Sunday 26 October 2008

Grainger plc's debt-for-equity-swap

Here's how debt-for-equity-swaps work in real life: 

Grainger plc is a property company, so like banks, its balance sheet is much more important that its profit and loss account. They have told the holders of their 3.625% Convertible Bonds due 2014, that they can repay them 35p in the £1 and give them 8p worth of new shares as well, as a consolation prize*.

This doesn't look very attractive, but what's the alternative? The company's properties are worth what they are worth; and those properties are owned, in economic terms, by the shareholders and bondholders. So if bondholder insist on being repaid £1 in the £1, the company wouldn't be able to repay all the bonds in full anyway.

And, if this works for relatively humble property companies, why wouldn't it work for banks? Why do banks get £37 billion chucked at them?

* Via Jack C at HPC.

2 comments:

Anonymous said...

I can only assume the reason is something to do with the nature of the bondholders. Are they all held by the Chinese and Arabs? If so the govt may not want to force them to accept large losses on their investments. In the USA I suspect the reason Fanny Mae and Feddie mac were effectively nationalised was to bail out the billions of dollars off their debt held by the Chinese, who could have cut up rough if they lost out. So the US taxpayer will subsidise the Chinese govt via its tax dollars for decades to come. Perhaps we are being forced to do likewise in the UK?

Mark Wadsworth said...

S, it is almost certainly true for the USA but much less so for UK banks, as I have blogged about before.