Worldline - Of Overdrafts and Pies - Model Update - Positioning

All,

Please find our updated analysis here. 

On our credit call yesterday, we decided that before going long the name at some point in the future, we would go short for the next two months. Names are dropping like pies from the sky, and Worldline has uneasy investors to satisfy. We think that in the short term, the risk is materially skewed to the downside, and even in the long run, the jury is still out.

- We are shorting the 2027 SUNs for 3% of NAV at 86.5c/€. Most likely the company remains stable, and the capital markets day will be a mild success in which new management explain 1) the overdraft and interest income, and 2) assert that no further client has deserted the FS division. However, failing either, we see very little downside protection in the business. So this should be a cheap short with a risk of bonds rallying 3.5 points to 90c/€ if management can even reveal a (highly dilutive and therefore unlikely rights issue. We plan to review the position following the capital markets day.

- In the medium term, we consider a long position in the lowest bonds then (long end). If some months go by and clients stay on board, then yields will tighten. Then, with €2.5bn of liquidity, of which €1,5bn excess and proceeds from the MeTS & DA business, the company can refinance its three short-term bonds and buy time through 2029. But we think of this credit as very binary. 

- Worldline is a bad business with a good balance sheet. Within the growing payments industry, it is in the slow growing verticals and saddled with legacy systems and 2x as many employees as its more nimble rivals (Ayden) would need to do the business. 

Key catalysts coming up:

- Q325 reporting and Capital Markets Day: On the one hand, management failing to quell investor concerns could set in motion a negative chain of events. Also, "Temporarily" re-insourced business is not coming back. On the other hand, if management can reveal the return of the lost customer, or the end to a probe, then good.

- Ultimately, this company may need an equity injection. A sale (brave buyer) or a Rights issue (would require an EGM and would be heavily dilutive), would be the ultimate upside risk.

- Medium-term restructuring: The company benefits from very low interest rates on convertible and 2027 bonds that will not be replicable at maturity. The cash war chest should be enough to reorganise under the IG bond documentation, which is entirely open to abuse via LME or a coercive A&E. Note that restructuring could be difficult if FS customers can re-insource their business.

Here to discuss this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.u