PMP bonds: Not for the fainthearted

Retail investors in PMP’s bond issue will get a high return, but consider the high risks as well.

Summary: Listed printing group PMP is raising $40 million through a high-yield bond issue. Retail investors stand to earn a high 8.75% return, but they will be getting less than the company’s banks and will rank behind them as well.
Key take-out: PMP has a serious challenge, with the majority of its bank debt needing to be refinanced in less than 12 months.
Key beneficiaries: General investors. Category: Fixed interest.

If you know anything about diversified printing company PMP, you’d know it’s been struggling for some years with declining revenues.

Now it’s come to the retail bond market with an issue where retail investors will get less on their money than the banks do lending to the same company … still the issue will no doubt be popular, so let’s have a look at it.

The chart of the share price of PMP shown below tells a lot about the fortunes of the company. The chart is also flashing warning lights at any potential investor in the minimum $40 million high-yield bond issue the company launched recently.

This is another high-yield bond issue originated by FIIG to be sold exclusively to its investor clients. These clients are largely self-managed superannuation funds.

Another warning signal is the 8.75% per annum coupon the company is willing to pay on the four-year bonds. This is the highest coupon yet on any FIIG arranged high-yield bond issue.

And even though that 8.75% might seem high to ordinary investors, it’s worth noting that PMP’s banks are getting more than 10% for their money. PMP, in its defence, will point out that its weighted average interest rate according to the 2013 annual report is 8.5% and dropping. But that’s before you include the fees charged by banks, which brings the figure above 10% and you, the retail investor, won’t be getting any fees.

Indeed, I’d have to classify this offering as below investment grade – that is, ‘junk’’. Now junk bonds are a perfectly good form of bonds. The terms ‘high-yield’ and ‘junk’ have been synonymous since the 1980s, when Michael Milken of Drexel Burnham Lambert pioneered the junk bond market in the US. The term junk was used because the issuers of these bonds were far from investment grade, and indeed were high risk.

In the US, where there is a deep and diversified bond market, many retail investors are more than willing to enter and trade in the junk bond market. Australian investors now have the chance to do it here. Hopefully all investors in this end of the domestic market are fully aware this is the area they are getting into.

As you would already know, this issue – in common with all retail issues in Australia – is ‘unrated’. But to fully justify this ‘junk’ classification, it only requires a quick look at the company’s 2013 annual report to see that PMP has lost money for the last three years.

Moreover, those losses have been getting bigger each year, with a loss of almost $70 million being incurred last year. Admittedly, the size of the loss is due in some part to the latest round of restructuring charges as the company tries to come to grips with being in a declining industry.

The company is in print media and has been suffering over the last decade, as have all other participants in the industry. Revenues have also been falling over the last three years.

Revenue totalled $1.2 billion in 2010, $1.1 billion in 2011, but didn’t quite make $1 billion in 2013.

However, the key question is, can PMP service its debt? Well, a simple calculation of its interest cover ratio for fiscal 2013 says it might have challenges.

We don’t really need to calculate the ratio because EBIT was a loss of $54.3 million. Its interest expense was $13.7 million, by the way.

Interestingly, the financial statements show that PMP reduced its debt by $49.5 million, but this was achieved from $69.6 million of asset sales.

PMP is showing total banking facilities of $153 million, of which $113 million was drawn at the end of June. The facilities are provided by ANZ and CBA.

Needless to say, the banks hold fixed and floating charges over all of the assets of the company. An interesting note to the accounts reveals that the facilities are due to be repaid on September 30, 2014. That is less than 12 months away.

Should investors be comforted by the revelation in PMP’s announcement of the proposed bond issue to the ASX, that its bankers have agreed to extend the maturity date of the bank lines by a further 12 months if the bond issue is successful?

No.

This company has a serious challenge, with all of its debt needing to be refinanced in less than 12 months. If the bond issue fails, PMP could be forced into an equity issue so that it can repay some of its debt and persuade its bankers to roll over the remainder.

And even if the bond issue succeeds, PMP will still have to renegotiate its debt with its bankers just a year later. At that time bond holders will be hoping that the banks do insist on an equity issue, because it will improve their position too, if successful.

To put the PMP side of the story, it will say its pure interest rate costs are dropping and it has some important improving indicators such as the drop over the last year of its debt-to-EBITDA ratio from 1.9 to 1.2. Moreover, the potential success of this forthcoming bond issue will further diversify its funding base.

However, any investor considering taking-up the PMP bonds needs to ask two questions:

1. Why am I taking an unsecured position, ranking behind PMP’s banks in any wind-up of the company?

2. Why am I being offered less return on that risk than PMP’s banks are earning on their secured debt?


Philip Bayley is a former director of Standard & Poor's and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.