Harry Potter and 007 Defy a Credit Market Battered by Brexit

(Bloomberg) --

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.

The bond will act as a payday for its shareholders, who stand to receive about 280 million pounds in the form of a dividend from the debt sale. Management told investors during this week’s meetings that the cash equity the sponsors had prior to the dividend was around 200 pounds, which means its entire holding has been taken off the table.

In its prospectus, Pinewood said uncertainty in global economic and geopolitical conditions threatens commercial relationships with its customers, suppliers and creditors. “If our customers suffer financial difficulty, they may not pay us, which would have a material adverse effect on our business, financial condition or results of operations,” according to the document.

On the upside, the studio recently signed 10-year contracts with Disney and Netflix. The contracts materially change the traditional, short-term hire business model and improve its turnover visibility, the company said in the prospectus.

That helped Pinewood win a one-notch upgrade from S&P Global Ratings on Monday, to BB-. The ratings firm said it expects the studio to “generate consistent income over at least the next 12 months, supported by the long leases, the growing demand for media content, and Pinewood’s long-term relationships with the major global film producers.”

Moody’s took a different view, downgrading Pinewood’s debt the next day by one level to Ba3, saying the “spike” in leverage “is a key credit negative.”

Representatives for Pinewood were unavailable for comment.

--With assistance from Paul Cohen.

To contact the reporter on this story: Laura Benitez in London at lbenitez1@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, ;Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher

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