14th March 2012
Beating the bonds to the Punch
Highly indebted companies in sectors ranging from property to food manufacturing now have to struggle to find investors happy to roll over bonds and other debts when they become due for repayment. And for those who believed bondholder "haircuts" were a Club Med practice for countries such as Portugal, Spain, Italy and Greece, think again. Default danger could be just around the corner – literally.
Let's start with what could be your local pub. When the history of the financial excesses of the New Labour period is finally written, Punch Taverns, a pub group, will feature as a case study in just about every form of corporate excess. To cut a long story short, it has been involved in complex financial engineering and almost perpetual debt refinancing negotiations for the best part of a decade, earning fortunes for investment bankers and lawyers but not shareholders. Along the way, one of its re-financings ended up featuring in a market abuse case that resulted in an £7.2m FSA fine.
Who could have believed that pulling pints and selling packets of pork scratchings was so hard? But then Punch was a property play, not an inn owner. The present incarnation is the tenanted rump of the old company following the spin-off of managed pubs arm Spirit last August in a move to placate investors.
Half a million a pub
Now more of its debt is up for re-financing as the company attempts to restructure its debt – the bonds alone come to £2.5bn or just over £520,000 per pub, a sum that would not be out of place in Athens.
According to The Financial Times, the only way change can go forward is for bondholders to give up hopes of full repayment. The company is in a "rule nothing in, rule nothing out" response mode but the chances of the bonds paying back more than 70p in the pound could be remote.
Investors may, of course, have their haircut sweetened by a debt for equity swap. But Punch shares are reeling at just 11p now.
Mr Kipling looks healthier
But there is brighter news for another creation of highly debt-laden financial engineering. Premier Foods, the home of larder staples such as Hovis, Hartley's Jam, Sharwoods, Mr Kipling and gravyboat champion Bisto, has managed to re-finance its debts.
Investors may have been impressed with new growth strategies although these are not due for formal announcement until the end of this month at the earliest. They are said to involve concentration on eight "power" brands with the sale of some time-honoured but time-expired labels on the cards. It has already re-positioned Mr Kipling from traditional cake to mum-friendly snack.
The high debts and the two profit warnings last year had forced the shares down from 35.5p to 3p over the past twelve months before recovering to 12p, proving shareholders are prepared to buy a recovery story, and ignore warnings that earnings are currently at the lower end of market expectations. The debt breathing space will help to bolster that feeling of well-being. Its bank facility of £1.2bn – more than four times its market capitalisation – has been extended from December 2013 to June 2016.
Covenants have also been re-set to reflect Premier's plan to focus investment behind eight 'power brands', as well as reduce costs and sell selected businesses.
But these two snapshots and their near £4bn in debt is just a drop in the debt rollover ocean. The next two to three years will see a re-financing crunch as more than $3trn of corporate debt reaches maturity.
Add that to sovereign and semi-sovereign debt such as individual US states, and then put property rollovers into the equation. Greece? It's could be sideshow.
More from Mindful Money:
To receive our free email newsletter sign up here.