Member Info for Hounddog10

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Hi Darbo

Yes from time to time I have also looked at BT, primarily because of the dividend so a few comments. Yes it has monstrous debt - in fact if you include the pension deficit, leases and commitments it is £31.8bn (page 55 of the annual report). BT generates strong operating cash flow (last year - £6.7bn) to service the debt but at the moment it has big cash capex outflow (last year £5.7bn) to upgrade its network to fibre. Once other amounts eg interest on loans/bonds, dividends which had to be paid BT needed to raise a further net £1.7bn borrowings in that year (see cash flow on page 154).

The pension fund deficit may get substantially better as by mid next year there will be a new triennial valuation based on the 30 June 2023 position. Rising interest rates are radically reducing pension deficits. However, the current plan is that they pay £780m a year to get rid of the deficit.

In short the debt, capex spend and pension deficit are real burdens and debt will likely rise until BT finish (in 2026) revamping the majority of their network with fibre. Thereafter, if business holds up, they should be able to repay the debt quite fast as capex spend will substantially fall away and probably the pension deficit will be sorted.

https://www.bt.com/bt-plc/assets/documents/investors/financial-reporting-and-news/annual-reports/2023/2023-bt-group-plc-annual-report.pdf

The two new Eurobonds, which each had a prospectus, were underwritten on 12 September. Barring extremely limited circumstances (essentially force majeure) this was when IDS unconditionally got the Eurobonds away. The underwriting is done by the syndicate banks subscribing (buying) the bonds and then selling them on to the end investors and within the process taking a margin. The banks are normally only on risk for a couple of days and although the prospectuses are not explicit it seem clear the Eurobonds were listed on 14 September. They can be seen on the LSE’s webpage for IDS (click on “four more instruments” on the right hand side).

https://www.londonstockexchange.com/stock/IDS/international-distributions-services-plc/company-page

I think this is where we are at:

- €135.5m of the €500m 2.375% July 2024 Eurobond has been repurchased leaving €364.5m outstanding

- Two new Eurobonds have been issued:

€500m 5.25% 2028

£250m 7.375% 2030

It is strange that so few of the 2024 bondholders accepted the tender offer especially as the bonds were being redeemed at near par, they were given priority for the new bonds and the new bonds have much higher interest rates. However, the bondholders will have overarching portfolio investment strategies, quite possibly using derivatives, which may mean it does not make sense for them.

The €500m 2028 eurobond essentially replaces the €500m 2024 Eurobond and IDS will be flush with an extra €364.5m of cash for ten months until they have to repay the remaining outstanding 2024 Eurobonds in July 2024.

The £250m 2030 sterling Eurobond is the additional amount of cash raised and amount borrowed.

The backstop facility to the £900m undrawn loan facility is being retired (per the Eurobond prospectuses). The same syndicate of banks that provided the backstop facility is underwriting the Eurobonds so I suspect it was always the intention to issue these new Eurobonds if they could be got away and retire the backstop. The prospectuses are silent on the main £900m facility so I should imagine that remains.

At 31 March 2023 IDS had £773m of cash (net of overdraft) plus around £100m of deferred sales proceeds from the sale of Nine Elms and Mount Pleasant (nearly all to be received this financial year). On the borrowing side it had the €500m 2024 Eurobond, the €550m 2026 Eurobond and £1,319m of lease commitments. There are other bits and pieces of cash and borrowings but those are the big numbers.

So with the loan facility and sterling Eurobond (and ignoring operating losses so far this financial year) IDS will have around £2bn of cash and money it could borrow (obviously debt goes up if IDS draws on the facility). It will have about £2.5bn of Eurobond borrowings and leases. (I am ignoring the temporary additional €364.5m cash in the cash and borrowing numbers).

Overall, this seems to have gone well for IDS. They have extended the maturities of their borrowings, got some extra cash and borrowed at some decent rates given current base rates. They will, however, suffer an extra £30m of interest costs per year and they have increased their leverage.

They are financially secure for the moment but need to get the operations sorted.

The CWU’s financial position looks to be getting a little more difficult. In its December 2022 return it actually showed 2,000 more members at 186,000 but membership income down a few hundred thousand (possibly due to retired members no longer subscribing?) It made a £1m deficit in that year and in addition had to put in £2m of deficit reduction payments into the DB pension scheme. So cash fell by about £2m to £15m. In addition, they still have £5m of quoted investments and £5m of unquoted investments.

This sounds quite a bit of cash and liquidity but effectively they are burning through £3m a year in deficit and pension deficit reduction payments. Any material reduction in members will make life much more difficult. Interestingly, they have put in a rather strange (and voluntary) note (note 26 on page 24) on their pension deficit pointing back to the 31 December 2020 last actuarial valuation of a £32m deficit rather than the 31 December 2022 £12m deficit. The £12m is the balance sheet accounting position which is based on much more lenient actuarial assumptions than the pure actuarial valuation (which is used to determine funding requirements). I suspect the CWU are over exaggerating the position as deficit payments since 31 December 2020 have gone in and interest rate hikes will have brought down liabilities but they are clearly saying that, despite their cash and investments, the CWU’s financial position is not good.

It will have some ramifications for the union’s attitude to job losses in RM and BT.

I wonder how they are getting on selling their HQ and whether they will get anything like balance sheet carrying value for it. I wouldn’t have thought there is an easy market for offices above a shopping centre.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1176126/743T_2022.pdf

Oligarch

I see it in the same way as you do - Mon/Wed/Fri seems sensible. Similarly, as you suggest, I am not really sure first class is needed. I think Royal Mail is trying to price it out of existence. Although I cannot find any numbers as to how much of RM’s letter volumes are first class I suspect it is not that much and certainly not worth it for them. I struggle to understand who, today, needs first class mail (which only “aims” for next day delivery) on a general basis. A much more important aspect I think is being tracked (eg for passports, driving licences etc) and there is Tracked 24/48 for that, albeit a good deal more expensive (but for the customer a fairly rare cost). And the DVLA is looking to moving licences to an app, starting with provisional licences in 2024.

I think there are some indirect signs that business volumes are under stress, viz:

- Evri substantially increasing staffing

- attempted pushback of extended working hours

- premature refinancing of the 2024 Eurobond

- Ofcom accepting a review of the USO so soon after such a move being rejected by Shapps

If Ofcom do accept revision to the USO I hope it will go further than just dropping Saturday. That ship sailed quite some time ago in my view. RM needs to go to a USO that is viable for a few years or otherwise there will be constant chopping and changing to work patterns with all the disruption and arguments that creates.

I got the feeling from the last webinar that Eric may stay a little longer. One problem in getting a new CEO may be that they will probably think there is a high chance that they might not be in the job very long.

I am not entirely clear why they are doing this tender offer. They are retiring as many of the €500m July 2024 eurobonds that bondholders will sell back to them and then will be reissuing new euro and sterling denominated eurobonds (amount will depend on how much of the existing Eurobond is retired). Companies do retire their debt by tender but it is somewhat unusual to retire their debt only to reissue it immediately.

I think the backdrop is probably the £925m undrawn loan facility which I am sure would have been used in whole or in part to repay the €500m 2024 Eurobond. This has been messed around with quite a bit through covenant relaxations to accommodate RM’s deteriorating financial position. Although IDS said (at 31 March 2023) that they were currently well within covenant requirements there must have been concerns going forward that the loan facility might not be available (due to being outside covenants) because they put in a backstop facility specifically to repay the €500m Eurobond without having recourse to the loan facility. The backstop facility can go out to July 2025 before repayment is required and is on the same terms as the loan facility.

So stepping back from it, two means of repaying the €500m Eurobond had been put in place. And the loan facility and the backstop facility are both very expensive with new financial terms as a quid pro quo for covenant relaxations . Now, if more than a third of the loan facility is used or there is an (unspecified) increase in group leverage then the interest rate moves to SONIA + 2.35% ie c7.6% at the moment. (This is disclosed on pages 214-216 of the annual report).

My guess is that this restructuring into new debt is a reflection of the fact that they now think they would have to use more of the loan facility and for longer than previously anticipated, and so they want to avoid that and at the same time stretch out the term of the Eurobond debt to a much longer maturity. It is also conceivable that they think that the loan facility would be unavailable to them (as outside covenants) and they would have to fall back into the backstop facility which, as indicated, only goes to July 2025.

It seems to me that it is a sign of increasing financial stress in the business ie more forced than voluntary. It may also reflect a view that raising debt for UK companies may be much more difficult next year and beyond (possible recession, Starmer etc.) so do it now to be safe.

The €500m Eurobond repayment was always going to be problematic.

Provided results hold up I would be confident that there will be a buyback next year of probably £2.5bn, perhaps even £3.0bn. They don’t want to be carrying surplus capital with Starmer & Co on the horizon. In any event they have said that they will distribute surplus capital (ie anything over 13.5% CET1) by end 2024 financials. Effectively therefore on the announcement of final results in February 2025. I think it is possible that they might start the process of distributing surplus capital on the interims next year.

It might be remembered that there is a rule on buybacks that the buyback purchase has to be done at a price under the last independent price. Effectively, this means that buyback purchases are much more easily effected where the share price is declining and quite difficult where the share price is consistently rising. In the two buybacks they did in the years pre COVID they were unable to complete the whole intended buyback. If this was to happen again I would imagine they would make a special dividend of capital that had not been distributed under the intended buyback programme.

Https://www.politico.eu/article/uk-politicians-raid-bank-profits-windfall-tax-general-election/

From The Times today:

https://www.thetimes.co.uk/article/surge-in-parcels-set-to-deliver-5-000-jobs-at-evri-0cchhj0lc#:~:text=Evri%20plans%20to%20employ%20more,year%20to%20more%20than%2010%2C000.

“Evri plans to employ more than 5,000 additional workers in Britain as the parcels delivery boom shows no signs of slowing.

The hiring spree at the rapidly growing company will take the number of jobs created by Evri this year to more than 10,000……”

Basic message is that they are expanding workforce from (presumably) 19,000 at beginning of year, to the 24,000 now, up to 29,000 by the end of the year.

I would be doubtful this reflects growth in the parcels market but that Evri is taking market share.

DerekRocholl

Thanks. I had a feeling RM did not have a locker proposition. I thought I read somewhere that the Post Office is starting to roll out some lockers and that would be an obvious tie up. It will take several million lockers to make a severe dent in delivery to the door and I think only thousands per year are currently being put in place each year. But it is another headwind.

Oligarch. Yes it is a good point. In the past they seem to have bought outright their motor vehicles. In 2020/21 - £99m of additions, 2021/22 - £125m versus £31m of leased vehicle additions for each of those years. In 2022/23 that mix changed quite significantly with £65m bought and £45m leased. Probably to conserve cash in the near term. Of course in the longer run they end up paying as much if not more by leasing.

It is not very clearly worded but I think the 2024 EV deadline is for the Blackpool area not RM as a whole. I did have a bit of a look at this a while ago to get an idea of future capex needs now that the hubs and parcel machines are paid for. I think RM uses Peugeot vans and the EV version seems to be around £27K. Can’t remember if that included VAT which they should get back and they will probably get a bulk discount. Anyway, almost 40,000 vans at £25K each is £1bn for the vehicles alone. So they will probably go at around no more than 4-5,000 vans a year. I don’t think they can afford much more than £150m total capex per year and they have other capex needs.

The Pitney Bowes report is interesting in that parcel volumes are likely to not rise much and that Amazon is taking market share quite consistently. The reference to lockers is also interesting as I suspect the market will move in that direction. IDS said that in GLS they are putting investment into lockers. Whether financially lockers are better or worse for RM I don’t know but it certainly will reduce staffing needs if they become widespread.

Something very strange is going on here. There seems to be a major board bust up over something (remember also that non-exec & investor Shaun Robinson also resigned about a month ago and that the recent trading update was slightly late which might indicate there was dispute over something). However, the shares have been active and rising quite sharply over the last few days in a quiet time of the year. There seems to be a consistent buyer in the background which is presumably why on this bad news the share price has not collapsed.

Baffling.

Thanks for the link. Got the impression that Eric might stay on a tad longer. July slightly ahead of schedule he said. There may be a possibility of closer to $80m EBITDA for this year. Hope that doesn’t jinx it.

Nunn does have a strategy which is to grow other income by £1.6bn by 2026 through focusing on wealth services and the Citra property venture. I have to say I don’t find it particularly exciting but it will probably do OK. He has hinted that we should start to see some tangible results next year.

The raw truth on Lloyds is that there is not much that can be done with it easily given its market size. Shareholders have to accept that. What it should increasingly become is a dividend machine as legacy issues clear away and share count comes down. Legacy issues are cleared or clearing eg big extra capital requirements now done, pension deficit contributions almost done (we should know shortly), HBOS Reading seems cleared, IFRS 17 implemented for full year by end of this year. PPI (Plevin) ), Visa/Mastercard litigation and £1bn tax case should become clearer in the next six months and likely dealt with by mid/end 2024. So uncertainties which can cause big one off costs are being cleared away with the only major new one being litigation on the motor business.

Longer term it is about reducing staff numbers, consolidating offices, closing branches and benefiting from not having to handle cheques and cash as they disappear (hopefully cash will not completely disappear but the trend is clear). Further, a great deal of money (one estimate is £800m) can be saved by revamping core IT systems which are ancient. AHO used to focus on this and although they are now spending even more money on software they have gone rather quiet on what they are up to. I tried looking on Lloyds’s website for information but could only find an uber woke video of the IT department with the expected cast of characters explaining what they do which included eliminating “problematic” IT terminology. This pleased me greatly as this would be a sure fire win to enhance shareholder value.

I would be very doubtful that they will pay any dividend this financial year. I think they will want to see how the changes in RM pan out plus impact of the increase in cost of living on, particularly, parcels. They then have c£400m of Eurobond to repay in July 2024. So I would think that the first time they would consider it would be at the 2024/5 interims (mid Nov 2024).

Prior to Covid, strikes etc the dividend had got to around 25p for the year. They have said about two thirds of past dividends have come from GLS. So assuming RM stabilises and is not cross subsidised they could probably go back to, say, 15p dividend for the year. And GLS is a stronger business now.

Thank you NicetoMichu. Kind of you to say so. Something is up today - so maybe we will be getting some news.

In the last but one webinar Eric said Ramula estimated to cost $125-150m and that WK likely to develop as a hub and spoke operation. Presumably Ramula as hub. I think he said it was doable to truck from Bushi/Insulu if/when that is developed. Eric said initial production from Ramula would be somewhere between NLGM and Singida - so say 50,000oz. Also said that there would definitely be no placing to fund WK and they would be looking for innovative funding, probably streaming I would assume in addition to debt, where outside finance was needed.

Permitting and resettlement will be major issues. Permitting, I imagine, may be arduous as the various politicians try to extract what they can from the process.

The new CEO may have other ideas.