Marston's Share Discussion Threads

[jeffian] 25/2/2011 15:09

Fair enough, Jak. I don't quite understand your comment that "a swap can only "hedge" expectation, it cannot "hedge" something that the company doesn't expect to happen!" Surely a swap is a standalone instrument which can cover any chosen eventuality - or even none at all (as M&B got stuffed by entering into out-of-the-money swaps without ever taking up the loans they were designed to cover.) Even if MARS were intending to refinance bonds early in 2012, that doesn't mean they haven't taken out a hedge against a longer, or the full, loan term, does it? Drawing on your 17 years' experience, what does the final sentence of this section mean?

"The interest rate risk profile, after taking account of derivative financial instruments, is as follows:
2010 2009
Floating rate
financial
liabilities
£m Fixed rate
financial
liabilities
£m Total
£m Floating rate
financial
liabilities
£m Fixed rate
financial
liabilities
£m Total
£m
Borrowings 0.6 1,157.1 1,157.7 5.4 1,204.5 1,209.9
The weighted average interest rate of the fixed rate financial borrowings was 5.5% (2009: 5.5%) and the weighted average period for which the rate is fixed was seven years (2009: eight years)."

[jeffian] 25/2/2011 12:12

Jak,
An expectation to redeem loans early is not the same as an obligation.
Surely interest rate 'swaps' are quite independent of the underlying debt (as M&B found out to their cost!)? How do you explain the comments from the AR posted earlier regarding the effective 'fixing' of floating rate loan notes?

[rmillaree] 25/2/2011 12:08

I guess it makes sense that they would not be hedged past the "expected maturity date."

If the rates are fixed at say 5.5% now though via a hedge until the expected maturity date and they were then to revert back to LIBOR + 1.7% say then would this not be a lower rate than 5.5% as current interest rates are now?

I will post whatever explanations i get from the company if they manage to respond to my query in any sensible period of time.

[rmillaree] 25/2/2011 10:50

The 1.6% was simply a quick estimate on my part of the average of the 3 rates -i think it works out as 1.66% if you combine the 3 rates - with the 2.55% portion being by far the smallest.

If the extra interest is £5 million then i would not call this amount punitive by any stretch of the imagination although any increase in interest charges does add an element of extra risk all other things being equal.

Is it not possible that the increase in rates may have been hedged by the company so that there is no increase when the floating rates step up? From the section posted by jeffian above it says the rates are fixed for 7 years.

[jeffian] 25/2/2011 10:01

"The Group uses interest rate swaps to fix the interest rate payable on the floating rate tranches of its securitised debt.....
......The weighted average interest rate of the fixed rate financial borrowings was 5.5% (2009: 5.5%) and the weighted average period for which the rate is fixed was seven years (2009: eight years)."

[rmillaree] 25/2/2011 00:33

JakNife - the rate charged for these debts goes up to LIBOR +1.6% or so
I am not an expert but this seems a reasonable rate to me.

Would appreciate any advise on how good a deal this is compared to what could be secured by refinancing now?

ok the new rate is a higher rate than the old one but that does not mean the increase is punitive.Also hedging MAY mitigate any adverse impacts.

I will email the company and ask them how this all pans out bearing in mind they have the rates hedged - i will supply any response when i receive this from the company.

[fangorn2] 24/2/2011 14:54

Interesting comments Jeffian, thanks for sharing.

I concur that Mars is a bit of a "plodder", was the other reason for my purchase really, that and the chunky divi. Always been a fan of pubs (Old English Pubs being a good investment for me years ago)

Only time will tell regarding the discretionary spending :) Will be keeping a close look on this one for the foreseeable future.

[jeffian] 24/2/2011 10:08

Jak,
You're slightly 'moving the goalposts'! My original comment was in response to yours ("However the debt will be a hurdle to renegotiate that much in the current environment") and Fangorn's ("there's still alot of debt out there that needs to be financed this year"). Other than a relatively small amount of bank debt, which was renewed in 2010 and comes up again in 2013, there is no short term refinancing requirement and their interest rates are effectively fixed.

Actually, this was a sideline to Fangorn's original question which was about the security and sustainability of the dividend. I can't reassure him on that because they haven't even achieved their targeted cover of 2x yet, so there is unlikely to be growth in the short term and it remains vulnerable until they can push eps on some. I have held since W&D days; MARS is never going to set the world alight but it plods along and I don't see it as a "significant risk" (compared to some in my portfolio!). I am also more relaxed than Fangorn about pub spending; although it is in the 'discretionary' category, in my experience (over many recessions since the 1970's and working in the trade for many years) it is among the last, rather than the first, things that people cut out in hard times and, in fact, there is some evidence that (food-led) pubs have actually benefited over the past 2 years from people 'trading down' from restaurants to pubs.

[rmillaree] 24/2/2011 01:10

JakNife

Re: Interest rates - from the section you have posted i read it that if rates had been higher profit too would have been higher not lower.
The next section specifically says
"All floating rate notes are hedged in full by the Group using interest rate swaps whereby all interest payments are swapped to fixed interest payable"

You also say the company needs to raise £500 million between now and this time next year - is this factually correct? - the loan notes you refer to do not have repayment periods ending in the near future. The fact that company may expect to repay these next year does not indicate these amounts must be repaid. Note after the time of the rights issue (results announced 3/12/2009) they stated they had no refinancing requirements till August 2013 and this is presumably simply the bank facility.

[fangorn2] 23/2/2011 10:42

I bought a while back, but am starting to get a little bit concerned. Am wondering whether it's worth selling and moving to something a bit more risk averse in the short term.

I do like Martsons as a long term investment though but the short term could get very choppy,particularly given the declining incomes of likely pub spenders.

[blobby] 23/2/2011 09:59

JakNife, based on this are you positive or negative on MARS (I can't tell). If they don't refinance and interest rates are 4% next year then they take a hit of £6M on profits of £52M, which presumably is a lot less than the effect of inflation on their assets?

[fangorn2] 23/2/2011 09:57

"High-street retailers have warned ministers that consumers have drastically cut back their spending in the face of Government austerity measures.

A number of Britain's largest store chains told The Times that trading had deteriorated since the new year, when the VAT rate rose from 17.5% to 20% and the reality of public spending cuts dawned. The findings augur badly for the Government since the retail sector is considered an early indicator of the direction of the economy, because of its reliance on consumer sentiment."


More evidence of Consumer PDI contracting. Surely expenditure in pubs is one of the first things to go? Drinking there is, after all, pretty expensive these days

[jeffian] 22/2/2011 23:38

Fangorn/Jaknife,
I was only picking up on your respective comments about debt needing to be "renegotiated" (Jaknife) or "financed" (Fangorn). This is not an issue IMHO. They have a mix of fixed and floating rates, JN, but they 'manage' these into effective fixed rates via interest rate swaps. Yes, they say they plan on early repayment, but that is an option not a necessity.

My 'rational' comment referred only to that aspect,Fangorn. Whether they are an appropriate hold for you in your circumstances, I have no idea. Given your view of general market risks (with which I do not disagree), I'd get out of the lot, never mind MARS!

[jazza] 22/2/2011 22:58

Fangorn2 - 22 Feb'11 - 19:55 - 922 of 924

That was a lot more relevant 3 years ago just before the UK consumer pulled his horns in.

He has been whittling down his debt:income ratio since then, so debt is less of an issue for both consumer and corporation now as compared to 2008.

Government debt is the only real issue now although the impressive PSBR numbers for January released today suggest the new government is on top of deficit-reduction..

[redartbmud] 22/2/2011 22:17

Don't discount another rights issue. The last one was badly timed & they have not caught up.
Results poor but executive bonus phenomenal. Non execs a disgrace on remuneration committee.
They are committed to the F plan - new pubs with food - major capex.
They have a lot of under-performing pubs they can't ditch.
They are having to subsidise tenants.
Debt securitised on the pubs.
Balance sheet could be better.
Dividend could be under threat.
This company will take a long time to recover.

[fangorn2] 22/2/2011 19:55

Er no Jeffian, I'm actually looking at the big picture, particularly thinking about Consumer debt(ie household debt of 1 trillion pounds.) and how the servicing of this, post all the tax hikes/inflation adjusted prices directly impacts on their disposable income - you know, what they have to spend in pubs!

Bank debt is but one part of the equation. Household debt is the other. And we all know people are being squeezed. So household PDI down - likely to have a negative impact on pub spending, preferring the cheaper alternative ,namely buying at supermarkets and having people around, rather than going to the pub.

So the pubs may be immune to rising debt servicing, but their customers certainly aren't. Add to that the general economic situ,and ME,and money might start to shift.ie a sell off in Equities for example. Any company will get hit by that regardless of how much debt they do or do not have.

So being perfectly rational here.