SWAP Restructure Completed

RNS Number : 6056U

Premier Foods plc

19 October 2010

 



PREMIER FOODS PLC

FINANCIAL STRATEGY UPDATE - SWAP RESTRUCTURE COMPLETED

19 October 2010

·    An important step toward delivering a more stable financial structure

·    A substantial reduction in risk and volatility in the balance sheet

·    Opens the way to diversifying sources of funding

In August 2010, Premier Foods plc announced its financial strategy.  A key part of this strategy was to restructure and de-risk its interest rate swap portfolio.  Premier Foods plc is pleased to announce that, in line with this strategy, it has completed this restructuring. 

The restructuring achieves de-risking by considerably shortening the maturity of the portfolio, removing early termination options and eliminating the volatility of the digital swaps.  The cost of the restructured swaps is a gross cost of £167m in line with the current mark to market.  The Company has agreed a settlement profile of this amount between now and 2013 which the Company believes is affordable given its strong cash generation. 

Under the existing swap portfolio certain of the swaps had maturities extending to 2037 and a portion of the portfolio had the effect that, as interest rates fell, the interest cost of that portion increased without any offsetting reduction in the cost of the Company's bank debt.  The swaps thus created an unhedged exposure to certain interest rate movements which could have cost the company up to £450m.  In return for agreeing to pay the current mark to market cost of £167m, the restructuring removes this risk. 

The portion of the swap portfolio which does not provide an economic hedge had a negative mark to market value of £151m gross of tax as at the end of June 2010.  At the time of restructuring the swaps, the negative value had become £167m.  The agreement the company has reached turns £47m of this element into an economic hedge and removes the risk on the remaining £120m by crystallising the mark to market at this level. 

The crystallised mark to market will be settled between now and 2013 when the bank facility is due for renewal.  Accordingly, £8m will be paid in 2010, £33m will be paid in 2012 and the remaining £79m will be become due at the end of 2013 and, in effect, will be refinanced at that time.  The settlement payments on the restructured swaps will attract tax relief as they are settled and are ignored for covenant purposes.  Covenant headroom remains ample.

The remaining swap portfolio provides an economic hedge to the company's bank debt.  This hedge converts the floating interest rate on £1,075m of bank debt to 6.2%.

The de-risking achieved through the restructuring now facilitates the Company's seeking a credit rating which, in turn opens up the possibility of raising funds in the bond market.  The Company intends to investigate this avenue as part of its strategy of diversifying its sources and maturities of funding. 

Jim Smart, Chief Financial Officer said:

"The restructuring of the swap portfolio is an important step in delivering a more stable financial structure.  Its successful completion removes a considerable amount of financial risk and volatility from our balance sheet.  This, together with the pensions changes announced in August 2010, achieves substantial progress towards the de-risking objective of our financial strategy and opens the way to diversifying our sources of funding."

For further information:

Premier Foods plc	[phone]
Jim Smart, Chief Financial Officer
Gwyn Tyley, Director of Investor Relations and M&A
Maitland	[phone]
Neil Bennett
Emma Burdett
Brian Hudspith

Effect of the Swap Restructure

Prior to Restructure

Prior to the restructuring, the swap portfolio was as follows:

Mark to market of financial Instruments	Nominal Value £m	MTM £m
		Jun 2010	Oct 2010
Economic hedging element
Conventional swaps	400	(35)	(34)
Long dated swaps	400	(33)	(33)
Digital swaps	275	(23)	(25)
Sub total - future economic hedging interest	1,075	(91)	(92)
Non economic hedging element
Long dated swaps		(61)	(73)
Digital swaps		(50)	(53)
Other financial instrument	150	(40)	(41)
Sub total - future additional interest		(151)	(167)
Total	1,225	(242)	(259)

The economic hedging element provided a hedge against £1,075m of the bank debt swapping LIBOR for 5.1%.  Any change in LIBOR thus has an equal and opposite effect on the interest payable on the bank debt and the swaps.

The non economic hedging element resulted in additional interest being payable if LIBOR fell below certain thresholds.  This amount was not offset by any change in interest on the Company's bank debt.  It was also volatile as it changed depending on changes to the future interest rate yield curve.  If, for example, the interest rate yield curve fell to 70bp through to 2037, this would have increased the mark to market cost by a further £278m, i.e. making the total cost £445m. 

The anticipated settlement schedule of the non economic hedging amount also reduced the Company's covenant and liquidity headroom in its banking facility which is agreed until 2013.

Profile of additional interest on non economic element of swap portfolio	2010	2011	2012	2013	Total	Addl risk
Long dated swaps			58	15	73	249
Digital swaps	6	22	18	7	53	19
Other financial instrument	1	2	38		41	10
Total	7	24	114	22	167	278

Notes:

This table shows the settlement of the October mark to market and hence excludes £16m of additional interest paid in first three quarters of 2010

Additional risk shows indicatively additional interest becoming payable if LIBOR yield curve flattened to 70bp through to 2037

Effect of the Restructure

The swap restructuring achieves the following:

Long dated swaps:  the duration of the long dated swaps are shortened to 2013 in line with the bank debt maturity.  The mark to market of the period after 2013 is crystallised and will be settled in 2013.  The earlier optional termination dates envisaged in the previous swap structures have been removed.  This provides some additional economic hedging for 2013. 

Digital swaps:  the previous digital swaps are converted into conventional interest rate swaps.  This removes the risk in these swaps if interest rates do not increase as envisaged by the current interest rate yield curve.  In effect, it spreads the current mark to market of the additional interest evenly over the period to 2013.  This provides some additional economic hedging for the bank debt. 

Other financial instrument:  this instrument has not been restructured.  This is a settlement arrangement arising from a previous long dated swap which expired in 2009.  The amount of risk arising from this transaction is minimal at around £10m.  An amount of £7.5m has been settled to achieve permission for the restructure of the remainder of the swap portfolio to take place.  The remaining mark to market value will be payable in 2012.

The swap restructuring, and consequent covenant amendments, needed permission from a majority of the 31 banks in the banking group.  It has been approved by 100% of the banks and, in return, the Company has paid a fee of £8.6m which will be amortised over the period to 2013.

As a result of the restructuring, the £167m non-economic hedging element is split into two parts; an additional hedging component and a fixed settlement amount.  The additional hedge amounts to £47m and increases the hedge cost on the £1,075m of nominal swaps to 6.2%.  The remaining £120m is crystallised and the revised settlement profile is as follows:

Profile of settlement of fixed swap settlement	2010	2011	2012	2013	Total	Addl risk
Long dated & digital swaps				79	79	0
Other financial instrument	8		33		41	10
Total fixed settlement	8	0	33	79	120	10
Additional hedging element	3	12	14	18	47
Total	11	12	47	97	167	10

The total amounts payable on the restructured swaps will be shown in the balance sheet as 'Other financial instruments held at fair value through the profit & loss account'.  The amounts paid against these instruments will be shown as 'Amortisation of Financial Instruments'.  They will be shown in the interest line and will attract tax relief.  The fixed settlement element will be excluded from Regular Interest for calculation of Adjusted Profit and Adjusted EPS. 

Revised Swap Portfolio

The revised swap portfolio is as follows:

Conventional swaps	Nominal £m	Maturity	Rate %
Cap & collar	350	June 2012	5.75
Vanilla	50	May 2013	4.60
Vanilla	100	June 2013	5.00
Vanilla	575	Dec 2013	6.87
Total	1075		6.21

Effect on Regular Interest

Regular Interest will change as the previous additional interest payable on the digital swaps is replaced by the interest on the additional hedging element.  Based on the current yield curve, regular interest would change as follows:

Change to Regular Interest	2010	2011	2012	2013	Total
Remove previous digital swap additional interest	6	22	18	7	53
Add additional hedging interest	(3)	(12)	(14)	(18)	(47)
Amortisation of restructuring fee	0	(3)	(3)	(3)	(9)
Net decrease / (increase) in Regular Interest	3	7	1	(14)	(3)

Effect on Covenants

The Company's debt covenants as reported at the half year and for the future are as follows:

Covenant headroom	H1 2010	2010	2011	2012
Covenant indebtedness	1,366
Covenant EBITDA	364
Covenant interest	138
Covenant tests:
Leverage test	3.75
Maximum limit	4.50	4.50	3.90	3.45
Headroom	17%
Interest cover test	2.64
Minimum limit	2.25	2.40	2.75	3.30
Headroom	17%

Previously, the definition of interest included settlement of additional interest on the swap portfolio.  At H1, 2010, this amounted to £21m and was included in the £138m of covenant interest.  This artificially reduced the headroom available against targets which were set without regard to these payments.  The new agreement excludes payments on the restructured swaps from the covenant definition of interest. 

In the event of a bond issue, proceeds would be applied to settle a proportion of the bank debt and a portion of the crystallised settlement amount otherwise due in 2013.  Depending on interest rates at the time such a bond issue is made, interest payable might increase in the short term.  In this event, the banks have agreed that the interest cover covenant will be adjusted to reflect any incremental interest payable on a bond compared with the interest payable on the bank debt it would replace. 

The amount shown in 'Other financial instruments held at fair value through the profit & loss account' does not rank as debt for covenant purposes.  However, its settlement increases net debt.  As with interest, this was not envisaged when the leverage covenant limits were set.  In order to restore headroom to the level envisaged at the outset, the Company has agreed that the amounts settled from 'Other financial instruments held at fair value through the profit & loss account' will not increase net debt for the purposes of the leverage covenant test.   

 

END

 

 

MSCFFMSIUFSSEDS