Analysis & Comment  > Bond of the Week

Share |
Back to 2011

Bond of the Week: 6 September 2011

Enterprise Inns bonds follow the share price south.............

    

We last featured the Enterprise Inns 6.5% 2018 (ISINXS0163019143) as our Bond of the Week in August 2010. Since then, government bonds have headed higher, lifted by the prospects of low interest rates for some time to come. The upward move in gilts has dragged the high-quality end of the corporate bonds along with it. However, the more speculative end of the bond market is typically equity-correlated, and prices in these sections have headed lower as risk-averse investors avoid bonds with perceived risk of default.

When I last looked at the Enterprise Inns bond, it was trading at a price of 84, equivalent to a YTM of 9%. My view at the time was:

"With a non-investment grade rating of BB-, the Enterprise Inns bond is not a candidate for risk-adverse investors - and I note that Moody’s placed the bond on "credit watch negative" in the spring, suggesting the risk is increasing. However, in the fixed income investor model portfolio we aim to have a spread of different types of credits, and I am tempted by the combination of yield of over 9% and a claim on some real assets to help secure our capital.

With more speculative positions, I generally take a smaller position size and with this in mind I have added £6,000 nominal of the bond to the portfolio, a total consideration of just over £5,000.

Moving back to the present, recent developments have knocked back the bond below my entry price. A fairly flat set of results saw the share price continue its decline, recently dropping through the 40p level (the shares were trading at over £1 when we purchased the bond last summer).

The bond has followed suit, dropping down from the 90’s in the summer to a recent level of 74.45. At that level, the YTM is now 11.8%. Clearly, given the high yield and the recent negative price action, investors are wary of the risk associated with holdings this asset. So, what to do with my holding? 

My view: The management of Enterprise Inns, along with many pub operators, have got their work cut out. The company is continuing to dispose of assets and shrink its balance sheet, But, revenue is also falling, a commercial situation that is always hard to deal with.

I will continue to hold my position in the Enterprise Inns 6.5% 2018. Operating profit continues to cover interest payments, albeit by a low multiple (1.7x), and, importantly, bondholders have the security of a charge on over 500 pubs. Whilst this is no great help in terms of servicing the debt, this debenture-like feature will help recovery in the event of the company folding.

On balance, I am happy to hold the security, but I am aware that over the medium-term, lower prices may well be seen. This theory is supported both by the volatile market conditions and observations of value/yield in other assets in the sector. Thus, speculative investors looking to pick up cheap bonds may do well to keep their powder dry for the moment.    

Mark Glowrey

PS - New Index Linked issue for National Grid.  Yesterday I attended the roadshow for a new retail-targeted index linked bond from National Grid PLC. The company is looking to issue a bond in the 10yr maturity area, with a structure that mirrors index-linked gilts (RPI-linked coupon plus RPI-linked repayment of capital).

Previous retail targeted issues have gone well, with significant initial premiums. My initial impression suggests that demand will be strong for this "linker" - the first in its field. The full terms of the issue are likely to be out next week and I will be covering the issue in detail.  

Disclaimer

www.fixedincomeinvestor.co.uk is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.

Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own,  the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.

None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such.  For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated.  The investments described by or in the services are not suitable for all investors. Investors  who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.

These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.