A sorry hybrid saga comes to an end

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A sorry saga ended last week for investors in a corporate hybrid note that was issued back in February 2007. Spicers Ltd acquired all of the outstanding Paperlinx Step-up Preference Securities that it did not already own and the securities were removed from official quotation on the ASX on Tuesday.

The Paperlinx hybrids were exchanged for Spicers shares, which on the day were trading at just three cents.

The hybrids were issued by the Paperlinx SPS Trust, a special purpose vehicle established by Spicers (or Paperlinx as it was then known) to raise long-term debt funding for use by Paperlinx. The issue raised $285 million and promised to pay distributions set at 240 basis points over the 180-day bank bill rate.

There was also a step-up margin of a further 225 bps that would become payable should the hybrids not be successfully remarketed or redeemed on 30 June 2012. The hybrids were technically perpetual.

Paperlinx was a $1.7 billion company at the time the hybrids were issued. But along came the GFC and distributions ceased after the end of 2011, and the notes effectively became perpetual when the first remarketing date was missed at the end of June 2012.

An attempt was made by Paperlinx to buy back the hybrids in October 2013. The company launched a takeover bid for the Paperlinx SPS Trust, following a review of options to rationalise its capital structure.

The SPS were considered an impediment to any takeover bids being launched for the company.

Paperlinx offered 250 ordinary shares for each hybrid note. This equated to approximately $14 each.

The bid failed at the end of February 2014, by which time Paperlinx had obtained acceptances from just 7.8 per cent of holders.

With a new board and management in place, Spicers, as it had then become, had another go at acquiring the Paperlinx SPS Trust last year. Spicers effectively repeated the offer made by Paperlinx in 2013 and it did it for the same reasons.

But this time Spicers offered 545 shares, then valued at 25 cents a share, for each hybrid note. This valued the notes at $13.63 and would give holders 70 per cent of the company.

In December, Spicers advised the ASX that it had entered into a binding agreement with the responsible entity of the Paperlinx SPS Trust to implement the buyback. As it was, hybrid noteholders and Spicers shareholders did not get to vote on the proposal until earlier this month but it was overwhelmingly approved by both.

Spicers’ share price moved up a little in the intervening period and thus holders of the hybrids ended up with about 68.3 per cent of the company upon the completion of the buyback, which gave the hybrids a final value of more than $16. This is not much of a return on a $100 investment made more than ten years ago.

But at least it’s a return. There is a litany of failed hybrid issues in which investors have fared worse, some have fared better, and some are still receiving distributions but may never see their principal.

Around the time that Paperlinx first flagged its intentions to buyback the hybrids in 2013, the Australian Securities and Investment Commission released a report on hybrid securities accompanied by a media release headlined “ASIC continues crackdown on hybrids”.

ASIC said it would be looking for possible misconduct in the sale of hybrids, including the use of inappropriate labels or acronyms, and unwarranted comparisons with senior debt and covered bonds. ASIC would crackdown on “spruiking” of high-yields and the brand name of the issuer, when not balanced with product risks, and ASIC wanted to improve investor education.

ASIC reiterated warnings that it had previously made to investors about long investment terms and the dangers of expecting early redemption, the ability and even obligation for non-cumulative coupon payments to be suspended, the subordination of hybrids and implications if the issuer fails, and the potential illiquidity of these instruments, even though listed on the ASX and the capital losses that may result.

ASIC went on to discuss those hybrid issues that it considered to have failed. The failed issues were from Origin Energy, Tabcorp, AGL Energy, Australand, Multiplex, Nufarm, Goodman, ANZ (in New Zealand), Elders (originally Futuris), Paperlinx and Gunns.

The Origin Energy, Tabcorp and AGL Energy hybrids were deemed to have failed because a “capital event” had already occurred, which would allow the hybrids to be redeemed. This capital event was the change in equity credit granted by S&P Global Ratings to the issuer.

The issuers opted not to redeem the hybrids, but doing so would have resulted in an investment failure from an investor’s perspective. As it was, investors should have been pleased that the hybrids were not redeemed and each was allowed to run until the first call date.

The Origin Energy and Tabcorp hybrids were recently redeemed and the AGL hybrids are due to be called in June 2019. Each of the issue has been otherwise trouble free.

Investors in these hybrids have emerged unscathed.

The Australand, Multiplex and Nufarm hybrids had failed because they were not redeemed on the first call date. The issuers have simply opted to pay a coupon step-up and the hybrids became perpetual.

However, Australand was subsequently taken over by Frasers Centrepoint, which triggered a change of control clause in the Australand hybrids, resulting in the notes being bought back at full face value plus accrued interest in September 2014.

The Multiplex and Nufarm hybrids remain outstanding and their current prices of $77.30 and $86.50 respectively reflect at least in part, their perpetual status. It is not clear that investors will ever be able to recoup the face value of their investment.

Goodman and ANZ disappointed investors by refusing to call their notes on the first call date. Goodman investors were rolled over into a new hybrid, which won’t be called until the end of this year (Goodman has flagged its intention to do so). And investors in the ANZ notes are now waiting for the second call date to arrive next year.

These investors suffered some initial disappointment but the end is in sight.

The Elders and Paperlinx hybrids became perpetual some time ago but also stopped paying coupons, due to financial distress.

Holder of the Elders hybrids eventually recovered most if not all of their capital as the fortunes of the company improved and progressive offers, at values that eventually reached full face value, were made to buy back the notes. The fate of the Paperlinx SPS note holders is detailed above.

The Gunns hybrids also became perpetual but Gunns later decided that the hybrids would have to be converted in ordinary equity. It was unfortunate that the company went broke before conversion could take place.

The hybrid investors rank ahead of shareholders as creditors, but it is believed that hybrid note holders will not receive any return of capital from the continuing liquidation of the company.

 

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