Friday, 26 July 2013

Debt-for-equity swap of the week

From City AM:

Yellow Pages is given to lenders in a £2bn swap

Long-suffering shareholders, who have seen shares plummet from a high of 603p in 2007 to just 0.17p yesterday, have been wiped out...

Loss-making Hibu had a debt pile of £2.3bn, equivalent to the GDP of the Maldives. Owners of the debt will take control of the business in a debt-for-equity swap.

Debts will be reduced to £580m in the form of five year senior secured debt and lenders will own a further £920m in ten year payment in kind notes, which will convert to stock later.

It's a misleading headline of course, the lenders were not "given" ownership of the business, they paid £2.3 billion for it.

It turned out the business was worth less than £2.3 billion but still appears to be viable (making the best of a bad job, I suppose), so the lenders chucked out the shareholders and took control of the company themselves. The assets side is unaffected and the book value of the debts is adjusted downwards accordingly (or converted into share capital at the stroke of a pen, plus a few forms SH01 to Companies House and so on).

It's the same general principle as the Dutch Tulip debt cancellation referred to earlier. Cancelling financial liabilities and assets has no impact on overall wealth. And it's a great pity that we didn't apply this principle to the banks (with a few notable exceptions).


Kj said...

I know you're not a big fan of the stock-market, but at least in cases like this, the proper function of the stock-market is upheld. People with money to spare can invest in large-scale projects with a certain risk, and trade that risk, while actual wealth creation goes on in the real world. Hadn't the policies of strongarming everyone and their grandmother (especially), to "take part in the ownership society" through the stockmarket, been enacted, we wouldn't need to be watching the stock-market with jitters all the time.

Mark Wadsworth said...

Kj, I am of course a big fan of a wide spread of private ownership of competing businesses. Risk and reward and all that.

It is just that the stock market is one of the worst ways of doing this.