Monday 14 January 2013

Portfolio Sale: Enterprise Inns 6.5% 2018 Corporate Bond (LSE:47VU)


‘A bird in the hand is worth two in the bush’ the traditional adage tells us.
Is this right or wrong for investment? Is this just a manifestation of one of our human behavioural biases - the urge to grab a profit?
I faced such a decision in the form of my holding of my corporate bond holding in Enterprise Inns paying a 6.5% coupon and maturing in 2018. When I bought them these were viewed by the market as quite risky and came with a hefty current yield of 9% and a deep discount on the face price. What was strange (to me at least, no doubt I was missing some other risk) was that these bonds were (unusually) backed by a dedicated pub property portfolio and the probability of an outright loss of my investment seemed quite remote.
Fast-wind to the present and I was showing a 35% capital gain, as the market had developed a taste for high-yield securities. This had become, by far, my biggest single holding. What was a more relevant measure to me is that this gain was equivalent to over four years’ income (from the coupon). My own metric for considering a sale is a capital gain of 5 years’ income, so this situation had me thinking:
‘Bird in the hand’:
  • It’s a nice profit
  • Times are hard for pubs
  • Pub property prices must be depressed - Lloyds recently sold its Admiral pub estate at a huge loss
  • I can re-invest the cash
‘Two in the bush’:
  • If I hold on until maturity, I’ll get this price anyway (it’s nearly at par - i.e. the redemption price)
  • There are potentially 5 more years of coupon to come
  • The current yield has fallen to around 6.6%, but this is not bad at all in the current yield climate.
There is a lot of evidence that we humans are not good at estimating probabilities. Logically, I can exclude most of the maturity value, so the difference comes down to the 5 years of a reasonably attractive coupon. Assuming that I could reinvest the sale capital at a fairly similar yield, the difference comes down to the risk of loss on the new security versus this one. So what is the probability of Enterprise Inns failing?
The 2012 Annual Accounts for Enterprise Inns puts a brave face on it, seeming to show in its headlines a recovery situation, with lower losses, reduced debts (still £2.7 billion, though!) and bank financing extended to 2016. However, there is a declining trend in profits before tax and exceptional items, cash flows and adjusted earnings per share. Looking at the cash flow, the company’s interest bill has nearly doubled since the previous year - equivalent to over half the operating cash flow. The company has been quietly buying back £52m worth of its own debt during the year as well as repaying £340m of other loans, but financed partially by taking out £160m of new loans - presumably at lower coupons.
So, it looks like the company is likely to limp forward for a few more years, and possibly with some improvement. But is it likely to be ultimately a success story? This seems unlikely to me - a lot of corporate activity seems to revolve around financial re-engineering. My particular piece of debt is part of a chunk valued at £600m, coming due in 2018: that’s a lot of refinancing to handle.
Anyway, I’ve headed for the exit. With my bird in my hand.
 [Sale price: £0.98]

(An earlier version of this post appeared on Citywire Money)
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Just ditched mine too for £0.99, bought in at £0.70 so a tidy little profit taken there.

    No just to find somewhere else to invest the money...