A Packer sting?

An ambitious $400 million raising from Crown threatens the revived reputation of James Packer.

Just as he was poised to resuscitate the Packer family brand name on the ASX, James Packer has jeopardised his chance of recruiting a new generation of retail investors with an offering – officially released this morning – that risks being too clever by half.

Packer has come such a long way in the public estimation as a entrepreneur it's hard to believe that less than three years ago, after enormous losses on US casino operations, he was being caricatured as a playboy undermining a legendary name in Australian business.

But that was before it became evident his strategic decision to exit media and enter the casino and entertainment business was a winner.

This week Packer sealed the success of that strategy with a 52 per cent lift in profits... one of the best headline results reported among the major companies this season.

Surrounded by mining tycoons who offer heightened risk as commodity prices soften, Packer and Crown are in a perfect position to harness a faithful long-term retail base from this point onwards.

Unfortunately, Packer has chosen the moment to release a $400 million 'hybrid note' aimed at retail shareholders, which some brokers are promoting as that most delicious prospect: a bond issued by a casino... but the deal has a sting.

The appeal to income hungry risk-averse investors is obvious. A bookbuild to be carried out today will most likely see the note priced at 5 per cent over the bank bill swap rate, indicating an initial yield of more than 8 per cent.

The note is a hybrid and comes as part of a long line of increasingly 'complex' and risky hybrid issues from Australian corporates.

The problem with hybrid notes is that in creating the structure to make these raisings a blend of both equity and debt – ie a hybrid – companies such as Crown must launch some very curious manoeuvres to satisfy the ratings agencies.

In fact, at its most extreme the terms of the Crown note gives Crown shares priority over the Crown notes... this is the exact opposite of what retail investors might logically expect when they avoid equities to buy an income note.

What is more, there is a distinct risk the central feature of an income note – that they will be repaid at an expected date in the future – may not be met in the case of Crown's issue.

Just a few days ago the Goodman Group, which has a somewhat similar hybrid note in the market, announced it would defer payment on a note originally set to be paid next year. The move dumped a range of retail investors into an unattractive roll over product. The Goodman move has dissappointed many in the market and is one of the reasons the Crown note is now branded as high risk by bond broker specialists such as Liz Moran at FIIG Securities.

All this does not mean the Crown note will not succeed. Indeed, don't be surprised if Crown gets to raise a lot more than it has requested – retail investors will go where institutions fear to tread. But they often don't read the fine print.

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