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Blue Star bondholders hopping mad at raw deal

A number of Blue Star Group's bondholders are hopping mad at the "take-it-or-lose-all-your-money" deal they're being offered but the Financial Markets Authority (FMS) doesn't look likely to intervene.

Thursday, 28 July 2011

by Jenny Ruth

Directors are insisting their refinancing proposal is bondholders only hope of getting at least some of their money back, even though their own documents show that is a long shot.

Michael Warrington at Chris Lee & Partners describes the deal as a violation of the well-established principle that shareholders get to eat last behind all debtors.

Liam Mason, the FMA's general counsel, says the Blue Star's prospectus has to contain information investors need to make an informed decision, but "at this stage, we have not seen evidence that the Blue Star prospectus is misleading."

Mason acknowledges the FMA has received "complaints from investors concerned that the offer from Blue Star is not in their best interests.

However, FMA does not comment on the merits of any offer. We encourage investors to take advice from an authorised financial adviser."

On Wednesday, Blue Star said it had "become aware that certain market commentators and bondholders have been advancing a view that, in the event that the amendment offer is not approved at the bondholders'

meeting, a further proposal or offer may be made by Blue Star."

However, Blue Star's board expects if the offer is rejected "Blue Star's banks will immediately move to protect their interests, likely through the appointment of a receiver," it says.

"In this scenario, it is probable that there would be no value recovery for bondholders."

Bondholders, whose investment has a face value of $105 million and against which $32.3 million in unpaid interest has accrued since August 2009, are being asked to vote to have 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, a prospect which appears unlikely.

Warrington, a bondholder himself as well as adviser to clients who are bondholders, is likely to be one of the "market commentators" Blue Star refers to.

"I don't see that I can vote for it because to do so is for me to tolerate a proposal that puts a shareholder ahead of a lender,"

Warrington says.

Under the deal, the existing major shareholder will provide a new loan of $15 million earning 18.05% ranking ahead of $67.5 million of bondholders's money (after they've accepted the complete write-off of the $32.3 million in interest they're owed). A previous $12.7 million shareholder loan earning interest which Warrington calculates as 17.25% will rank ahead of the remaining $37.5 million of bondholders' money.

The first tranche of bondholders's money will earn zero interest until July 2013 and then will start earning 9.1%. The second tranche will earn no interest at all and will get just 20% of the business' future sale price. The shareholders will retain 80% of that sale price.

Comments from our readers

On 28 July 2011 at 12:23 pm Ron Palmer said:
It is incomprehensible that shareholders are ranked ahead of bond holders and the comments by Michael Warrington are absolutley correct. The mismanagement by Blue Star Print is on par with the many NBDT that have gone into receivership and have been investigated by the SFO. Directors and senior management should be held accountable for the obvious incompentent mismanagement of Blue Star Print.
On 28 July 2011 at 1:50 pm Mike said:
the management and CHAMP must think that the bondholders are really stupid people. Thats all i can say. Apart from the proposal completely stinks.
On 29 July 2011 at 8:44 am Peter said:
It is a disgraceful offer to the bondholders. They want us to gift a legally owed debt to the company, none of those directors are my relatives, and that is who I make gifts too. I will be voting against. It is major concessions, one after another. Our money will not be worth anything by the time we get it, if at all.
On 29 July 2011 at 10:25 am Ivan said:
I wonder if this is going to be the first company that issues bonds to be looking at having trouble when it comes repaying them.
Oh well I suppose the FMA are too busy with their massages.
On 29 July 2011 at 10:27 am Bryan Preston said:
I have stated plainly to Directors and Management that this proposal is an insult to bondholders.
Anyone who believes these people can achieve the proposed turnaround need only look at the last few years performance and the decisions made to confirm they are in "faryland".
I will vote against even if that means receivership.
The priciple is wrong and in any case better to se if there is anything for bondholders now than waiting 4 years for confirmation of a total loss!
On 29 July 2011 at 11:48 am Don said:
My understanding has always been that a bond takes precedence over shareholders interests. When the bonds were issued the Blue Star directors must have believed they could be repaid by due date otherwise their statements supporting the issue must have been false or misleading. Why should shareholder be better off under the proposed deal than the bondholders who have supported the company.
On 29 July 2011 at 12:57 pm Mike Thornbury said:
When CHAMP (chump?)took over BSG they accepted the liability for bondholder, without question. Now they want to contribute $15M and be richly rewarded at 18.05% (far too excessive in present climate) while bondolders will contribute $44M and receive zero interest plus loss of all their capital! Fair?
I will vote NO and hope a receiver is appointed!
On 29 July 2011 at 2:43 pm Michael said:
I agree it is not a very good deal, but faced with this deal or receivership (which does look very likely) then I can't see we have much choice other than to vote for this.
On 29 July 2011 at 3:30 pm Steve said:
My view is there is no downside to the bond holders voting 'No'. The bonds have no value now and will have no value later under this new amendment. But the bond holders will cause CHAMP a substantial loss if receivership results from a 'no' vote. A 'no' vote will force CHAMP to renegotiate or lose their investment. It puts the onus back on CHAMP to sort this out. I am voting NO!
On 29 July 2011 at 3:36 pm Ron said:
The toothless FMA sits on it's hands as in the past while bond holders get fleeced.
On 30 July 2011 at 10:41 am Paul said:
This is a massive David v Golaith rort and against all investment prinicples. I have voted against. I'm not adverse to pushing the rewewal date out but changing the priorites and being asked to forgive interest, when sharehlder loans with higher interest come in over the top is unfair (putting it mildly). Equally there are existing shareholder loans with similar rate trying to rort bondholders

The way I see it comes down to bad management. They say too much capacity, but they keep spending more capital to create capacity rather than pay debt. perhaps directors should take a pay cut too!

One view is only matter of time to go into receivership or liquidation, bondholders delaying inevitable, so I see no downside to a NO vote and if nothing else gives mgmt a bloody nose.

Mgmt also spending money on call centre to follow up vote. Waste money don't they!
On 4 August 2011 at 12:31 pm Ian said:
In addition to the above, the bondholders' Trustee is being totally neutered.
Commenting is closed


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