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Bond of the Week: 5 November 2013

IPF 6.125% 2020 Tap Issue

    

International Personal Finance (IPF) has reopened its inaugural ORB issue of May this year. This is the first time an existing ORB issue has been tapped. With a tap, unlike with a brand new offering, the offer price is not necessarily par but (in this case) 100.75. This price broadly reflects the bid side of the existing bond in the secondary market. There is no accrued to pay on this tap (although at the settlement date there should have been 13 days to pay to align it with the secondary tranche). If you include the free 13 days accrued that you are receiving at 100.75, then that equates to a price of 100.53 in the secondary market.

I rather wish the market convention for taps had been stuck to whereby the relevant days of accrued was charged (with a corresponding lower offer price). In attempting to make it easier I think it has become more complicated. My understanding is that market convention was going to be followed (so no blame to the issuer or Canaccord) until some country brokers, cider flagons in hand, complained that accrued was a concept too difficult to get their heads around.  Sharpen up there.

I wrote up the original issue in May and you might like to have a look at my comments. Here are the terms of this issue.

Issuer: International Personal Finance PLC
Maturity: 8th May 2020 (six years and six months)
Coupo: 6.125% (semi-annual 8th May/Nov)
Issue Rating: BB+ (Fitch)
Issue Price: 100.75, including 13 days’ accrued interest, amounting to £0.22 per
£100 nominal
Yield at issue price 6.025% (G+418bp)
Denoms £100
Min Subscription £2,000
Books open Now
Books Close/Settlement Noon, 15th Nov 2013 (subject to early close)
Settlement 21st Nov 2013 (funges with existing issue)
Status Senior unsecured, guaranteed.
Financial Covenants EBITA; interest min 2x. Gearing maximum of 3.75x
Distribution Only to be sold into the UK, Isle of Man and Channel Islands
ISIN XS0919406800
SEDOL B9SL9X3
Listing London Stock Exchange, ORB
Selling concession 0.25% (members of the LSE only)
Lead Manager Canaccord Genuity Limited
Settlement Euroclear, CREST, Clearstream.

IPF is a provider of home credit in Eastern Europe (Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria and Lithuania) and Mexico. They were split off from Provident Financial (also an issuer of ORB bonds) which provides home credit in the UK. At the time of the split it was felt by shareholders that IPF represented a better growth story and should be divested from Provident.

Home credit, to be brutal about it, is the lending of small amounts of money at high interest rates to poor people.  However, it needs to be distinguished from the now notorious pay day lenders (a much more recent invention). Other than that the interest rates being charged by home credit are much lower and the lending period is longer (maybe a year rather than to the next pay day) there is one crucial difference. Home credit lends a fixed sum for fixed repayments and there are no interest charges or penalty charges for failure to keep up payments. Indeed IPF says they expect the occasional missed or delayed payment. The danger with pay day lenders is that even as the borrower desperately tries to make up missed payments, interest builds up upon interest and the accumulated debt mounts ever higher. The other major difference is that home credit is a person to person business. IPF have 29,500 agents visiting customer’s houses and collecting money on a weekly basis. The agents themselves are paid on a commission basis on the amount of money collected not paid out. There is therefore less chance, as with pay day lenders, of money being spewed out in all directions without any real attempt to ascertain whether those who apply for credit are able to repay; and of course such loose lending policies have to be paid for by interest rates in the 1,000s.

Year to date profit is up 28% to £74.8 million with particular strong profit growth in Mexico. Since the issue in April, they have reported (June 30th) receivables up 14%, revenue up 9% impairments up 6% etc. ; in short their business is steadily growing and it is being financed from profits. In July IPF opened their first two branches in Lithuania and they started operating in Sofia (Bulgaria) in September. Since I last wrote on IPF (18th April) the share price is up from £4.38 to £5.79, an increase of 32%, so at least we can say the stock market likes the company.  The current market cap is £1.4bn and the company is a member of the FTSE 250.

From a debt holders perspective IPF has a very attractive and unusual financial profile. Their borrowings are long (eg this bond) and they lend short. 96% of receivables are due within a year and 95% of borrowings are longer than a year. In other words if IPF lent no more money, within in a year practically all loans they had made would have be repaid (bar defaults of course). This also makes the business very cash generative (2010 £134mil, 2011 £144mil, 2012 £172mil). Interest cover is 3.4X and gearing 0.8X.  Return on equity has hovered between 20 and 23% over the last three years. Bank facilities account for 37% of borrowing and importantly bond holders and banks all rank pari passu (so there is no structural subordination).

Their equity to receivables ration is 58.9%. To put it simply, for each £1 lent 58.9p is backed by shareholders equity.  For those who follow such things I am told this figure of 58.9% would equate to a Core Tier 1 ratio if they were a bank. Banks typically hold between 9-14% Core Tier 1. You would expect a home credit provider to have a much lower gearing ratio than a bank, but quite how different is apparent from these figures. I did mention to the CEO that recently there had been a share buy back operation and the money spent roughly equated to the issue size of the original ORB bond! Could he , I therefore asked, assure me that money from this bond would not be used to buy back further shares?  He could not assure me.   Not unreasonably he pointed out money was fungible and the bond lasted for seven years (ie he could not make a seven year commitment). However, there was no current plan to launch a further buyback. He also pointed out that management’s target for equity to receivables was 50-55% and that even with continuing to expand lending at the present rate, so much cash was thrown off by the business that without share buy backs gearing would automatically keep decreasing, thereby harming shareholder returns.

comparables

Conclusion. This is undoubtedly a well-run company and indeed the shares, despite having already performed so well, may be worth monitoring. The bond offers the best yield on the ORB market and within the institutional sphere yield is even more difficult to find. 6% compared with the above table looks pretty good to me. This bond therefore offers value for money and if you need some yield this is a place to find it while not taking an unreasonable risk. I also think that with a maturity of 6 ½ years and a six percent yield, you do not have too much interest rate risk to worry about. Your yield is likely to anaesthetise you from probable rate rises in one or two years’ time. In terms of performance, as a tap issue this will bond is unlikely to produce the immediately satisfying capital gain that investors have become used to (I hope not hooked on?) in the ORB market. That is not to say that in the fullness of time this issue will not perform. I recommend a buy if you have money in search of a home in the fixed interest market.

Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.

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