Wednesday, 24 February 2010

Finding a level

MU Finance's bonds have stopped their collapse in price and appear to have (for the moment) "found a level". For those who don't have access to Bloomberg or Reuters, here are the figures at today's close (all figures are from Reuters).

You can see what has happened to the price and yield since the offer in these two charts:

So still a pretty lousy performance and a yield still above 10% is not a vote of confidence in the business model. One bond manager was quoted as saying the weakness of United's bonds had made it harder for other companies to issue "unrated" bonds.

But the price has levelled out and we shouldn't ignore that.  Yielding almost 11% a week ago, that's 7.5% more than gilts (UK government bonds), they did look pretty cheap.

Of course the bonds have to be redeemed at 101% of par in the event that the Glazers sell United.  Keep an eye on the price, because if it carries on rising from here, it could be because there are some Red Knights riding over the hill.



Kris said...

Hi Anders,

I have no knowledge of how the bond markets work, so could you just provide a couple of answers to the below questions? They are probably quite simple but any understanding would be appreciated.

Now that the Bonds are on the open market, does the Yield % effect the Glazers in anyway?

If so, what way do we want the yield % to go. Up or Down and is there a certain figure that would heap more pressure on the Glazers?

Also if the Bond Price keeps on dropping, again does that have an effect on the Glazers?

Does the bond market work like the share market, best time to buy is when it is low in price?

How would the Red Knights profit from this if the bonds are low in price as bonds aren't like shares are they as the more you increase your holding, the more of a say you have?

andersred said...

Hey Kris,

Unfortunately the bond price doesn't impact the Glazers at all (excep that its embarrassing in the City). They've got the money at a fixed price.

From here on in, the bond price gives us an indication as to what the market thinks about the financial strength of the company. The initial very sharp fall in price told us that the bonds were a lot riskier than Gill etc would have us believe. They managed to sell them to less well informed investors at too low a yield on the back of the brand name. The fall in price went too far, that's what financial markets do, but the current price stills says the whole thing is fraught with risk.

I wasn't being totally serious about my Red Knight comment, although if someone bought the Glazers out they would almost certainly have to buy the bonds at 101 (or at least do a deal with the bondholders). It goes without saying that if you think its likely they're a steal....


Kris said...

Hi Anders,

Thanks for your answers, just a couple of questions in reponse to your answers. I am sure there are other people out there who might have the same questions.

If the bond price is embarrassing to the Glazers, will that effect them further down the track?

i.e. say in 2-3 years (hopefully they are gone by then) the debts are starting to get out of control. The Glazers are looking to refinance via another bond issue/loans/float on the market again (i assume they can do all these refinancing options)

Will the Banks/FIs/Market look at this bond issue and see it as a risky option lending money or investing in United?

At present you said that the Investors have overvalued bonds after this issue.

If the price kept on dropping to say mid 80s or lower, would any of the investors holding the bonds try to sell them?

Or do they just sit on the bonds no matter the price and wait for the yearly interest payments of 8% (can't remember exact figure) to be paid?

Do the Bonds in United get traded on the open market? If so is it worth United fans trying to buy them or do we just stick with MUST and the Phoenix account?


andersred said...

Hi Kris,

It might have an impact in years to come (as you say let's hope it doesn't matter). So far everyone who bought the issue will be pretty pissed off. If the Glazers and Gill are right and all is well in the world, a few years of cracking profit numbers and the price will bounce back.....

If not, it is hard for the Glazers to come back to the market for more money. But they've bought time with this bond issue (and the £75m bank facility they've put in place). They don't need more money until 2017.

If you owned the bonds and were confident in the whole story, you'd just sit it out to 2017. The yield I quote is the combined return from the semi-annual coupon (interest payments) and the gain you eventually get when the bonds are paid back at 100 in 2017. So if you are happy and patient you just wait. But buying bonds is not that different from buying shares. The value of your portfolio is struck daily and those who bought MU Finance bonds are sitting on a loss so far.

I don't think the bonds are very overvalued at the current price (please note that is a personal view and not investment advice!). I thought they were at the issue price but they've fallen a lot (for a bond) since then, so in the absence of a total disaster for United, which if it happens will be in the next few years not the next few weeks or months, I can't see them falling much further.

The bonds are traded (they trade officially in Luxembourg but it'll be New York and London based investment banks that deal in them). The minimum you can buy is 50,000 I'm afraid......