Tuesday 29 October 2013 by Week in review

From the Trading Desk – PMP is hot off the press with 8.64% fixed

Key points:

1. PMP’s new fixed rate bond offers a very high 8.64% fixed return
2. There are unique and protective covenants that help protect investors in the bond
3. This financial year, PMP’s share price has increased by almost 50%, a positive sign

Now that the PMP Finance Pty Limited’s initial bond offering (IBO) is complete and the bond is actively trading in the secondary market, I thought it might be worth comparing it to other high yield bonds and the impact the bond has had on the company’s share price.

PMP Background - The industry

PMP have spent the past two years consolidating the business into its core competency, namely the catalogue printing business. This industry is very much cashflow positive, providing around $30m in free cashflow, and is showing no signs of giving way to any online advertising alternative in the near term (see Figure 1). Over 50% of the catalogues delivered are read, and over 50% of those who read a catalogue act upon it. I cannot imagine a retailer giving up on that advertising venue. Here’s another way of looking at it:

cataloque_influences_decisions

Figure 1

PMP’s strategy

PMP’s stated strategy is to reduce costs, improve competitiveness, and retire debt. This debt issue ironically implements the third part of that strategy. All of the $50m of funds raised were used to retire part of PMP’s $115m senior secured bank facility, and around $30m in cash generated from its business will be set aside with the specific goal to repay the bond issue at maturity. The covenants put in place with this issue are there to assure that strategy remains in place. Specifically:

  1. Negative pledge – limits the ability of PMP to permit any security interest ranking ahead of note-holders to a maximum of 1.00x EBITDA.
  2. Limit on debt incurrence – limits the ability to issue any debt (senior, junior, or equal to this issue) that would cause the company’s interest coverage ratio to fall below 3.5:1.
  3. Restricted payments to equity – no dividends are to be paid by the company until FY2015 and after that, only up to 50% net profit after tax.
  4. Change of control – in the case of a change of control (i.e. a corporate takeover), investors have the option to redeem the bonds at $101.

PMP intend to be debt free upon maturity of the bond in 2017.

Relative value

The notes were offered in the primary market at a yield of 8.75%, which equated to a margin of 525bps over the swap rate. They are currently available in the secondary market at a slightly lower yield of 8.64%, or a margin of 516bps over the swap rate. Figure 2 shows the relative value this represents by comparing yields on other unrated bonds.

fiig_originated_bonds

Figure2

Stock market reaction

There are a number of people who are wary due to having lost money on an equity investment in PMP in the past. I cannot reiterate strongly enough that this is an investment in PMP’s debt, not the equity and as such the main question investors need to answer is “Am I going to be paid back my investment in four years?”

Stock market reactions, though, are a clear indication of what the equity investors think of this issuance in terms of the overall outlook for the company as a whole. The share price is up almost 50 per cent for the financial year to date (see Figure 3). For reference, this issue was announced on 9 October.

pmp_share_price

Figure 3

The PMP Finance bonds are only available to wholesale investors in minimum $50,000 parcels.

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