September 1, 2014 / 9:27 AM / 3 years ago

Phones 4U PIK in free fall on Vodafone news

LONDON, Sept 1 (IFR) - Phones 4U’s deeply subordinated payment-in-kind note lost more than 50 points on Monday after the UK phone retailer announced that key partner Vodafone would not be renewing its network agreement.

The company, majority-owned by private equity firm BC Partners, put the PIK in place in September 2013 as well as £25m of cash on balance sheet to pay its owners a £223m dividend.

The Vodafone contract, which ends in February next year, was crucial to the business. 27% of the retailer’s post-pay connections and 16% of its pre-pay connections were made with Vodafone in the last 12 months to the end of July.

That translated into £212m of revenue and £18.5m of Ebitda over the period. One high-yield investor said the company generated just over £100m of Ebitda last year.

The £205m 10% 2019 PIK toggle was issued at 99 to yield 10.25% last year, and was bid as high as 103 in January as rumours of an IPO swirled.

The investor saw the notes quoted at a bid of 52 at 8:15am on Monday morning, a drop of 35 points from their opening price.

The bid collapsed even further as the morning progressed. The bonds were quoted as low as 30 by 10:00am on Tradeweb, less than a third of their face value.

The company’s £430m 9.5% 2018 senior secured notes also fell, losing 20 points to 80 bid.

“It is very bad news,” the investor said.

“There have been hints at the struggle throughout the year. Their delayed partial bond redemption was a canary in the coal mine, and when Carphone Warehouse tied up with Dixons it began to raise questions of their viability as a standalone entity.”

Phones 4U indicated to investors last year that it was planning to repay some of its senior secured bonds. Those became callable at 104.75 in April, but the repayment has not materialised.

The Vodafone news caps a torrid year for holders of the PIK notes. In January mobile operator O2 dropped Phones 4U as a retail partner, but even more damaging was the news in February of rival Carphone Warehouse’s merger with electronics retailer Dixons.

The merger, which has since completed, was described by one investor as “a slap in the face for Phones 4U”. The company had a partnership with Dixons allowing it to operate store-in-stores in more than 150 Currys and PC World outlets.

The latest news leaves the retailer in a particularly precarious position. Its only remaining network agreements are with EE - which comprises T-Mobile and Orange - and Virgin Mobile. EE is the UK’s biggest mobile operator, and the company announced in June that it is reviewing sales through third-party retailers.

BC Partners held 91% of the company’s equity when the PIK was issued, with management owning the rest. (Reporting by Robert Smith, Edited by Helene Durand, Julian Baker)

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