Sirius Minerals announced on Tuesday that it had pulled a planned $500m bond sale, blaming “difficult market conditions”. The bond was marketed to institutional high yield accounts in July, but failed to secure demand for the issue, with the company announcing that it would try again later before its money runs out at the end of September. It had wanted to add warrants to the package and sweeten the deal, but this had been stymied by JP Morgan, arranger of the package, which wanted to see all-in yields below 15% to give it comfort on subsequent refinancing.
But now the UK mining company has admitted that the bond is not going to happen. The failure of the high yield issue also brings the rest of the company’s financing package down. Convertible bonds, sold earlier in the year with the proceeds placed in escrow, will have to be paid back. A planned $2.5bn credit facility, which would fund construction of the company’s mine and extraction infrastructure, mostly a long tunnel, will now be scrapped.
That leaves the company’s future in tatters. It said in an announcement that it would have to slow construction of its mine infrastructure, allowing it to eke out its existing liquidity for a six month review period, during which it would seek alternative financing sources. It has already been rebuffed by the government, which it hoped would support a funding package. A distressed takeover or a government rescue (the firm employs about 2,000 people in a deprived area of the country) are the only likely routes forward.
For high yield buyers, this isn’t a huge shock. The fact that market conditions in general have never been better, with new rounds of central bank easing fuelling record low coupons for leveraged issuers, does not mean that the market was there for Sirius.
Bond and loan investors are cashflow lenders. A growth story is nice, but they only stand to earn par plus the fixed coupons. They want to see debt servicing capacity. Sirius, however, had nothing much to secure its bonds on. No mine and no extraction tunnel meant no revenues — and a leap of faith required from creditors. Hence the demand for warrants, which would have given bond buyers some upside.
For retail stockholders invested in Sirius, a few phone calls to bond buyers — or even a casual perusal of some corners of credit Twitter would have made it pretty clear that even a revamped bond offering was unlikely to succeed.
But more likely, shareholders would have relied on an echo chamber of day trading sites, with The Motley Fool, for example, publishing an article saying the company “could either plunge to zero or multiply in value several fold... I’m even tempted to risk a further small amount”.
Even on Tuesday this week, retail brokerage Hargreaves Lansdown, whose clients form the largest part of Sirius’s shareholder register, managed to find an optimistic note, saying that “investors will be somewhat pleased to see sales agreements increased in the [half year] — these are important for attracting future funding.”
However, it did at least say that “Sirius continues to be a company that carries significant risks”, while The Motley Fool acknowledged “the risks now outweigh the rewards by some distance… my advice to battle-worn Sirius investors is to sell out while the stock is still worth something”.
For regulators, this poses a problem. Much of the post-crisis regulation has focused on which products financial intermediaries can push to retail buyers, and the information they might need to make investment decisions.
Bank capital is supposed to be firmly out of retail hands (mostly to make bank recaps less politically toxic), structured products are strictly managed and limited, while products such as high yield and securitization remain resolutely institutional. Corporates wanting to sell bonds to retail must clear higher hurdles in disclosure, and prepare a “Key Investor Information Document”, on the assumption retail investors won’t read or understand a full prospectus.
Yet, given a free hand, retail buyers run headlong into some of the riskiest assets available. Sirius’s all-or-nothing business plan was a gamble — and that meant returns could be through the roof. The longstanding popularity of oil exploration companies such as Cairn and Tullow with the retail crowd scratch the same itch. Amateurs can spend happy hours educating themselves about geological formations in Guyana, or the mechanics of tunnel boring, and kid themselves that, when their bet pays off, it was all down to investing skill.
As John Paul Getty’s formula for success went: “Get up early, work hard, strike oil.”
Regulators have no duty to stop investors losing money — risk-bearing capital is a vital part of the system, and there is no excuse for restricting profitable investing opportunities to those who are already wealthy.
But they can help small investors help themselves. In the UK and Ireland, the consolidated Regulatory News Service — where all listed companies announce market-moving information — is partial and incomplete, especially where institutional credit markets are concerned.
There’s a steady stream of spam about fund NAVs or ever-changing concentration disclosures from specific banks and brokers. But you would look in vain for accurate information on the progress of most financings in institutional markets, which are announced, if at all, on closing. It’s laughably easy to find details of director share dealing, but a huge chore to find even basic details on a company’s capital structure. Put simply, it has virtually none of the information about the things that actually end up breaking companies.
Retail investors will always want to spin the wheel and buy stock in companies such as Sirius — and it’s almost impossible to stop them. But one thing that is achievable is to make sure they have the same access to information as their professional counterparties.