We last featured the Enterprise Inns 6.5 per cent 2018 (ISIN: XS0163019143) as the Bond of the Week in August 2010. Since then, government bonds have headed higher, lifted by the prospects of low interest rates for some time to come. The upward move in gilts has dragged the high-quality end of the corporate bonds along with it. However, the more speculative end of the bond market is typically equity-correlated, and prices in these sections have headed lower as risk-averse investors avoid bonds with perceived risk of default.
When I last looked at the Enterprise Inns bond, it was trading at a price of 84p, equivalent to a yield-to-maturity (YTM) of 9 per cent. My view at the time was that while the bond certainly wasn't one for widows and orphans, any bond portfolio should contain a range of risks and maturities, and the 9 per cent yield was certainly not to be sniffed at.
Moving back to the present, recent developments have knocked back the bond below my entry price. A fairly flat set of results saw the share price - we are sellers of the shares, on account of the company's substantial debt burden - continue its decline, recently dropping through the 40p level. The bond has followed suit, dropping down from the 90s in the summer to a recent level of 74.45p. At that level, the YTM is now 11.8 per cent. Clearly, given the high yield and the recent negative price action, investors are wary of the risk associated with holding this asset.
The managers of Enterprise Inns, along with many pub operators, have got their work cut out. The company is continuing to dispose of assets and shrink its balance sheet. But revenue is also falling, a commercial situation that is always hard to deal with. Still, operating profit continues to cover interest payments, albeit by a low multiple of 1.7 times, and, importantly, bondholders have the security of a claim on over 500 pubs. While this is no great help in terms of servicing the debt, it's a debenture-like feature will help the recovery of the assets in the event of the company folding - and one that isn't available to the equity holders.
