News

1st Jun

A Gusher for the DIY Investor as EnQuest Hikes Retail Bond Coupon to 7%?

The North Sea oil operator has breached a covenant of its retail bond and raised the coupon on its 2022 bond from 5.5% to 7.0%

From the perspective of the DIY investor, there can be little quarrel that retail bonds have been a success; a dearth of new notes issued on ORB and high demand from income seeking investors have conspired to push prices in the secondary market way above par.

However, two issues (Premier Oil – trading at £71 and EnQuest at £62) have been battered by the collapse in the oil price, to the extent that one has now broken a covenant negotiated to protect bondholders.

Bonds trading at such levels are symptomatic of distressed businesses and because of the position of such loans in the debt structure of the business, restructuring can often lead to shareholders being swamped as debt is exchanged for equity.

As a result of its announcement (view here) EnQuest will be raising the coupon on its ENQLN 5.5% 2022 bonds to 7%, in line with the covenant amendments negotiated with the bondholders last April.

This is clearly good news for holders of the bond, but it is uncertain what will happen next.

The notice states that the coupon period from August 2016 to February 2016 will benefit from the new higher coupon, because its leverage ratio as of 31st December was more than 3:1; however, this is not a permanent development.

If the company pulls back inside the covenants (a credit-positive development), it is presumed that the coupon will revert to its 5.5% original level, although it is unclear what will happen next year if this is not the case.

EnQuest raised £145m with its initial foray onto ORB and then ‘tapped’ the market for additional funding at an effective coupon of 5.25% on the strength of a secondary market valuation of £102.07 and a share price of 136.75p.

However, when things turned ugly its retail bond hit a nadir at £28.95 and EnQuest’s share price tanked to 11p; the company may need to go back to noteholders again.

Pretty bleak, but things have looked decidedly rosier since January 2016 and in addition to the improvement in its bond price, the company is today trading at 33p and the bigger picture is that Brent Crude has now nudged over $50 a barrel, with some analysts predicting it will break though $70 before the end of the year.

So, despite some uncertainty over the precise nature of the bone they have been thrown, holders of EnQuest retail bonds should be reasonably content to receive an enhanced coupon and barring an unforeseen catastrophic failure of the issuer or change in their personal circumstances, should be able to ride out their investment until 2022.

So, the $64k question – is this the time to pile into EnQuest to take advantage of an enhanced coupon for however long it is applied, safe in the knowledge that the bonds will be redeemed at par in 2022, or is this the point at which the DIY investor does a passable impression of Edvard Munch’s Scream and vows to steer well clear of those pesky energy stocks that have made such a dent in their portfolio?

A case could be argued either way, but only you will know if such an investment would keep you up at night and it is worth mentioning at this point that retail bonds are not covered by the Financial Services Compensation Scheme.

 

 


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