Wendel : Summary on February 11, 2021 - 827.03 Ko - PDF

Wendel

Primary Credit Analyst:

Marta Bevilacqua, Milan + (39)0272111298;[e-mail]

Secondary Contact:

Mikaela Hillman, Stockholm + 46 84 40 5917;[e-mail]

Table Of Contents

Credit Highlights Outlook

Our Base-Case Scenario Company Description Peer Comparison Business Risk Financial Risk Liquidity Covenant Analysis

Issue Ratings - Subordination Risk Analysis Ratings Score Snapshot

Related Criteria

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

Wendel

Business Risk: FAIR

Vulnerable

Financial Risk: MODEST

Excellent

Highly leveraged

Minimal

Credit Highlights

Overview

Key strengths

Key risks

Adjusted portfolio of about €7.3 billion (net of cash, including €17 million investment commitments, €44 million in put options and earnout clauses, and

Wendel's portfolio is concentrated. Bureau Veritas (BV) retains a pivotal role for the portfolio composition and our 'BBB' issuer

€39 million in treasury shares, after an analytical adjustment on unlisted assets credit rating on Wendel. BV is for the moment the only listedof about €250 million), with rebalanced geographic exposure in favor of developed economies as well as a fairly diverse industry mix thanks to Wendel's management active portfolio rotation over 2018-2020.

asset; it represents about 50% of the portfolio value, sustains the portfolio's average creditworthiness, and allows for a degree of stable dividend stream.

Arms-length relations with its investee subsidiaries and an ample cash balance Wendel's unlisted assets weigh on the group's average creditof about €1.2 billion support Wendel's strategy of developing a growth portfolio with sound ESG foundations.

quality, which sits in the 'bb' category, with COVID-19 further hampering growth ambitions for some of its recently acquired assets, notably the Crisis Prevention Institute (CPI).

Some of its unlisted assets could soon be ready for IPO or sale, thereby unlocking value and returns and consolidating Wendel's positive track record of double-digit returns on its investments.

Alternative investment platform, Wendel Lab, needs potentially higher investment before generating tangible returns--to the potential detriment of leverage.

Ample financial flexibility with S&P Global Ratings-adjusted loan-to-value ratio Low cash dividends from its investee assets, reflecting Wendel'scurrently estimated at about 7%, against our LTV ceiling of 20%.

growth portfolio and the holding's decision to leave its unlisted assets with sufficient resources for organic growth, exacerbated in 2020 by BV's dividend cancellation.

No debt maturities until April 2023 when €300 million euro notes will come due, and a sound liquidity profile supported by a €750 million revolving credit facility (RCF) undrawn coming due in 2024.

Wendel's recently updated strategy will favor new investments with sustainable growth opportunities, presenting strong ESG elements, with a balanced approach toward listed and private assets. Wendel has rebalanced its portfolio over the past three years: in 2018-2020 this led it to successful exits from non-critical assets such as NOP, Saham, CSP Technologies and, more notably, Allied Universal (full disposal; sale proceeds $918 million compared to $378 million initial investment) and of necessity from Tsebo with a transfer of shares to the company's lenders. Wendel's management is now willing to redeploy capital in new ventures with high growth potential. We expect Wendel to maintain a balanced approach toward listed and private assets and to favor investments in developed economies, in contrast to the holding's previous focus on emerging markets.

Given that Wendel's portfolio is more exposed to unlisted assets, if we exclude BV representing about 50% of the portfolio we do not expect material investments in large listed and yielding assets. Rather, we think Wendel willcontinue its strategy of unlocking the majority of value from exit strategies or IPOs, thereby maximizing returns on its long-term investments.

We also expect Wendel will remain an engaged shareholder, occasionally sustaining its unlisted portfolio with new capital injections. Previously it injected $125 million into Cromology and also gave Tsebo a $17.7 million equity injection in 2019. We do not foresee the need for such equity injections in the coming year.

Wendel's updated investment strategy has a sharper focus on companies with strong ESG foundations. To achieve this target, we understand that Wendel has changed its internal processes. For new investment opportunities, management is now systematically running corporate social responsibility (CSR) due diligence.

Wendel aims to develop Wendel Lab, its alternative investment platform engaged in investing directly or in funds of funds that could offer good returns in the future and leverage on these new assets to serve the rest of the portfolio. Management expects Wendel Lab to represent about 4%-5% of its reported NAV in the coming years. As of the end of June 2020, investment commitments to this investment platform, which we see as akin to debt for Wendel, reached €17 million.

Wendel has ample financial flexibility, with an estimated adjusted LTV of 7% currently, allowing for new investments when opportunities arise. We expect Wendel to maintain tight control over its LTV. Unlike other investment holding companies such as Exor, Investor AB, or more recently JAB, Wendel does not have an outspoken leverage tolerance. We also believe that the holding has shown a sufficient track record of maintaining low leverage over the last four years. We anticipate its leverage will not change much in the absence of large acquisitions. Therefore, Wendel has ample financial flexibility under our 20% LTV ceiling. It could easily accommodate slightly more than €1.1 billion of new acquisitions without breaching our leverage limit for the 'BBB' rating, all else being equal.

Chart 1

The sound cash position of about €1.2 billion provides ample room for maneuver to pay dividends and undertake some share buybacks, notwithstanding low dividend prospects. Wendel does not typically rely primarily on cash dividends upstreamed from its investee assets to fund holding operating costs and interest payments. We regard Wendel's business model as closer to that of a private equity firm for which annual dividend extraction from assets is not an absolute priority. Wendel prefers to sustain companies' growth potential rather than receive dividends aiming for higher exit returns.

BV is currently the only asset in Wendel's portfolio with dividend potential. Over 2019 Wendel opted to receive a scrip dividend from BV, then in 2020 the company cancelled its dividend to preserve its cash amid the pandemic. As a result, Wendel's cash dividend income over the last couple of years has been zero. Wendel's structural low-cash-dividend prospects are offset by the high cash balances it retains. Cash now covers Wendel's operating costs and interest expenses for about 10x. This year we expect BV will resume its dividend distribution and not materially depart from €0.56 per share (as declared in 2019 and 2018). This means Wendel could receive about €80 million-€100 million cash income. We therefore expect cash flow adequacy ratio could reach about 0.7x-0.9x in 2021.

During the pandemic, Wendel's investee assets' performance has been mixed, with CPI taking a big hit. Over the first nine months of 2020, several of Wendel's assets--BV, IHS Towers, and Constantia Flexibles--were relatively resilient to the pandemic. In early 2020, IHS Towers also announced its intention to explore a potential IPO in the U.S., which could have an interesting positive effect on Wendel's portfolio value. Social distancing measures and government-imposed lockdowns had a more negative impact on Cromology, Stahl, and CPI's toplines. Nevertheless, Stahl has been able to keep its EBITDA margin above 20% and Cromology has improved its profitability, both in absolute and relative value terms. Of all the companies in the portfolio, CPI, acquired in 2019 for $569 million, has been the most affected because it cannot hold in-person on-site training sessions. We therefore anticipate a material decline in CPI's evaluation, which will likely slightly weigh on the holding's LTV. According to Wendel, all its companies were cash generative in 2020, despite the crisis.

Outlook: Stable

The stable outlook on France-based investment holding company Wendel reflects our view that it will maintain defensive leverage over the next 12-24 months, showing ample headroom against our 20% LTV threshold.

Downside scenario

We could consider a negative rating action if the LTV ratio increased above 20% over a prolonged period without Wendel taking steps toward a rapid recovery. We could also lower the ratings over the medium term if Wendel's cash flow adequacy remained below 0.7x and its cash position diminished such that the holding operating deficit was not abundantly compensated by cash held.

Upside scenario

Given the nature of Wendel's investment portfolio and business model, we regard a potential positive rating action as unlikely over the next 24 months. However, we would consider upgrading Wendel if its portfolio value and diversity increases in favor of listed assets such that the share of liquid assets as a portion of the total portfolio value is well above 60%, all else being equal.