Langton Capital – 2018-06-25 – Mini-bonds, heatwave, calories, Gaucho, C Wells & other:
Mini-bonds, heatwave, calories, Gaucho, C Wells & other:
A DAY IN THE LIFE:
So yesterday, in a belated attempt at a spring-clean and of course before the England match, I emptied the garage and spread the contents all over the garden in an attempt to find stuff to chuck away.
That took longer than expected and, after a two-hour break to watch the footie, I returned to the task and managed to throw out a couple of bikes, a busted battery charger and some spare bits and bobs for a trampoline that’s already been chucked away.
Then, feeling that at least something was headed for the tip, I tried to get everything back in but would it fit? No, it would not.
Fortunately, it didn’t rain because this cleaning exercise both 1) taught me that tightly-packing your rubbish is perhaps reasonably efficient and 2) there’s something in the saying ‘let sleeping dogs lie’ and 3) it left me with a problem as to what to do with the remaining bikes, the push-mower, ladders, redundant motorbike top-boxes, shelving and various other bumph that is still, as I write, sunbathing on the grass. On to the news:
MINI-BONDS: DEBT YIELD BUT EQUITY RISK?
Mini-bonds: Plugging a gap?
• Entrepreneurs don’t want dilution
• And, as they maybe cannot get bank debt, some are turning to mini-bonds
• But do ‘investors’ realise what they are (and what they are not) buying?
A worked example:
• A company we were close to issued a bond at one stage (details here all from memory).
• It issued this with a c8% coupon (rising to 10% in year three).
• It tied this bond to a similar sized investment in equity.
• The latter had no yield but equity turned out to be a 100% plus return.
• The blended ‘yield’ was therefore over 20% over 3yrs.
• This seemed fair to us as, whilst the c8% yielder looked like a bond, the whole of the investment in reality faced an equity risk and should share equity returns.
The current fashion:
• Entrepreneurs are now issuing bonds for loss making companies
• These companies could probably not raise bank debt – and that tells you something
• There will be limited security and, if the company folds, the ‘yield’ was an illusion
• Some marketing is, if not incorrect, at least allowing investors to mislead themselves
• Debt has no upside other than its yield
Where are we heading?
• There will likely be disappointment and perhaps allegations of misselling
• Winning companies will not be sharing the upside with bondholders
• But the latter will find themselves likely sharing any potential downside
• We wouldn’t be surprised if, at some point, lawyers don’t get involved
PUB, RESTAURANT & DRINK PRODUCERS:
• Met Office says heatwave is on the way. It says we will enjoy ‘plenty of fine, sunny and warm weather to the UK this weekend. However, as we move into the start of next week, we’ll see temperatures rise even further.’
• Government proposes obliging restaurants, cafes and takeaway outlets to display calorie counts for each meal that they sell. The government aims to halve levels of childhood obesity within 12 years.
• UKHospitality has said the introduction of mandatory menu calorie labelling ‘would represent a significant burden for businesses, particularly smaller operators’.
• Kings Park Capital has sold The Inn Collection Group to a NewCo back backed by Alchemy Partners. Sean Donkin, Managing director of The Inn Collection Group, commented: ‘We would like to thank Kings Park Capital, whose support over the last five years has been instrumental in helping us evolve the Inn Collection model and grow the Group to eight units.’
• It is believed that the final bids for the whole or parts of the Gaucho business are due this week, reports the MCA. The struggling 22-strong restaurant group hired advisors last month as it considered all its options.
• Charles Wells Ltd, which operates tenanted and leased pubs having sold its brewing business to Marston’s last year, has reported full year numbers for the year to end-September 2017 to Companies House.
• Charles Wells reports turnover down (on the disposal) to £138.8m from £195.7m in 2016. EBITDA is £10.0m (2016: £14.5m) but the group has £9.2m in cash in the bank compared with debts of £54.5m last year.
• Charles Wells says continuing operating profits were down £0.3m at £3.9m. The group has expanded its managed estate and has sold two smaller units. It says that its France operation has ‘again performed strongly’.
• The BBPA have responded to the price increases by Sky Sports and BT Sport for pub subscriptions, stating: ‘It is disappointing that both Sky Sports and BT Sport have announced increases above inflation. This is a blow to pubs who already face considerable cost pressures from elsewhere’.
• Snack delivery brand SnackNation has acquired Love With Food’s parent company EdgiLife.
• The Forum of Private Business has warned the government not to ignore existing business issues as Brexit discussions progress. The business support organisation’s managing director Ian Cass said: ‘An unfortunate amount of time is being spent on internal squabbling and political positioning. In the meantime, small businesses are working to tighter margins than ever, and are dealing with issues such as late payments. Additionally, smaller suppliers are being subjected to poor behaviour from their larger customers. There has also been a decline of the high street, and there is a real lack of focus on retail in the Industrial Strategy.’
• Takeaway food could become cheaper than home cooking by 2030 as technological advancements reduce costs, per The Telegraph. In future, robots could take over preparation and drones could deliver meals, and operators such as Deliveroo have already stated their aim of having customers use their services every day.
• Creditors have backed House of Fraser’s plans to close some 39 of its 59 shops in the UK, although landlords registered their dissatisfaction.
HOLIDAYS & LEISURE TRAVEL:
• Soho House is to open an outlet in Amsterdam in July. The 79-room unit is in the Bungehuis building. Originally built in the 1930s as a trading office, the 6-storey building was part of the university in the 70s.
• A draft proposal presented to MEPs revealed Brits may have to pay £52 for an EU visa following Brexit. However, officials in Brussels said it was unlikely that the EU would require Britons to apply for visas, given the desire for close relations after Brexit.
• Barclays’ head of investment strategy, Will Hobbs, told the UK’s Guild of Travel Management Companies ‘We thought Brexit would pose a headwind, but a digestible one.’ at a conference in Ireland.
• The East Coast Main Line is back under government control following the failure of the Stagecoach and Virgin franchises. The Department for Transport will run the service until a new public-private partnership can be appointed in 2020.
• Europe’s hotel industry saw occupancy fall 0.8% to 74.4% year-on-year in May, although a 1.5% increase in average daily rate helped push RevPAR up 0.6% to €84.31, per STR. Meanwhile, UK occupancy grew 0.5% to 79.8% but ADR fell 0.8% to £93.31, causing revenue per available room to drop 0.3% to £74.47.
• The US hotel industry maintained steady year-on-year growth in May, with occupancy up 0.8% to 64.2%, average daily rate up 2.7% to $129, and revenue per available room up 3.6% to $83.
• Uber has begun to appeal the decision to strip it of its licence in London after being ruled unfit to run a taxi service in its most important European market. Transport for London told the ride hailing app that it would not renew its licence last September because of concerns regarding Uber’s approach to reporting serious criminal offences.
• Moody’s has reported that Disney’s $71.3 billion deal for Fox entertainment assets is credit negative. It says ‘the deal, which would also include Disney assuming about $13.8 billion of Fox debt net of expected cash on hand, is credit negative for Disney and prompted us to put its ratings on review for downgrade. ‘
• Moody’s reports ‘although the combined Disney-Fox-Sky would generate substantial annual free cash flow that, if fully committed to repaying debt, would return leverage to levels consistent with Disney’s A2 current rating within two to two-and-a-half years, this time frame is generally outside our comfort zone for maintaining Disney’s present ratings.’
• Arena Events Group acquires Sheffield-based Events Solutions Ltd for an undisclosed sum. Events Solution provides equipment including barriers, gantries and fencing for high profile events like the London Marathon.
FINANCE & MARKETS:
• Eurozone countries have agreed another debt-deal for Greece. EU Economic Affairs Commissioner Pierre Moscovici said ‘the Greek crisis ends here’.
• Sterling unchanged vs dollar at $1.3261 but down vs Euro at €1.1379
• Oil up at $74.24
• UK 10yr gilt yield up 5bps at 1.32%
• World markets: UK, Europe & US up on Friday. Far East lower in Monday trade.
• Brexit, politics etc.:
o Survation survey says 48% of the public support a People’s Vote on the final Brexit terms. Only 25% oppose
o People’s Vote march in London says we have been sold a lie.
o Airbus says it might have to leave the UK. BMW says likewise. Cabinet minister Jeremy Hunt says business should not comment on such matters in public. Siemens says business still lacks clarity on the proposed nature of Brexit. Liam Fox says no deal ‘won’t be good for Britain – but it won’t be good for Europe either.’
o CBI boss Paul Drechsler says Mr Hunt’s comments were the “perfect strategy” for discouraging investment
o Independent suggests more than 50 conservative MPs would vote against the government if the UK were to propose leaving the EU without a deal
PRIOR DAY TWEETS:
• Later tweets: H of Fraser CVA argy-bargy. Landlords arguing about how to spread the pain, not about how to stop it? That’s beyond even their gift
• The Internet & eating out. It’s complicated. Promotes delivery, pressures margins & hits other stores, which reduces footfall. See email.
• Mini-bonds. Debt yield with equity risk? Shouldn’t they be tied to equity, have a warrant attached or whatever? See email.
• Trends trending. Union Square boss says more will go cashless, UBS says delivery will grow. Inevitable.
• Not all experiential is bound to succeed. Trampolining co in Derby in administration due to ‘lower revenues and higher costs…’
START THE DAY WITH A SONG:
Last Friday’s song was Shake It Out by Florence + The Machines. Kicking off the new week, who sang:
And a lion, a lion, roars would you not listen?,
If a child, a child cries would you not forgive them?
RETAIL NEWS WITH NICK BUBB:
• Saturday Press and News (1): The big focus was on the news that House of Fraser “won” its CVA vote on Friday morning, with a widespread assumption that this will now lead to the closure of 31 stores early next year and the loss of 6000 jobs etc. There was little coverage in the Saturday papers of the possible legal challenge from the landlords, with the exception of the Times, which quoted the head of the BPF saying that House of Fraser had “exposed the dark arts of how CVA votes are put together”. The Guardian had a feature on its News pages on the general problems of House of Fraser and Debenhams: “End of an era: Online sales kill off 31 department stores”.
• Saturday Press and News (2): The other big story was the US Supreme Court ruling about Online retailers paying state sales tax, as this hit ASOS in particular on Friday; the Daily Mail market report was headlined “Asos and Boohoo reel as US slaps tax on web sales”, whilst the Telegraph market report went with “Asos falls out of fashion with investors after US tax shake-up”. Finally, the Times had an interesting interview with the estimable Kate Swann of the catering group SSP (“The high-flying retailer who likes to keep her feet firmly on the ground”), revealing that she has lunch every month with her successor at WH Smith, the equally low-profile Steve Clarke.
• Sunday Press and News (1): The much-awaited book about the embattled Philip Green (”Damaged Goods”) by the excellent Oliver Shah of the Sunday Times is officially published on Thursday, but ahead of that, inevitably, the Sunday Times had a big extract, filling several pages of the magazine with a feature on “The Rise and Fall of Philip Green” and lurid revelations about his bullying and swearing. There was no mention, however, of the role that the Sunday Times “Rich List” played in 2004 in first publicising and validating the big short-term profit improvement Philip Green engineered at BHS…It was equally surprising that there was no mention of the fact that Top Shop, once the “jewel in the crown” in his struggling Arcadia fashion empire, fell into a reported loss in y/e Aug 2017 in the Sunday Times Business story that a leaked email from a shrewd partner at the hapless US private
• Sunday Press and News (2): In other news, the Sunday Times flagged that Chris Edwards, the founder of the bankrupt Poundworld chain, is trying to buy 186 stores back from the administrators. The Mail on Sunday noted that the beleaguered House of Fraser has called on its banks to lend it another £50m. And the Observer had a feature on the success that the family-owned Blackwell’s book chain is having in selling non-academic books (“”Aloof” Blackwell’s comes off campus and book sales surge”).
• News Flow This Week: Tomorrow brings the Carpetright finals and the latest Kantar/Nielsen grocery sales figures. John Lewis Partnership announces a Strategy update on Wednesday, with an analysts meeting at Westfield White City at the unholy hour of 8am…We then get the JD Sports AGM update on Thursday. And, with the end of the month coming up quickly now, the CBI Distributive Trades survey for “June” is out tomorrow morning and the monthly GFK Consumer Confidence index is out first thing on Friday.
• World Cup Watch: As expected, England had no trouble in thrashing Panama in their second game yesterday lunchtime. So the result of their third match versus Belgium at 7pm on Thursday evening will decide which of the two teams will come top of Group G and thus who they play from Group H (Japan? Colombia?) in their “last 16” knockout match, on July 2nd/3rd…