Blue Star's bondholders face a nasty choice
Blue Star Group's bondholders are being offered a nasty choice between the near certainty of losing all their money or holding on to a slim chance of being repaid a small part of it in three year's time.
Monday, 18 July 2011
by Jenny Ruth
The NZX-listed bonds have a face value of $105 million. Since interest payments were suspended in August 2009, a further $32.3 million in interest has accrued.
The proposal they are being asked to vote for on August 10 would see the net present value of their investment reduced to $44 million, just over a third of its current face value, but that's only if everything proceeds as directors propose.
Bondholders would have to write off their $32.3 million of accrued interest immediately.
The earliest they would see any actual cash is on October 15, 2013 when they would be paid interest at the rate of 9.1% from July 15, 2013 on $67.5 million face value. Between now and then, Blue Star's bankers won't allow it to pay interest to bondholders. The bonds are currently accruing interest at 13.1%.
The other $37.5 million of bonds will be converted to "participating bonds," or effectively equity on which no interest is payable and which have a September 15, 2023 maturity date.
To get this second part of their money back, investors have to hope the business can be sold for a large enough sum to repay them.
The only realistic alternative, according to directors, is insolvency in which case bondholders are unlikely to receive anything.
Independent expert accounting firm KPMG concluded that while management forecasts are "realistic," it can provide no assurance the forecasts will be achieved.
"Recent performance has indicated that the group is continuing to experience difficult trading conditions," KPMG says, citing the impact of the Christchurch earthquake and commissioning costs of a new plant in Auckland.
"If trading conditions continue to deteriorate, this will impact on the group's ability to achieve its financial forecasts," KPMG says. Failing to meet those forecasts could lead to default of Blue Star's banking agreement and could send it into receivership anyway with bondholders receiving nothing.
Even if everything does go to plan, KPMG doesn't think bondholders will get even the written down value of their money back. "The likely outcome is that the level of repayment will be low relative to the face value of the interest bearing bondsand there is unlikely to be any repayment on the participating bonds."
Blue Star's track record to date doesn't inspire confidence. Back in 2005 when the bonds were being sold, director Tom Sturgess was confidently predicting Blue Star would buy back the bonds long before maturity at 103.5% of their face value.
Sturgess and Australian private equity firm CHAMP own 93.7% of Blue Star.
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