Further evidence, as if any were needed.
From Thursday’s half year results statement from Mitchells & Butlers, owner of the All Bar One and Harvester chains:
Since the half year end the long term interest rate swap held against the medium term borrowings has been settled at a net cash cost of £69m post tax.
Long term debt in line with the 28 year swap is not now commercially available and with a swap termination clause in 2010 it is therefore appropriate to settle this liability using a medium term loan agreement with an initial value of £75m. This transaction will give rise to an enhancement to profit of £5m in FY10 as interest rates on the facility are based on short term rates, which are currently below 2%, as opposed to the previous 5.5% fixed by the swap.
As reflected in the financial statements, the swap had a pretax mark to market loss at 27 September 2008 of £40m which had subsequently increased to £95m as at 11 April 2009 due to lower long term interest rates.
And from Note 12 of the results statement
As at 11 April 2009, the Group held swaps (‘the £225m swaps’) which had an initial notional principal of £225m and a maturity date of 15 September 2037 against its medium-term borrowings; these included a mandatory early termination and settlement provision in December 2010 and did not qualify for hedge accounting. On 11 March 2009 the Group acquired forward starting swaps to limit the exposure of the fair value of the £225m swaps to further reductions in long term interest rates. These substantially fixed the economic fair value of the £225m swaps. The forward starting swaps had a start date of 15 September 2009, following which the Group would have paid LIBOR and received fixed rate interest of 3.6617% and included a mandatory early termination and settlement provision effective on 15 September 2009.
On 20 May 2009 the Group agreed to settle the £225m swaps and the forward starting swaps at their fair value of £(96)m. The movement in the fair value of these swaps during the period was £(55)m before tax, disclosed within IAS 39 movements in note 4.
Cofused? We are.
The swaps were, of course, taken against interest rate and inflation fluctuations to underpin a property joint venture deal with R20, the investment vehicle of Robert Tchenguiz, the ex-property entrepreneur. This was back in the boom times, when you may recall OpCo/PropCo models were all the rage.
Refreshingly, someone has paid the price for these fresh losses.
In the light of the crystallisation of the swap loss, Tim Clarke has tendered his resignation, which has been accepted. He will leave Mitchells & Butlers by mutual agreement. Adam Fowle, currently Chief Operating Officer will become acting Chief Executive as the company carries out a thorough process to review the best candidate for the Chief Executive role.
In fact, Clarke is the second person to lose his job over these disastrous swaps – an earlier loss of £391m saw last orders called on finance director Karim Naffah.
The question is now – who would want to be CEO of M&B?
Not only is the pub operator struggling under £2.6bn of debt but take a look at it two biggest shareholders: Joe Lewis, the currency billionaire, owns around 23 per cent of the company, while Elpida, an investment vehicle controlled by Irish tycoons John Magnier and JP McManus, own 16 per cent.
Not exactly pliant long-only institutional investors are they?
Related link:
M&B chief quits over derivatives losses – FT