Following the Apr25 sale announcement of Mobico’s (MCGLN; B2 neg., NR, BB+ RWNeg.) US School Bus business and underwhelming sale proceeds (well-below expectations), the group’s credit profile has deteriorated sharply.
Mobico faces mounting pressure from both rating agencies (downgraded three-notches by Moody’s and one-notch by Fitch), and the group’s options for rating stabilization are further complicated by: (i) covenant compliance (interest cover >3.5x, leverage <3.5x), (ii) lower-than-expected proceeds limiting potential for gross debt reduction, (iii) pressure from funds attempting to trigger an ‘event of default’ on the senior bonds under the ‘cessation of business clause’ (provides more incentive to retain the proceeds as cash).
In our view, Mobico’s weak debt metrics and increasing interest costs constitute the most pressing short-term barrier to ratings stabilization. We believe that Mobico’s current strategy of cash preservation instead of proactive debt reduction exposes it to continued credit rating pressure, increased coupon step-ups (hybrid) and rising refinancing costs.
However, we do see several potential remedies which could alter its trajectory; including: (i) proactive management of debt (pages 13-15), (ii) a rights issue, (iii) equity injection, (iv) additional asset disposals, (v) a takeover by the Cosmen family, (vi) activist investor involvement, (vii) a government bail-out, or (viii) a private equity buyout.
Overall, we recommend investors to switch-up in subordination (we prefer €, £ Seniors but see some upside on its £ Hybrid at current valuations) given opportunistic EoD trigger despite further potential credit deterioration:
(i) Opportunistic Buy on its Senior Bonds (MCGLN EUR 4⅞ 2031 and GBP 3⅝ 2028)
- We estimate recovery value at 76–100% for Mobico’s seniors (BBVA Credit Desk Strategy Calculation); supported by partial asset coverage even if subordinated to bank debt (lower claim on assets held under ALSA),
- Potential upside scenarios: (i) EoD is successfully triggered by activist funds (pages 8-11), (ii) change of control put option clause (pages 16-17), (iii) any proactive tender by Mobico must be at par/above par (pages 13-15)
- Risk to our view: senior bond valuations are vulnerable to further negative rating & fundamental developments
(ii) Neutral Hybrid at 60 (MCGLN 4.25 PERP NC-Nov25)
- We do not expect Mobico to call its hybrid at the Nov-25 call date as we see substantial covenant breach risk if called (gearing >3.5x), unless Mobico can access additional liquidity (e.g.; via an equity injection, pages 13-17),
- Weak fundamentals and cash limitations imply a clean exit via partial tender, which we see as a viable upside, but we would expect this tender offer to be heavily oversubscribed (pages 13-15),
- Risk to our view: Recovery value near zero (BBVA Credit Desk Strategy Calculation) in restructuring scenarios due to subordination (page 10) and option to switch off the coupon (coupon deferability).