Buying bonds can damage your wealth. Buying junk bonds…well, what does it say on the label? The buyers of the bonds issued last September by Phones4u have learned just how damaging these things can be, as the price went from £100 to £12 in a matter of days. As Joseph Cotterill noted, this was a Wile E Coyote moment, since the signs had been there for months that not all was hunky-dory at P4u.
Perhaps for the first time, the bondholders are reading the prospectus for the senior bonds and the accompanying pay-in-kind notes. These are peculiarly dangerous instruments: instead of a cash coupon, you get more and more notes, until the wonderful day when all the rolled-up paper is redeemed. Or, as in this case, not. Trading at £85 in August, they are now standing at, er, £3.
Like many P4u employees, the holders can’t see the funny side of the decision of the company’s owners, BC Partners, to pull the plug. BC is laughing all the way to the bank, since the proceeds of the bond offers went to finance a dividend which repaid the whole of its investment. In the private equity trade, this is called a “dividend recap”, replacing the owners’ capital with new debt. In this case, it took P4u’s debt from 2.2 times ebitda to 4 times, a level that leaves no room for error (and little cash for investment).
The network companies sensed financial weakness. They saw the chance to grab a fatter slice of the mobile pie, and (almost) all’s fair in love and business. O2 abruptly cancelled its contract in January. BC wrote off the value of the post-recap equity in May, when the long engagement of Carphone Warehouse and Dixons (a P4u retailer) was finally consummated. When Vodafone announced that it could live without P4u, the game was up and the company collapsed.
The bondholders are, understandably, trying to salvage something from the wreckage, mulling turning their useless debt back into new equity. They are also reaching for their lawyers. Should the management have hung up earlier to preserve cash? Did BC know, or at least suspect, more than the long list of risk factors disclosed in the prospectus?
There’s many a billable hour here, but the real moral of the tale is that too many bonds in today’s climate offer miserable yields for potentially catastrophic risks. And does anyone read the small print?
How to keep the lights on
The boffins at National Grid must hope that Britain ‘s Indian summer lasts all the way to March. Those of us who believe that weather tends to balance out over time (remember the soaking spring?) suspect that there’s a price to pay this winter.
Even before the unplanned closure of four geriatric nuclear stations, Grid’s own forecast is for the margin of capacity over demand to fall below 7 per cent, and to little more than 2 per cent in 2015/16. Its novel solution is to call for volunteers; companies will be paid not to take juice at peak periods, either shutting down or making do with their own stand-by diesel power.
This power costs both the companies and the environment dear, but it reflects the desperate measures needed to keep the lights on. We’re here as a result of the cat’s-cradle of EU directives, successive government green initiatives, and the resulting reluctance of anyone to commit to new build.
A paper from the Global Warming Policy Forum, a climate-sceptic pressure group, spells this out in grim, if not exactly novel, detail. It recommends speeding up shale gas development, delaying compliance with the EU’s emissions directive and scrapping the carbon price floor, a levy that has the peverse effect of making it cheaper to burn coal than gas.
This is typical of the unintended consequences of an energy policy run by two political parties with opposing views on how to do it. Coming soon: so-called smart meters. Not so smart, since they don’t tell the washing machine to switch on only when the price of power drops to a level you’ve set. One day. maybe, but until then we must just hope that the weather bill for our everlasting summer doesn’t come in next winter.
This is my FT column from last Saturday