Description

(all numbers in millions of euros unless otherwise noted)

Verisure Holding AB is the Issuer of the bonds under discussion.  The proceeds of the debt raised were part of a financing for the LBO of Securitas Direct by private equity firms Bain Capital and Hellman & Friedman.  Securitas Direct was a publicly traded stock on the Stockholm exchange and has been written up twice on VIC.   

The thesis is that these bonds are more than two times covered by the value of the business and have an attractive total return potential given the risk.  The bonds trade at 87, pay a 8.75% coupon, and yield 12% to a December 2018 maturity.  I believe the security will trade to par over the next 12 months, creating a one-year total return of 25%, which includes price appreciation and interest.  Total return is simply (price appreciation+interest)/purchase price.  USD investors may want to hedge the currency.  These bonds are issued in 144A and Reg-S form.  144A bonds are for Qualified Institutional Buyers (more than $100 million in liquid assets generally), and 144A bonds are for foreign buyers but can be purchased by US non-QIBs since the bond is seasoned.  A buyer must purchase at least 100,000 EUR of the bond.       

Description

Securitas Direct is a leading provider of monitored alarm solutions for residential households and small businesses in Europe.  Securitas Direct sells and installs alarms, and provides ongoing monitoring services across nine countries in Europe, and recently began operations in Latin America.  The company holds either the first or second market position in 8 of the 9 European countries in which it operates.  In 2011, residential households accounted for 72% of subscribers and small businesses accounted for 28%.   

Positives

The company was founded in 1988 and has grown its subscriber base at an attractive clip since inception.  The number of subscribers grew at a 21% CAGR from 2000-2010.  Currently has 1.4 million subscribers. 

Based on historical trends, the company estimates that residential subscribers remain with the company for between 11 and 16 years.  Small business subscribers remain on average for between 6 and 8 years. 

Low maintenance capital expenditures and no net working capital outlays. 

H&F and Bain Capital are high quality sponsors with good track records.  While I would never want to rely on this, I believe that the sponsors would inject more equity into the company if it were to get into trouble.  The reason I feel this way is not only because the sponsors wrote large checks, but also because Securitas Direct is a good business which should be able to increase its intrinsic value over time.  

In Spain, the company grew its subscriber base during each of the years from 2008 to 2010.   

Negatives

Meaningful leverage. 

Eurozone/Spain.  49% of the company’s subscribers live in Spain and the Spanish market represents 50% of sales.                             

Labor costs represented 42% of total operating costs in 2010.                                                                                                                                

Subscriber based model, so will be very exposed to lower ARPUs, increase in cancellation rates, rising customer acquisition costs. 

Sources & Uses - LBO & Subsequent Refinancing

The LBO happened in 2011, and then the company issued Series A and Series B notes in February 2012 to refinance the bridge financing ("Senior loan").  The notes I am recommending are the Series B notes.  I also think the Series A notes are good value for the risk though they are not high return instruments.   

Catalyst