It could be the next installment in the boy wizard’s epic saga: Harry Potter and the Half-Yield Bond.
Pinewood Studios, the home of movie franchises spanning Potter to James Bond, is defying Britain’s moribund junk-bond market to borrow at a yield half the average. Demand has been so strong the company has increased the size of the issue by 10% to 550 million pounds ($680 million), even as some fret the fine print in the deal’s documentation.
It looks like being a rare success story for junk-rated borrowers laid low by the political crisis engulfing the U.K. And it’s all the more remarkable because a sizable chunk of the cash raised will go straight to the company’s shareholders.
There hasn’t been a sterling high-yield issue since July, and back then the borrower paid a rate of 10%. Pinewood’s banks are expecting to price this bond Wednesday in the 3.25%-3.5% yield range -- that’s not much compensation for the deal’s risks, according to Thomas Hanson, head of high-yield at Kames Capital Plc.
“Given the political backdrop, issuing in sterling has been something of a challenge recently as can be seen from the lack of sterling deals,” Hanson said. The use of proceeds is “obviously not ideal from an investor standpoint, but potentially an area that may cause more concern is the loose covenant package,” he said.
In addition to highlighting the threat of Brexit, a prospectus seen by Bloomberg News also includes an unusual provision that allows Pinewood to withhold information from investors regarding its debt capacity. The borrowings will lift the company’s leverage to about eight times according to Moody’s Investors Service, well above the average for its rating category.
Yet it seems the glamor of film and the promise of new contracts with Disney and Netflix are trumping qualms about a company boosting leverage as default rates rise and Britain frets the risk of recession.
Brexit Woes
Corporate debt denominated in pounds has lagged the broad bond rally of 2019, which has been fueled by speculation of easier central bank policy. While the market has remained open for investment-grade companies selling about 1.7 billion pounds of bonds a month, it’s been much patchier for those on the lower end of the ratings spectrum.
The last foray by a junk-rated issuer demonstrated some of the funding struggles. CVC Capital Partners-owned Domestic & General had to drop a sterling floating-rate note while boosting the price on a subordinated tranche to 10% to get the deal across the line -- the second highest yield of the year in Europe’s speculative-grade market.
Pinewood Group Ltd., dating back to 1936, was sold in 2016 for 323 million pounds to Aermont Capital LLP, a London-based asset manager focused on real estate investments. According to the bond offering memorandum, Pinewood Studios and its sister Shepperton Studios are worth 1.1 billion pounds.