to 20 thousand unique cable subscribers and 30 thousand RGUs, for €12 million. Jun'15 United Group plans to complete the acquisition of BHB Cable TV d.o.o, a cable pay-TV operator in Bosnia and Herzegovina Jun'15 Company has announced intention to acquire five relatively small cable TV operators in Bosnia and Herzegovina. Expected to close in Jun 2015 1 Apr '15 Closing of Tušmobil acquisition for €110m of which €26m to be paid in 3yrs equivalent to 10.0x EV/EBITDA multiple 1 Apr '15 Issued Tap worth €150m of 7.875% Sr sec notes '20 used to fund the acquisition Divisional Revenue RGU Breakdown
LTM Revenues RGUs Other Others, 8% Fixed 4% Elimination, -22% telephony Cable pay- United Media, 17% TV 20% 38%
Telemach BH, 12% SBB Serbia, 42% Broadband 17% Telemach DTH pay-TV Slovenia, 39% 24%
Historical EBITDA Performance and Margin Trends EBITDA & Margin Performance Net Sa les EBITDA Ma rgin 350 50 % 2011A 174 79 45.6 % 300 2012A 192 91 47.7 % 48 % 250 2013A 243 109 44.9 % 46 % 200 2014A 284 134 47.1 % 44 % 2015A 377 161 42.7 % 150 42 % 2016A 460 190 41.4 % 100 40 % 2017E 521 225 43.1 % 50 2018E 613 259 42.3 % - 38 % 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2019E 696 293 42.1 %
Divisional information Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Dec-17 Dec-18 Dec-19 FYE Dec-31 (EUR m) 2015A Q 1 16A Q 2 16A Q 3 16A Q 4 16A 2016A Q 1 17A Q 2 17A Q 3 17A Q 4 17E 2017E 2018E 2019E SBB Serbia 175 41 42 53 49 185 45 57 53 53 208 228 236 Telemach Slovenia 148 42 53 45 52 191 47 48 52 55 202 214 221 Telemach BH 42 13 13 14 15 55 15 16 16 16 62 67 69 United Media 47 15 17 21 21 74 27 29 29 29 114 120 126 CME Assets 60 127 Other Entities & Ellimination 23 6 6 10 9 32 7 14 10 9 41 41 41 Elimination (57) (13) (13) (28) (22) (77) (20) (36) (26) (25) (107) (116) (124) Total Revenues 377 104 118 115 123 460 121 128 133 138 521 613 696 YoY growth - reported 33.0 % 39.8 % 21.3 % 12.6 % 18.5 % 21.8 % 16.9 % 8.5 % 16.1 % 12.4 % 13.3 % 17.6 % 13.6 %
SBB Serbia 66 18 18 19 20 76 22 22 25 23 91 100 104 Telemach Slovenia 56 15 17 15 17 63 15 16 17 17 64 71 73 Telemach BH 17 4 5 5 5 19 6 5 5 5 22 23 24 United Media 15 6 6 5 6 24 9 10 10 9 37 41 43 CME Assets 14 39 Other Entities & Ellimination 7 2 2 2 2 9 2 3 2 3 10 10 10 Adj. EBITDA 161 45 49 47 50 190 53 56 59 57 225 259 293 % margin 42.7 % 43.8 % 41.4 % 40.6 % 40.3 % 41.4 % 43.9 % 43.4 % 44.4 % 40.9 % 43.1 % 42.3 % 42.1 % YoY growth 20.6 % 36.2 % 21.2 % 8.1 % 12.0 % 18.3 % 17.3 % 13.8 % 27.0 % 13.9 % 17.9 % 15.4 % 13.0 %
Ca pex 150 24 36 37 46 143 34 35 40 28 136 144 160 as a % of sales 39.7 % 23.3 % 30.2 % 32.2 % 37.4 % 31.1 % 28.3 % 27.1 % 29.6 % 20.0 % 26.1 % 23.5 % 23.0 %
Subscribers Cable TV 920 922 928 958 967 967 973 1,079 1,091 1,070 1,070 1,090 1,102 Broadband 558 566 579 603 626 626 637 704 721 716 716 752 756 Telephony 343 364 382 404 431 431 453 482 506 519 519 591 599 DTH 474 475 474 484 467 467 498 501 501 506 506 526 530 OTT 107 110 110 112 115 115 119 118 123 123 123 123 123 Mobile 331 343 361 380 399 399 414 430 448 463 463 503 531 Others 116 112 116 118 117 117 117 116 108 108 108 108 108
Blended ARPU (YTD) 18.3 19.0 19.1 19.3 19.4 19.4 20.0 20.1 20.2 Source: Deutsche Bank, Company data
Deutsche Bank AG/London Page 11
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HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group
Figure 24: United Group Capital Structure Summary
Organizational Structure
€ 575m 4.375% Senior Secured Notes Due 2022 Governing Law of Indenture: New York Law Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented 54.0% of Total Assets. The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; (ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans. In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full. Optional Redemption: Prior to July 1, 2019 - MW premium prior B+50pbs; Equity Claw 40% of the Notes at 104.375%; Redeem 10% of the aggregate principal every year at 103% Call Schedule: Jul-19 102.188% Jul-20 101.094% Jul-21 100.000% Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date. Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x Permitted Investments: Greater of €25m and 3.1% of Total Assets € 450m (E+4.375%) Senior Secured FRN's due 2023 Governing Law of Indenture: New York Law Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented 54.0% of Total Assets. The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; (ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans. In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full. Optional Redemption: MW premium prior to July 1, 2018, B+50pbs; Call Schedule: Jul-18 100.000% Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date. Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x Permitted Investments: Greater of €25m and 3.1% of Total Assets € 325m 4.875% Senior Secured Notes Due 2024 Governing Law of Indenture: New York Law Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented 54.0% of Total Assets. The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; (ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.; and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans. In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full. Optional Redemption: Prior to July 1, 2020 - MW premium B+50pbs; Equity Claw 40% of the Notes at 104.875% ; Redeem 10% of the aggregate principal every year at 103% Call Schedule: Jul-20 102.438% Jul-21 101.219% Jul-22 100.000% Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date. Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x Permitted Investments: Greater of €25m and 3.1% of Total Assets Equity Ownership KKR and EBRD - 70.3%, Management through Gerrard Enterprises LLC, Dragan ˇSolak and Cable Management Company Ltd - 26.2% and Middlesbor Associates Limited - 3.5% Source: Deutsche Bank, Offering Memorandum, Company data
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist Institution Disclosure United Group NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
For historical recommendations pertaining to a European security mentioned in this report, please visit our website at http://gm.db.com/welcome.html?about/spreadsheet.html
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vivek Khanna
Deutsche Bank AG/London Page 13
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Deutsche Bank debt rating key Bond rating dispersion and banking relationships CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to 250 70 % outperform the credit spread of bonds / CDS of other 200
issuers operating in similar sectors or rating 150 62 % categories over the next six months. 100 25 % CreditHold (“C-H”): The credit spread of the Reference 54 % Credit Instrument (bond or CDS) is expected to 50 4 %71 % perform in line with the credit spread of bonds / CDS 0 of other issuers operating in similar sectors or rating Buy Hold Sell categories over the next six months. CreditSell (“C-S”): The credit spread of the Reference Companies Covered Cos. w/ Banking Relationship Credit Instrument (bond or CDS) is expected to European Universe underperform the credit spread of bonds / CDS of
other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating. Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at
the discretion of the analyst. (a)
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(b) Additional Information
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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed-rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or liquidation of positions), and settlement issues related to local clearing houses are also important risk factors. The sensitivity of fixed-income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. The index fixings may – by construction – lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. Funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks typical to options in addition to the risks related to rates movements.
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David Folkerts-Landau Group Chief Economist and Global Head of Research
Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research
Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research
Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research
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