29th Nov

For Your Eyes Only - Mr Bond in Conversation with Premier Oil Finance Director Tony Durrant

Following the launch of its first retail bond in the UK (Premier Oil Maintains Flow of Retail Bonds, Offering 5% due 2020 – Retail Bond Expert 25th November) Retail Bond Expert is delighted to have had the opportunity to speak to FD Tony Durrant who, in this unique interview, tells us more about the strategy that underpins £1.8 billion FTSE 250 oil exploration company Premier Oil and shares his thoughts about the Order Book for Retail Bonds (ORB).

What were the key objectives behind the launch of the bond?

Tony Durrant (TD) ‘This is primarily a refinancing exercise, we have a bank roll-over facility of $1.5 billion due in March 2015, and the issue of a retail bond will help us reduce our dependence on banks. We are very capital intensive, that is the model, but we are diversifying away from banks’ said Mr Durrant.

He added that having launched similar products in the US and Asia, to do so in the UK was a logical move and that the company was ‘anxious to take advantage of the current low interest rate environment by getting a fixed rate at this time'

Have you set a target figure for the bond to raise?

TD ‘We have not set a formal target, but the advice we have received is that we should achieve something toward the upper end of the range achieved by recent issues on ORB – somewhere between £100 million and £150 million’

Mr Durrant continued by saying that the degree of institutional support was likely to be a key influence on the overall performance of the issue.

When suggesting that the participation of institutional investors was often predicated upon the product being independently rated, Mr Bond was told that the recent dearth of Sterling denominated issues was likely to stimulate institutional interest and that liquidity was likely to be a key factor.

What are the core attributes of Premier Oil that you believe could make it attractive to a potential investor?

TD ‘Premier Oil sits at the top end of a sector that ranges from small scale exploration through to production and development. The company currently produces 60,000 barrels of oil per day, with a medium term objective of achieving 100,000 per day, and achieves $1 billion p.a. in cash flow. The company is not without risk, but it spreads its risk and is currently active in more than twenty oil and gas fields’

Is there any science behind the coupon that is offered, or do you simply look at what has gone before and offer what you believe the market will stand?

TD ‘Our approach is a little more scientific, but there is also a degree of psychology involved, particularly in the retail sector; we believe that to a retail investor a coupon that begins with a ‘5’ is seen as being positive, whereas an institutional analyst is likely to conduct a more objective appraisal and describe the bond as offering an improvement of ‘x%’ over a comparable gilt’. Mr Durrant added that as a borrower the company aimed to offer investors an attractive rate of return whilst remaining competitive with other debt markets.

Is there a direct correlation between the coupon that is offered and the amount of risk an investor is exposed to?

TD ‘Definitely, yes. Because we have come to market after oil company EnQuest successfully raised £145 million in February this year and recently added to that with a ‘tap’, there will inevitably be questions as to why EnQuest paid 5.5% whilst we are offering 5%. There are undoubtedly similarities between our businesses, but Premier Oil is bigger than EnQuest, generates more cash and is active in more fields. Whereas the offer from EnQuest was for subordinated debt, our bond is issued pari passu with bank borrowing and that structural difference is something that justifies the difference in the coupon’

Mr Durrant went on to say that he believes that the distinction between the structures of the debt on offer is something that is very important to get across – particularly to the retail investor, re-emphasising the advantage of holding pari passu debt in the event of corporate failure.

Are you in support of issuer group, ORBIG’s, call for a ‘traffic light rating system for retail bonds?

TD ‘We have not studied ORBIG’s proposal in detail, but we are in support of anything that contributes to the health and welfare of the market and provides information and guidance to retail investors’

What led you to appoint three lead managers to promote the launch of your bond?

TD ‘Premier Oil had existing relationships with each of the book runners, and they have all contributed to the creation and distribution of its debut on ORB’

Presumably, for anyone currently earning a pitiful return on their savings, the decision to switch their investment into Premier Oil retail bonds should not be a difficult one?

TD ‘Obviously we would not recommend that anyone should put all of their cash into a single investment, but as part of an investment strategy, we believe that Premier Oil retail bonds offer an attractive alternative to some savings products’

Mr Bond recommends that anyone considering an investment into retail bonds should seek professional financial advice appropriate to their level of financial literacy and investment experience.

Issuance on ORB in 2013 has been at the lower end of expectation, what do you think the prospects are for the sector, and do you think it has been hampered by the lack of diversity in terms of issuers?

TD ‘Issuance in most bond markets has been low, and the corporate sector is generally well ‘cashed-up’, with floating rate bank debt relatively cheap. The challenge we face is deciding when is the right time to lock in some long term bond finance which may cost more than we are currently paying; effectively we are taking a seven year view on interest rates’

Mr Durrant believes that the recent experience of Co-Op bond holders (inter alia The Only Way is Ethics – Co-op Bank Bond Holders Fight ‘Bail-In’ – Retail Bond Expert 27th August) has caused investors to be wary, and believes that the industrial sector in particular has been slow to embrace retail bonds as a source of finance.

However, he also believes that the current state of ORB can be viewed as a double-edged sword, as he expects that Premier Oil will be rewarded for the relatively high levels of brand awareness and trust it enjoys.

Asked whether he could describe a ‘typical’ would-be investor, Mr Durrant said that it was for distributors to ensure that investments appropriate to the risk profile of their clients were promoted and that retail investors were apprised of all of the facts surrounding a product.

He added that Premier Oil was at the ‘conservative end’ of its sector and its bonds should be considered as part of a balanced portfolio.

There are concerns that the cost and complexity of documents required in support of retail bond launches are endangering the sector. Have you found this process onerous?

TD ‘Onerous, yes, but we do understand the duty of regulators to protect investors – I suppose the question is whether the increasing length of information documents add to this protection, or whether it merely points to an increased use of ‘legalese’. The challenge is deliver clarity without allowing the lawyers to take over’

Do you think that levels of financial literacy are generally high enough to allow retail clients to make informed investment decisions?

TD ‘I don’t believe that there is any great heritage of individual investing in the UK, people have traditionally taken the advice of those charged with managing their investments’

However, Mr Durrant went on to say that he believed that a combination of poor investment performance and excessive charges were leading to people ‘thinking harder’ about their money.

Mr Bond concurred, saying that educating and engaging those seeking to take personal control of their financial future was at the heart of Retail Bond Expert and its family of sites.

Do you feel that there is a need for clarity and more strictly applied definitions around the plethora of ‘mini’, ‘loyalty and ‘corporate’ products that appear interchangeably described as ‘retail bonds’?

TD ‘Yes –people need to understand the real essence of what they are investing in’

Mr Carney has recently increased his estimate of the liklihood that unemployment rates will hit the threshold point of 7% in 2014 to 40%. What effect do you think this will have on the retail bond sector?

TD ‘Even if interest rates did start to climb, there would be a very long way to go before existing debt became unattractive, and I do not see that as being a great concern.

Mr Bond welcomes any comments or thoughts you may have regarding the comments contained herein, and will invite Mr Durrant to personally respond if appropriate.

Mr Durrant has also agreed to provide a follow up to this piece after the closure of this issue, and Retail Bond Expert would like to take the opportunity to thank him for what we hope will be the first of many such articles.


Posted on 23/09/2014 19:39:12

What a pleasure to find someone who idiienfets the issues so clearly

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