EU CONSUMER STAPLES: Metro AG; secondary

(MEOGR 29s; NR/BBB- Neg)

+1pt/-20bps in secondary.

• €600m 5Y +180 vs. FV +150 (30bp NIC) now +160
  • Not a value view as we priced in a retail premium

We do think there is some confusion in markets on how to price steps. Couple of asides we wanted to make;

• A step-up without a step-down provision on a return into IG (not standard but was the case above) does NOT need to be 'annualised' into spread terms by looking at bond duration etc. - it is a parallel shift in the coupons from a certain date.
• Your max upside above is still limited to 125bps x (4/5=0.8) since you cannot accrue for the first year (even if it is downgraded today). This is standard with docs and check for how it handles final year (in Metro case it will retrospectively adjust the final coupon too).
• Steps - by nature - help those that see the levels as unattractive. Say you believe Metro won't show a recovery this year and therefore see a 100% chance of a downgrade within the next year - at final pricing of +180 your theoretical price including step was +280.
  • If you saw a downgrade between year 1-2 (hence step from yr 2 onwards) value would be +255, Yr 2-3 value would be +228, Year 3-4 Z+200 and Yr 4-5 Z+200. The last two are the same given the above retrospective clause adjustment. You can add probabilities to each as you see fit.