Marston's Share Discussion Threads

[wskill] 03/3/2011 16:11

Never thought we would see these levels again.

[rmillaree] 28/2/2011 12:34

re the loan notes.
I have had a response from the company as follows.

1.We have guided the market that the overall interest charge is likely to increase by circa £3m in 2013 as a consequence of the step-up in 2013. This is incorporated into most analysts models. As an aside you should note that in the past two years or interest income has been negligible. We would expect by 2013 interest rates and subsequently interest income to be higher to mitigate some of this increase

2.We have no obligation to pay down before the principle ends – we can continue to pay as per the original repayment profile.

3.There are no adverse effects on the company financially for not negotiating before 2012 – these were simply expected maturity dates. The legal maturity is the key relevant date. Clearly, if an appropriate and more financially beneficial alternative arises, we would consider this.

A graph of our amortization profile is included in the appendices of our preliminary results presentation, which may provide you with further guidance on this matter.

[phoenix knight] 26/2/2011 20:28

You will see that Derek Andrew's wife purchased another 100,000. Takes her to 1,096,169.

[milacs] 26/2/2011 10:36

Don't particularly like the head and shoulders formation. If the price follows the script it should bottom out round about 85p.

I am reminded Goldman Sachs had a sell recommendation on 26 Jan with 81p as a goal.

M

[jeffian] 25/2/2011 23:30

blobby,
We've done the small print to death so I promise I'll shut up after this, but I think one also needs to stand back and look at the bigger picture in these circumstances. Jaknife's caution was around the issue that "debt is a hurdle to renegotiate" and that, without that, MARS face an increased interest bill of £5.25m pa. My thoughts go along these lines -
1) the vast majority of MARS' debt is in the form of securitised bonds which mature between 2020 and 2035.
2) Some of the variable rate bonds have interest escalators which kick in during 2012. MARS have indicated they "expect" to refinance these in 2012, but there is no obligation on them to refinance at this time, so it is not much of a "hurdle" and the banks have no particular hold over them.
3) If the 3 bonds escalating in 2012 are not refinanced, the average interest rate across the 3, involving £491m, will rocket to an average..........2.08% (Edit: Subject to prevailing LIBOR rates)
4) MARS claim to have 'fixed' their floating rate bonds via swaps for the next 7 years.
5) MARS claim that from August 2010 the blended cost of debt for the Group will marginally increase to 6.9%.

Do you think that MARS are going to change half their long-term securitised debt for short-term bank debt? Do you think that their interest bill in 2012 is going to increase by c.£5m?
No, nor do I.

[blobby] 25/2/2011 15:35

JakNife, thanks for all your posts on this and your expert views. It has been great to have some issues highlighted that I may not otherwise have considered.

I'm hoping that Marstons have been around long enough to know what is expected from them from the banks and perhaps a trip around the premises with their bank managers and a few glasses of Pedigree will help oil the wheels. My experience of companies I've had shares in is that they usually get stuffed by their banks with a big fee even if they just renew on similar terms. (e.g. ZTR which I hold)

[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?