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Executive Summary

  • We maintain our Buy recommendation on the lower priced SFRFP ’29 SSNs, and our Hold recommendation on the remainder of the SSN stack. We also roll our Sell recommendation on the Altice France Holding SA notes.
  • Altice has reportedly offered a counter proposal to that presented by the secured group steerco a few weeks ago. Details are sparse though Bloomberg reports that the company’s proposal offers a haircut for certain secured debt in exchange for an equity stake as well as a maturity extension and coupon reductions.
  • We see this proposal as an important step towards a negotiated deal between SFR and its creditors. The gap between secured recoveries from the original steerco proposal and the counter proposal appears fairly modest and we expect a deal could be agreed in the coming months.
  • Our base case assumptions see net leverage at SFR moving down to the low 4x range with positive FCF (in part due to interest cost savings from the deleveraging efforts and loanholder extensions with an associated margin ratchet). We see recoveries in this scenario for SSNs in the 85-92c range.

Relative Value

SFR secured notes, notably the ‘29s were up several points on Friday following Bloomberg reports on Thursday that Altice has offered a counter proposal to that put forth a few weeks ago by the Secured group steerco (see Altice France – Sec’ds Bring Drahi a Counter-Offer). According to the report, the offer would see secured creditors take a 10-15% haircut on their debt in exchange for the same proportion of Altice France equity. The plan would also see maturity extension and coupon reductions. Altice has also reportedly now requested steerco members sign an NDA with the company to allow negotiations to begin in earnest.

While details are sparse and will no doubt change further, we view this counter offer as an important step towards a negotiated deal that paves the way to a normalization of the Altice credit story. Crucially, we see a relatively modest gap between the expected recoveries for secured lenders in the steerco proposal, which we estimate to be in ~low 90s, and the mid-80s recovery we see as implied by this counter proposal (for more details, please see below). With a reasonable amount of pragmatism on both sides (and harsh treatment of the junior creditors at Altice France Holdings SA), we expect a deal can be agreed in the next few months. With the secured coop successfully extending their agreement through February 2026, dragging their feet has become a less attractive option for Altice and we expect both they and secured creditors are now incentivized to strike a deal as soon as feasible to prevent further value leakage and begin a turnaround for the business.

At our base case assumptions, laid out below, we see a path to a deal that brings net leverage down for Altice France into the low 4x range, with annual interest costs of ~€700-800 mn (as such annual FCF of ~€500-800 mn) and implies an overall recovery for senior secured bondholders in a 85-92 c range (based on a 4.5-6x EV/EBITDA multiple for Altice France). In a more conservative case (with a smaller contribution of asset sales) which would see net leverage of ~4.7x, we see recoveries in a 79-90c range (based on the same 4.5-6x EV/EBITDA multiples).

Given our expected recovery values and growing confidence in the likelihood of a negotiated deal, we roll our Buy recommendations on the longer dated SFRFP SSNs (‘29s). Now in the mid-70s the remaining upside is more limited, but we continue to prefer these lower priced notes given a smaller gap to recovery in a worst case scenario and that we expect they could see somewhat more favorable economics in the course of a debt reduction exercise (e.g. through a tender process using asset sale proceeds). We maintain our Hold position on the other SSNs.

We retain our Sell recommendation on the junior Altice France Holding SA notes, which we continue to see as weakly positioned in negotiations. We continue to see risk of the restructuring taking the form of a conciliation process that leaves the junior creditors with a very low recovery. And while we see some room for a less-bad outcome in the course of negotiations, even in what we would see as a potential best-case scenario (up to 20% of the equity) it would require at least a 6x multiple for Altice France to generate a recovery for the SNs in excess of 30c by our estimates. We view such an outcome as a very much a long-shot.

What might the mechanics of deal look like?

While we have no details on the specifics of Drahi’s new proposal beyond the short Bloomberg note, we lay out in the tables below the mechanics of a potential compromise between this deal and that proposed by the steerco.

Specifically, we assume that any deal with the secured group is likely to include 2 options – an extension option (without equity) structured to appeal to CLO investors, which helps push out maturities and reduce interest costs, and an option structured to appeal to other secured creditors (SSNs and loans held outside of CLOs) that includes a haircut in exchange for equity. As a starting point we assume a 15% haircut for 15% of the equity, but without either extension or coupon reduction for the participating secured creditors. We assume ~€5.5 bn of loans are subject to a 2-year extension with margins cut to ~E+200-250 bp (contributing to a ~€150-175 mn reduction in interest costs). While these loans that extend would not see a haircut to principal, the economic value of such securities would most likely be below the 85c baseline implied for the haircut debt. Naturally, we would expect any exchange deal would also come with a tightening up of documentation (notably around the use of unrestricted subsidiaries) to better protect creditors in the future if this initial one-and-done deal does not prove sufficient.

From Altice, we assume the contribution of ~€3.5 bn from asset sale proceeds, including the cash held at unrestricted subsidiaries from the sale of data centers (€0.5 bn) and the media assets (€1.55 bn), as well as a sale of the La Poste stake (€0.5 bn) and a €1.0 bn recap of Altice’s stake in XpFibre (also at an unrestricted subsidiary). We do not assume any further contribution of equity from Drahi in our base case. We assume these asset sales are used to redeem 2025 debt at par as it falls due (a necessary step to avoid over complicating negotiations in our view), as well as to fund a tender offer for exchanging secured debt. Such a tender offer (we assume par in our base case, but it could also be structured to further capture a discount from willing sellers, such as through an unmodified reverse Dutch auction) would aid deleveraging and also facilitate an exit opportunity for some of those that participate.

For junior creditors, our base case assumes a 90% haircut (i.e. 10c in cash) in exchange for 10% of Altice France equity. The economics of a 15% stake for secured lenders in exchange for a 15% haircut (i.e. ~€3.1 bn in value – assuming the full €20.5 bn of secured debt is considered to have participated), imply writing off €4.3 bn of junior debt could be worth as much as a 21% equity stake for the junior creditors – we see this as the high end of what could be achieved through negotiations. However, we see junior creditors as weakly positioned to negotiate in a deal that implies value breaks in the secured layer.

For Drahi, we see the contribution of asset sale proceeds as an acceptable compromise – effectively following through (of sorts) with previous commitments – with a goal of retaining 60-75% of Altice equity. Such a deal would require a longer term EV/EBITDA multiple of ~5.5-6x to make economic sense to Drahi (i.e. for the value of his stake to be more than the cash contribution from the asset sales), which we see as reasonable. Crucially, structuring a deal in this way would mean materially reduced legal risk for Drahi and Altice directors and be easier to execute than a deal contingent on a sizable injection of new equity. As noted previously, given the 2025 and 2026 maturities we see simply stripping the cash from the sale of data centers and the media assets as challenging to execute; we see taking XpFibre (worth potentially ~€4bn by our estimates) as the more viable option for Drahi. Thus a compromise deal as laid out here would imply break-even economics for Drahi in a 5.5-6x range (which again we view as palatable).

With low 4x leverage and a downward margin ratchet on loans that are extended, we estimate interest costs for Altice France would fall from ~€1.4 bn to ~€700 – 800mn. Assuming capex of ~€2.0 bn (modestly above what we view as longer term run-rate), this implies FCF of ~€500-800 mn (depending on the trajectory of EBITDA, taxes and frequent “one-offs” such as a reduction of the securitization programme). We do not assume maturity extension or coupon reductions for bondholders that participate in the exchange, both because we do not view it as necessary to put Altice France on a stable footing and because it would only increase the amount of equity compensation that would be required for the economics to be acceptable to secured lenders. We lay out a potential maturity schedule in the chart below. Such a maturity, leverage and FCF profile would reposition Altice France as a performing single-B credit in our view.

In the bear case laid out below, we assume only the contribution of the cash from the data centers and media assets is used for debt reduction (i.e. La Poste is not sold and there is no contribution from XpFibre). We also assume that a tender offer (albeit in modest size due to the limited cash contribution) is executed at a discount (90). This scenario would leave leverage in the mid to high 4x range – the upper end of what we think could be passed off as viable, but would still be sufficient to see Altice France emerge with decent FCF generation capacity (likely €400-700 mn). Though implied recoveries would be lower, somewhat more asset value would be retained within the group (albeit at unrestricted subsidiaries – creditors would likely push to tighten up language around these assets in any exchange), which should provide some comfort.