Sunday 12 January 2014

Onerous terms of Blumont's credit line

I have written little (here and here) about the penny stock saga around Blumont and other connected counters in Singapore. I do hope that the court cases and the investigation by the Singapore authorities will throw more light on this (for many people involved rather painful) affair.

The Edge Singapore highlighted a new credit line of USD 30 Million that Blumont has taken up, the details of which can be found here. In short:
  • To be repaid full within 6 months after the first drawdown
  • Interest rate of 10% per year, to be paid monthly
  • Drawdown fee of 5%
  • Administration fee of 0.5% per month
  • Arranger fee of 4%
I can not remember I ever saw such onerous terms, I think even any self respecting "ah long" would be embarrassed by these. A back on the envelope calculation gives an annualised yield of well beyond 30% a year including all fees. How many listed companies have a ROCE (Return On Capital Employed) beyond 30% a year? Not many, and I strongly doubt Blumont falls in that category.

In The Edge Singapore Alex Molyneux (not yet appointed as Chairman) remarked:

".... if you 're not an investment-grade company, you don't borrow at 5%, 6%".

But is that really the case? Below is the graph for the yield of the so called "junk" bonds, the lowest grade of corporate bonds:


Many junk bonds are indeed yielding only 5-6%, that seems to contradict Molyneux.

Seth Klarman (Baupost Group) mentioned in Capital & Crisis (December 2013):

"It is almost embarrassing that five years after a crisis - a crisis that can happen again - we're back to those levels of speculative behaviour. It's really astonishing. Everything that can be financed has gotten financed."

The article, titled "The Silly Season", continues:

"You can find good evidence of this in the exuberant corporate junk bond market. This is where the iffy borrowers go and interest rates are high. In fact, it's often called the high-yield market. But today, it seems just about every company has been able to borrow, or refinance, at record-low rates. The High-Yield Index, a proxy for the junk bond market, hit an all-time low in yield this year."

For Blumont, apart from the incredible terms of the loan, there is also the issue how it plans to repay the loan, after only six months. The company owns chunks of not very liquid mining companies that are unlikely to pay any dividend in the near future. If it can't pay back its loan, it might be in danger of losing the assets it pledged against the loan.

And for the global situation regarding risk and return: it looks like we are back to the situation in 2006/07, the "goldilocks" days. Does the world really have such a short term memory, that all the events of 2008/09 have been forgotten?

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