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Burberry (Baa2, NR) IPT follow up

CONSUMER CYCLICALS

IPT £Benchmark 6Y UKT+200a vs. FV +217 (-17 inside)

We will record this as negative NIC with FV unch (see image below). Please note swap spreads are close to flat in sterling 6Y (at -3) and not throwing us off; to be clear FV is Z+220 or 6.2% or UKT+216 (against the 0.375% Oct 30s). Couple of final cautionary notes for investors before we leave this to pricing;


  • The vol you see in the 25s (below) should be noted; it spiked to T+240 in 1H22 and was a ~3y at the time. The duration on this line is significantly higher.
  • Neither the 25s nor this have CoC - this is important for us given market has been brewing if a PE player or fellow European conglomerate (LVMH etc.) will step in and take control.
  • Burberry tends to get significant vol for any lux retailer that reports weakness in Asia particularly China given its 44% of sales in Asia - i.e. risk events are not limited to just earnings.
  • Our view is management holds back on giving colour including on answering questions like what its online sales as a percentage of revenue is. Key for us (and likely the analyst that asked it) given its spending money on store refreshments yet flagging falling foot traffic.
  • Stock price is at a 12y low and a trailing P/E of 14x and still 17 analyst are on hold, 4 on sell with only 2 on buy.

We hope Burberry proves us wrong, shows a turnaround in its brand and allows credit investors to reap some excess returns. But our views are based on information we have and the estimates we can make on that - on which this deal screens well rich. For those disappointed they are missing out on carry, B&M in HY that trades north of it is worth taking a look - we like the 8.125% 30s (cheap view on it) and see early call as likely into cheaper refi.

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