The UK’s refinancing crisis

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.


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10 thoughts on “The UK’s refinancing crisis”

  1. John says:

    What your article points up is that “spending=income” and that the past stimuli to spending are now running out of steam.

    QE does little to put money into the hands of those who might spend largely on items from within the US economy. But increasing government spending will increase the deficit, which is a battle that Obama wants to put off until he is re-elected. So I don’t expect much that indicates a fundamental change; it will be something to please the markets and keep the lid on things for a few months. You can see why they both want and need to keep the EZ situation quiet.

    Personally, I believe the neo-liberal paradigm is well and truly broken and fails to represent reality, but those in power in the US aren’t going to accept this. Consequently, they’ll bumble on, ducking the real actions they should take, causing the general population to suffer.

    1. Anonymous says:

      Hi John
      I do not envy Ben Bernanke tomorrow as every word he utters will be dissected. However at least some of it is his own making as he has fed the monetary junkie culture with his actions.
      However it is refreshing to see an official Fed paper questioning QE (Quantitative Easing) and its effects and about time too I say.Frankly they were known before QE began…

  2. Anonymous says:

    It seems as though there is no accountability for Ben Bernanke and his ilk. Can they go on for ever making such important decisions with no check at all?

    1. Anonymous says:

      Hi Josephine
      Ben Bernanke has to report to Congress on monetary policy regularly but they cannot fire him. The President appoints him but can only fire him for “cause” and this has never actually happened in practice.

  3. Rob says:

    Hi Shaun and thanks for your second welcome to your blog.

    Ben’s speech tomorrow “Down In The Hole” will deliver enough to keep the US markets ticking along nicely at their inflated levels. Will he tell the truth or will he have to tell “Lies”?

    Mid September will be a turning point in the year for Europe but more importantly for the USA and Barry’s re-election prospects so Ben will be keeping his QE powder dry until the FOMC meeting. He will know by then what is happening with the bailout plan for Greece and if the begging bowls are to be filled by the ECB for Spain and Italy.

    Ben is between a “Rock and a Hard Place”

    1. Anonymous says:

      Hi Rob
      Apologies, the new system is not as clear on who is new as the old and I am afraid the fallback system (my memory) is by no means perfect!
      Will it be “Little Lies” or bigger ones? Perhaps he will tell the US economy “It’s not me it’s you”.
      As to the Euro the timetable seems to be slipping which is a very familiar theme for officlal actions there. First we had promises of September now some details for Spain seem to be being delayed until November so Ben may not be able to wait for them given the US election timetable.

  4. forbin says:

    Hello Shaun,

    I guess the USA got something for its money then – all we got was more recession.

    Maybe Merve the Swerve’s replacement will think bigger!! ( god help us)

    So what is wrong with all this stimulus ? perhaps encouraging more debt in stead of production is the issue… If we need people to spend more why not make ’em richer ? pay them more? no cant do that either.

    no the money goes to the banks because they are the economy. There was even someone on BBC this morning suggesting we need to relax the mortgage criteria – more debt!


    1. DaveS says:

      Our role in the global system is to consume but with falling real incomes we need debt to grow consumption – we can’t borrow without collateral i.e. houses or without confidence i.e. rising house prices.

      The whole crazy system fails when house prices stop rising – they will do everything they can to re-ignite the housing market (without actually crashing house prices of course) – at moment that means trying to push down cost of debt, but its not working so eventually they will have to inflate incomes as well – but will probably take a Labour govt to pull the trigger as Boy George can’t really allow that.

      Thats globalisation for you.

    2. Anonymous says:

      Hi Forbin
      When the credit crunch began I remember the many cries that went up saying that we must never return to lax mortgage criteria because of what it led too. How quickly some forget,was this pointed out by the BBC?

  5. Noo 2 Economics says:

    Hi Shaun,
    $1.3 trillion in liquidity in the US financial system still looking for a home. Why would Ben Bernanke do more QE?

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