Europcar Groupe S.A. Auto Rental Trade Idea: Swap out of the FRNs due 2013 into the 9.75% Sr. Sec. Notes due 2017 Due to a more conservative economic outlook for 2012 (our economists have recently lowered Euro area GDP estimates to -0.5%, down from 1.6%) and our view that investors will be much more selective in buying new high yield issues, we recommend investors look at a swapping out of the EUROCA sr. sub. FRNs into the EUROCA 9.75% sr. sec. notes due 2017. We think this trade makes sense given upside/downside scenarios (especially given the higher coupon and, in our view, materially higher recovery for the 2017 notes versus the 2013s). We believe investors will continue to be cautious on companies with significant maturities due within 2y-3y. In Europcar s case, the company has ~ 775mn of refinancing (or ~ 578mn of cash maturities, using the 153mn in outstandings under the senior revolver) to complete prior to June 2013 (the senior revolving credit facilities due end of May 2013, and the 2013 Sr. Sub. Secured FRNs due 15 May 2013). We are not suggesting that the market will remain closed during 2012-1H 2013, but we did want to explore Europcar's credit profile in the case the company was forced to pay a materially higher interest rate on any new bonds, as well as the revolver. We note that at present, JPM's Euro HY Split B index is trading at a YTW of 14.5%. Even if Europcar were to roll over 425mn of bonds at better levels than what is being suggested by the marketplace, our estimates for 2012 cash flows would be extremely limited at the corporate level. For example, using our base case for the refinancing of the FRNs and the revolver, we estimate an additional 21mn- 26mn of interest costs (depending on revolver drawings), virtually eliminating the benefit Europcar will receive from improved swap terms. We have included our base case, stress case and bull case scenario analysis starting on page 3. We are assuming in this instance that the 2012 fleet financing is settled prior to the financing of the bonds/revolver. In all three of these cases the main driver of the difference between them is financing costs, as Europcar has proven quite adept in managing operations in upside/downside scenarios by de(re)fleeting and managing overheads. We note that in our bull case scenario, where the FRNs are refinanced by June 2012, we could, for example, expect ~22pts return on the FRNs (including coupon), versus a 26pts return on the 2017s (11% yield at 30 June 2012, including coupon). European Credit - Autos, Chemicals, and General Industrials Stephanie A Renegar AC Danielle Ward (44-20) 7742-7344 danielle.x.ward@jpmorgan.com High Yield Strategy Daniel Lamy AC (44-20) 7777-1875 daniel.lamy@jpmorgan.com J.P. Morgan Securities Ltd. EUROCA Bond Prices, open 26 Sept. 2011 Europcar FRNs due 2013: Bid Price: 79pts Europcar 9.375% Notes: Bid Price: 59pts Europcar 9.75% Notes: Offer Price: 77pts As of this writing, we are lowering our rating on the EUROCA FRNs to Underweight from Neutral. We maintain our Neutral rating on the 9.75% senior secured notes due 2017 and our Underweight rating on the 9.375% sr. sub. notes due 2018. See page 8 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com
Trade Mechanics Below we show details of the trade, which can be structured either by switching out of the FRN (for investors that own this bond), or by going outright short. At present we believe the FRNs are available in repo and do not trade special. Note that after bid-offer costs are taken into account, an investor putting on this trade receives cash upfront, and generates positive carry of close to 5% (depending on where 3m Euribor fixes for each coupon date). Table 1: Trade Details Issuer B/S Notional Coupon Maturity Price Accrued Z-Spread/DM Upfront cost Annual carry EC Finance B 5.0mm 9.75% 01-Aug-17 77.00 1.57 1540 3,928,500 487,500 Europcar Groupe S 5.0mm 3mE+3.5% 15-May-13 79.00 0.55 1877-3,977,500-251,750 TOTAL - 49,000 235,750 Source: J.P. Morgan. Bid-offer costs taken into account. Carry assumes current coupon on the FRNs but does not include pull-to-par. Over the next six months: In an upside scenario (where Europcar receives equity capital, or the market reopens, quickly, at lower costs than expected) we think that there still is material upside in the 2017s, even versus the 2013s. Our view on this is based on limited capacity to put in more debt down at the SPVs (other than the greater advance rates received by Europcar in the instance of an SPV notes' rating) as well as our opinion that the 2017s are also trading at a level where it is apparent there are near-term refinancing concerns at the Corporate level. In addition, given the relatively short maturity, the principal upside (albeit potentially faster) for the FRNs is par, whereas the 2017s have further upside in the instance the business case for Europcar improves substantially. The worst case for the 2017s in a bull case for the FRNs is that the FRNs get refinanced more quickly than expected, but the outlook for Europcar post this refinancing continues to deteriorate (we view this as unlikely given the lower likelihood investors will be willing to roll into new FRNs at economic levels, especially if prospects for recovery are lower given there will most likely be more collateral needed/higher costs associated with additional fleet financing and the revolver). As stated on page 1, we note that in our bull case scenario, where the FRNs are refinanced by June 2012 at somewhat economic levels, we could, for example, expect ~22pts return on the FRNs (including coupon), versus a 26pts return on the 2017s (11% yield at 30 June 2012, including coupon). Base Case: Our base case is that Europcar's operations are in line with a slower economy and the company continues to cut costs, but re-financings done for more subordinated parts of high yield corporate capital structures continue to be done at quite expensive levels. In this case, we believe that hope for a refinancing for the 2013s will not be abandoned, but that that new investors in Europcar will look to be in the senior secured notes (closer to the vehicle assets, which due to the fact that the bulk of Europcar's car purchases are on buyback, have more transparent value than the security/guarantee package offered to the FRNs (the 2nd lien claim on the shares of ECI, senior sub. guarantees from certain operating subsidiaries)). Bear Case: In the instance where the 2013 bonds/bank debt cannot get refinanced at all/close to economic levels, we believe that the 2017 notes offer investors more downside protection. In addition, investors will also benefit ~1.5y from a 2
higher coupon on the 2017s, versus the 2013 FRNs. In this case, we would also view the recovery on the 2018s to be extremely limited. Investment Rationale: Fundamental View Higher financing costs (in the form of higher cash interest costs and capital intensity) continue to erode value for more subordinated parts of Europcar s capital structure: In our view, Europcar s operations are extremely flexible during down cycles, and the company has proven in difficult environments to have access to the capital markets. However, this access has come at a cost, and our current forecasts on Europcar reveal that higher spreads paid for the recent senior secured notes (due 2017), the refinancing of the 2014 notes (8.125%, to 9.375% bonds due 2018), the recent SARF (spreads rose, and advance rates have fallen dramatically since the original loans made in 2006) have limited the upside for Corporate EBITDA. For example, Europcar's revenues and Consolidated EBITDA have fallen by ~7% since 2007, but Corporate EBITDA has fallen by ~25%, primarily due to the higher cost of funding. Even PF for the 2012 swap package, Corporate EBITDA has fallen by 3% versus 3Q10, despite 4% higher revenues. We are concerned that this phenomenon will continue as overall high yield spreads remain high and expectations for growth are subdued. Bondholders, in our view, benefit from the additional security provided to the 2017 notes, while refinancing concerns could pressure the 2013 notes in the coming months. Europcar s 2017 notes are secured by a loan that was made to SPVs which purchase vehicles for Europcar's operations (most of the vehicles purchased by these companies are on manufacturer buyback agreements). The 2017s also benefit from a senior guarantee from ECI (Europcar International), which has ownership of Europcar's operating companies. The FRNs have a 2nd lien share pledge of ECI (after the 2013 revolver), and senior subordinated guarantees of certain German and UK subsidiaries of ECI (but not by ECI itself). In our view, just the cushion provided by assets at the Securitifleet companies provide some comfort to bondholders in a downside scenario (given manufacturers continued to honor repurchase agreements even in times of distress, and the SPV's collateral is not co-mingled with assets at the Corporate level from where the revolver, the FRNs, and the fixed-rate notes are issued). 3
Table 2: Europcar: Case Studies Base Case m Bear Case, Refinancing Questionable m Bull Case (Operating- Related Only) m PF 2012e PF 2012e PF 2012e Corporate EBITDA 132 Corporate EBITDA 102 Corporate EBITDA 167 Corporate Cash Interest Costs, at 12% for new bond 84 Corporate Interest Costs, at 14% for new bond 94 Corporate Interest Costs, at 9.5% for new bond 73 Cash Taxes 13 Cash Taxes 0 Cash Taxes 11 Non-Fleet Capex 23 Non-Fleet Capex 20 Non-Fleet Capex 23 Corp Cash Flow to Bonds, pre non-fleet w/c 12 Corp Cash Flow to Bonds, pre non-fleet w/c -11 Corp Cash Flow to Bonds, pre non-fleet w/c 60 Corporate Cash post paying 12% Coupon 184 Corporate Cash Post Paying 14% 154 Corporate Cash post paying 9.5% Coupon 219 Net Corp. Debt/EBITDA (PF for financing) 4.8x Net Corp. Debt/EBITDA (PF for financing) 6.6x Net Corp. Debt/EBITDA (PF for financing) 3.2x Net Corp. Debt+ Revolver/EBITDA (PF for financing) 6.0x Net Corp. Debt+ Revolver/EBITDA (PF for financing) 8.0x Net Corp. Debt+ Revolver/EBITDA (PF for financing) 4.5x Net Corp. Debt/EBITDA through bonds (PF for financing) 3.1x Source: J.P. Morgan estimates, Company data. Net Corp. Debt/EBITDA through bonds (PF for financing) 4.3x Net Corp. Debt/EBITDA through bonds (PF for financing) 2.3x 4
Table 3: 2013 Maturity Summary Europcar Maturities due 2013 Maturity Coupon Outstanding ( m) Senior Revolving Credit Facility 31-May-2013 E +350bp 153.0 350.0 2013 Senior Subordinated FRNs 15-May-2013 E+ 350bp 425.0 425.0 Total Due 578.0 775.0 Source: Company reports.2011 and 2012 Outlook and Estimates Available ( m) Issuer Security Guarantees Europcar International S.A.S.U. Europcar Groupe SA Security includes trademarks, EGSA's subsidiaries' shares, receivables under buyback agreements w/the car manufacturers held by the operating companies, VAT receivables/bank accounts, and certain other business assets. 1st lien on shares of ECI. No overlap in security from SARF/2017s and the assets securing the revolver. 2nd lien on ECI shares Guarantees have been granted by EGSA, ECI, Europcar Holding SAS, Europcar France SAS, Parcoto Services SARL, Europcar Intl S.A. & Co. ohg, Europcar Autovermietung GmbH, Europcar IB S.A., Europcar S.A., Europcar Italia SpA and Eurocpar UK Ltd. Current Use of Proceeds Financing for fleet purchases, working capital/gcp, interest payments, repayment of inter-company loans Banks Involved BNP Paribas, Credit Agricole, DB, Soc Gen Other Notes Average outstandings ~ 166mn during 1H11. Covenant: ratio of cash flow to debt service cannot be < 1.1x. Borrowings by EGSA are limited to 50mn. Certain German & UK Subsidiaries. Each Subsidiary Guarantee is an unsecured senior subordinated guarantee, ranking junior to any Senior Debt of Subsidiary Guarantors. x x x 5
Table 4: Europcar Financial Summary m PF PF PF PF PF PF PF PF PF 2008 2009 2010 1Q2011 2Q2011 3Q2011e 2011e 2012e 2013e Income Statement Revenues 2091 1851 1973 402 508 627 1983 2021 2097 Revenues at Constant FX Y/Y Change -11.5% 6.6% 1.0% 0.4% 1.3% 0.5% 1.9% 3.8% Fleet holding costs -576-509 -530-121 -137-155 -533-540 -546 Fleet, rental and revenue related costs -735-646 -706-158 -181-211 -708-710 -733 Personnel costs -329-298 -305-75 -76-76 -301-304 -312 Network and Headquarters and overheads -220-203 -207-52 -52-52 -208-206 -208 Depreciation, amortization and impairment -34-34 -35-9 -11-10 -39-39 -40 Other income/(expense) 13 7 14 2 1 0 3 0 0 Adjusted Operating Profits 210 168 204-10 52 122 198 222 258 Other non recurring -25-147 -89-2 -2-2 -9 0 0 Net financing Costs -223-189 -242-53 -58-58 -216-192 -175 EBT -38-168 -126-64 -9 62-28 30 83 Adjusted Operating Profits 210 168 204-10 52 122 198 222 258 Interest Expense included in Operating Lease Rents 40.3 44.9 38.0 8.8 10.7 9.7 39.5 44.3 44.9 Underlying Operating Profit 250 213 242-1 62 132 237 266 303 Adjusted Operating Profit Margins 12.0% 11.5% 12.3% -0.2% 12.3% 21.1% 12.0% 13.2% 14.5% EBITDA Reconciliations EBIT 185 21 116-11 49 122 198 222 258 Fleet depreciation 455 408 423 94 109 127 432 437 457 Non Fleet D&A 42 131 42 10 11 10 39 39 40 Other adjustments (non-recurring) 19 51 82 1 2 2 1 0 0 Adjusted Consolidated EBITDA 702 610 662 93 172 262 669 699 755 Adjusted Consolidated EBITDA Margins 33.5% 33.0% 33.6% 23.1% 33.8% 41.8% 33.8% 34.6% 36.0% Less: Fleet D&A, operating lease rents, fleet financing -581-506 -536-123 -141-169 -565-567 -600 Adjusted Corporate EBITDA 120 105 127-31 31 93 105 132 155 Adjusted Corporate EBITDA Margin 5.7% 5.7% 6.4% -7.6% 6.1% 14.9% 5.3% 6.5% 7.4% Operating Metrics Utlisation 71.60% 73.70% 73.60% RPD 32.4 33.5 RPD yoy variation 3.4% 3.70% Avg. Fleet Holding Costs (euros/unit/month) 193.5 200.5 Securitifleet Total Asset Value 1936.2 1174.1 Source: J.P. Morgan estimates, Company data. 6
Table 5: Europcar Financial Summary, continued m PF PF PF PF PF PF PF PF PF 2008 2009 2010 1Q2011 2Q2011 3Q2011e 2011e 2012e 2013e Cash Flow Adjusted Corporate EBITDA 120 105 128-32 29 93 105 132 155 Non cash items in EBITDA -15-44 -22-1 -4 0-5 0 0 Interest Expenses (Non-Fleet) -61-66 -66-8 -22-7 -64-82 -89 Interest Income 0 0 0 0 0 0 0 0 0 Cash Tax -34 12-20 0 2-9 -7-13 -20 FFO 11 7 20-41 5 77 29 37 46 Net fleet capex 373 579 45 31-231 -300 36-110 -85 Changes in Other Working Capital 44 45-13 12 33-7 29 11 2 Non fleet Capex & other investment (net of disp) -24-27 -25-5 -6-5 -22-23 -25 FCF 404 604 27-3 -199-236 72-86 -62 Increase (decrease in net debt) -361-559 81 43 186 236-44 103 62 Balance Sheet Senior Asset Financing Loan 1511 900 630 476 584 659 Vanguard Asset Financing 453 435 496 406 409 419 Revolver /Other fleet lines 0 0 120 172 172 172 HY Bonds 0 0 350 350 350 350 Total Fleet - Drawdown 1964 1335 1596 1404 1515 1599 Senior Sub Secured FRN 425 425 425 425 425 425 8.125% Senior Sub Unsecured/new senior uns notes 375 375 400 400 400 400 Revolver 42 85 0 0 0 0 Other 25 34 0 0 0 0 Deferred Issuance Costs -20-14 -10 0 0 0 Total Corporate 846 905 815 825 825 825 Total Consolidated 2810 2240 2411 2229 2340 2424 Operating Leases 778 918 991 1021 1026 1052 Cash & Equivalent 320 309 392 301 308 331 Average Net Debt 3539 3128 3220 Ratios Total Net Debt (+ operating leases, less HY Notes)/Adjusted Consolidated EBITDA 3.5x 3.4x 3.3x 3.2x 3.2x 3.1x Total Net Debt (+ operating leases)/adjusted Consolidated EBITDA 4.7x 4.7x 4.5x 4.4x 4.4x 4.2x Corporate Net Debt/Corporate EBITDA (JPMe) 6.2x 7.4x 4.7x 6.1x 4.8x 4.0x Adjusted Consolidated EBITDA/Total Financing Costs (incl. operating lease rents) 3.0x 2.8x 2.4x 2.6x 3.0x 3.4x Source: J.P. Morgan estimates, Company data. 7
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. and/or an affiliate is a market maker and/or liquidity provider in Europcar Groupe S.A.. Other Significant Financial Interests:J.P. Morgan owns a position of 1 million USD or more in the debt securities of Europcar Groupe S.A.. Europcar Groupe S.A. - J.P. Morgan Recommendation History Date Rating Instrument 24 Jan 11 Neutral 9.375% 2018 06 May 11 Underweight 9.375% 2018 Recommendation changes made by J.P. Morgan Credit Research Analysts in the subject company over the past 12 months (or, if no recommendation changes were made in that period, the most recent change). Explanation of Credit Research Ratings: Ratings System: J.P. Morgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark). J.P. Morgan's Emerging Market research uses a rating of Marketweight, which is equivalent to a Neutral rating. Valuation & Methodology: In J.P. Morgan's credit research, we assign a rating to each issuer (Overweight, Underweight or Neutral) based on our credit view of the issuer and the relative value of its securities, taking into account the ratings assigned to the issuer by credit rating agencies and the market prices for the issuer's securities. Our credit view of an issuer is based upon our opinion as to whether the issuer will be able service its debt obligations when they become due and payable. We assess this by analyzing, among other things, the issuer's credit position using standard credit ratios such as cash flow to debt and fixed charge coverage (including and excluding capital investment). We also analyze the issuer's ability to generate cash flow by reviewing standard operational measures for comparable companies in the sector, such as revenue and earnings growth rates, margins, and the composition of the issuer's balance sheet relative to the operational leverage in its business. J.P. Morgan Credit Research Ratings Distribution, as of June 30, 2011 Overweight Neutral Underweight EMEA Credit Research Universe 30% 49% 21% IB clients* 53% 63% 49% Represents Ratings on the most liquid bond or 5-year CDS for all companies under coverage. *Percentage of investment banking clients in each rating category. Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities, Fixed Income, and Investment Banking. Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. QIB Only 8
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