CONSUMER CYCLICALS: Best and Worst on credit governance this year

(€IG/HY: Consumer & Transport)

Worst:

• Victoria PLC; The UK flooring provider riding high-beta to housing activity slow-down and facing 7x leverage decided to get ahead of a €500m maturity in 2026 through a tender. But it said market conditions did not allow it to complete that and instead decided to use the cash on a share buyback. It was confusing to us and apparently to Moody's who moved to negative outlook two weeks later. Downgrades since put it on the verge of CCC. Longs have managed positive returns (26s +15%, 28s +6%) - but they are abysmal numbers for the realised vol (drawdowns >5pts more than once this year).
• Mobico: The parent of National Express & Spanish ALSA bus operations was trying hard to hold onto IG ratings earlier this year as earnings hit a trough. It thought 1H earnings would be a good time to announce it wouldn't call its hybrid on the first call date - a still 1.5years away. It reassured investors it had run the cash flow impact from the (then) harsh reset. Moody's wasn't having it, giving it a double notch junking and refusing to wait for a pending asset sale. The €31s are left underperforming the index (+3.1%), £28s the poster child for coupon-step ups (+7% vs. £IG +2.4%) and the perps coming from cheap levels has performed through the vol (+12%).
• Avis: we imagine will make the list for many years to come. HY maturity walls were a widely shared concern late last year when rates were up to +100bps higher and BBB/B over 100bps wider. Apparently it wasn't for Avis who sent $1.3b in the FCF from its record year straight to equity holders. It came to primary this year to refi the €26s paying +225bps over it in refi costs (on €600m deal). It followed that with a €200m tap of the 30s in May at even pricier levels and capped the year off with a $700m dollar 5NC2 that needed a 35-40bp NIC to price at a harsh 8.25%/OAS+440. €30s are left with abysmal +3.2% in returns - 7.25% in carry not able to offset widening.

(honourable mentions to Auchan's 1H earnings call, Whirlpool's deleveraging "effort" and Flutter starting buybacks by effectively ignoring a €2.5 bridge loan)

Best:

• Tesco: UK's largest grocer has a year of success, taking market share in some months at the fastest pace since late 2021. But equity holders apparently wanted more than just Tesco bank sale proceeds pointing to leverage at the bottom end of target. Management pushed back adding "the times we live in it's always better to have a stronger balance sheet than it is to have a weaker one". S&P moved to positive outlook in July and in a rough year for grocer sentiment it has held its own; €31s (a value view from early in the year) end +5.5% firmly outperforming French peer Carrefour.
• IAG: The parent of British Airways has had a stellar year and is now on track to take pole position (from Ryanair) on European airline margins. That performance did not stop BS conservatism; it has taken net leverage down to 1.0x well below target 1.8x and waited till the tail-end to the year (when the FY outlook was more clear to it) to begin reasonably sized equity-pay-outs. Moody's rewarding it with a double-notch upgrade, S&P moving to positive outlook. It has made the top 10 equity performers, spread performers and total returns (€29s).
• Carnival: riding a firm bounce back in cruise travel it has seen healthy FCF return. It has led to equity analyst asking for the return of pay-outs which have been on pause for over 4 years now. Management pushed back adding "right now our priority is generate all that free cash flow, pay down debt and re-strengthen the balance sheet...I can't wait to have those conversations, but I'd say that's premature". It has been rewarded with 2-notch upgrade at S&P, 1-notch at Moody's and a Fitch initiation on firm BB Positive rating. €29s end the year as one of the best performing HY lines in our sector - an impressive +22% return.