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Bond of the Week: 4 April 2012

Enterprise Inns 6.5% 2018 bond recovers - still offers good value......

    

Pub landlord Enterprise Inns, along with many players in the pub sector, is having a fairly tough time.  A squeezed consumer, along with changing social trends mean that pubs are no longer automatic cash generators. It is reported, sadly, that the UK is losing its watering-holes at a rate of fifty a week.

Add to that Enterprise Inn’s high level of gearing and it is clear that the management has its work cut out. The situation is perhaps illustrated by the company’s share price, which stood at over £7 in 2007. Recently, Enterprise Inns has seen some recovery from the 25p lows, but at 58p, remains in penny-stock territory. Clearly, investors view the situation as being not without risk.

What of the company’s bonds? I follow the Enterprise Inns 6.5% Dec 2018 issue. I first looked at these in August 2010, noting the volatility and high yield (9%) of the instrument. At the time, I viewed the bond as a buy for risk-positive investors and have been monitoring the situation since. For those not familiar with the bonds, here are the details.

  • Issuer - Enterprise Inns PLC
  • Size of issue - £600 million (original issue £250 mil, increased in ’03)
  • Collateral - secured
  • Coupon - 6.5% (s/a)
  • Maturity - 6th Dec 2018
  • Price - 84.5
  • Yield to maturity - 9.7%
  • Min piece - £1,000
  • Rating -  BB- (S&P)
  • SIPP/ISA - Yes/Yes
  • ISIN - XS0163019143 

Last summer, the bonds took a turn south again, and when I updated the Bond of the Week in September, the price had fallen to the mid-seventies, pushing the yield up to nearly twelve percent. My view at the time? Holders should grit their teeth and hang on.

That proved to be the right course of action, and the price has recovered (see chart). So what should investors do? I continue to view the EI bond as a buy, or if already owned; a hold. To my mind, the crucial factor for this instrument is the charge on the assets. This £600 million pound bond issue is secured directly against a defined pool of the company’s pubs and, in a worse-case scenario, the bond holders would have a prior claim on these solid assets. To read more about this, see page three of the original offering circular here.

My view: Trading in the mid-eighties, with a YTM of over 9%, the bond continues to represent good value on a risk-reward basis. With five years and eight months to run until maturity, the instrument is ISA-eligible and makes an attractive holding for risk-positive investors within a diversified portfolio.

Mark Glowrey

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