Life’s a beach (or not)

Ah, the holiday season. Dreams of surf, sea, sand – and soggy share prices, or so it must seem to the bewildered shareholders in Thomas Cook. The travel agent’s “amendment to bank facilities” on 21 October lasted just 38 days before the business fell into the arms of its 17 banks, who put up £200m in emergency funding to tide it over until the summer.

This week we learned the full horrors of why the money was so desperately needed. Exceptional charges totalled £573m. The balance sheet is shot. The Cooks were keen to emphasise that £428m was non-cash writedowns, but that’s just another way of admitting that past acquisitions and investments were a waste of money.

The (interim) chief executive promises a turnaround plan, following an assault on the thesaurus. “The plan is intended to optimise the UK airline, refocus product strategy, improve yield management, rationalise distribution and improve operational efficiency.” Well, let’s hope so. At 15.9p, the market value of this £10bn-turnover business is just £130 million, and Panmure expect debt to reach £3.5bn at the seasonal peak. No wonder the brokers reckon the shares are worth just 10p of option money.

Thomas Cook remains one of the best names in the business, and it’s unlikely that many readers of The Sun will have worried about the details of refinancing. The Brits will still want their Sangria on Sea when they can next afford it, since increasing affluence leads to more travel. Unfortunately, increasing affluence could be a decade away. By then, the travel agency business may have been reduced to a mobile app – everywhere in the world you’ve planned to go, your phone will tell you what to do next, and who’s expecting you. Not much margin there for the intermediary.

Not so grim Up Northern

One of my worst investments in recent years is Northern Rock. No, not the shares, which collapsed so quickly that even the bargain-hunters hardly had time to get in, but the splendidly-named Northern Rock 12.625 per cent Perpetual Subordinated Unsecured cumulative loan stock. At least that’s what it was called at the time. It had metamorphosed from the Permanent Interest-Bearing Shares of the old Northern Rock Building Society, and at £80 per cent it looked like a bargain.

It wasn’t. The Crock was butchered by UKFI. I got a couple of fat coupons, then everything stopped and the price collapsed to around £20 per cent. The prime cuts of Northern Rock have since been sold to Richard Branson (he’s mostly using other people’s money, as usual) so you’d expect the rest to be offal and some mechanically recovered mortgages.

Yet as the FT’s Charlene Goff points out the carcase of Northern, plus that of Bradford & Bingley, have delivered a £300m book profit to HMG, following a tender for some of these old securities which closed this week. The sale to Branson incurred a loss, so the bad bank has been a better bet for the taxpayer than the good one.

So far, it’s not been a great bet for me. The 12.625 per cent were not in the tender process; a year ago UKFI had generously offered £33 per cent, alongside such gloomy warnings about the future that I decided to hold on. Since then UKFI’s Keith Morgan has done a fine job paying down the government’s £20bn rescue loan, and working through the £80bn of mortgages. He announced his departure this week. Yet banking is a funny business, and patience may well be rewarded. I don’t expect to see par on my holding any time soon, but the price has recovered to £46 per cent, and I’m not selling.

More nonsense on pensions

They cannot be serious. The latest report from the Pension Protection Fund shows an alarming plunge into the red. At the end of last month, the deficit on the 6,533 schemes it covers jumped to £222bn from £159bn at the end of October. So what happened to make things £63bnworse in a single month? More rogue employers? Meltdown in the markets? Shocking new longevity numbers?

None of the above. The deficit widened because the market value of the assets in the funds went up. If you owned something that went up in price, you’d probably decide you were richer. Thanks to the nonsensical way the actuaries do their sums, a rise in bond prices (with the corresponding fall in yield) means the opposite, because their calculation of the present value of future liabilities is greater.

When it comes to shares, the boffins take the opposite, common sense approach, and decide that a share is worth what the market says it is worth. No fancy discounting of future dividends here, thank you. If the price of a share goes down, the yield may go up, but the actuaries argue that the move signals a question-mark over future payments. The baleful result is that today’s actuarially-calculated value of these longest of long-term funds swings about all over the place. On the downswings, companies are obliged to pour cash into their pension funds, rather than investing it in the business to secure a long-term future.

The pressure from the actuaries to invest in bonds, and preferably the “risk-free” bonds issued by the UK government, is impossible to resist, as successive regulations have pushed pension claims further up the creditors’ pecking order. So rather than provide the risk capital on which economic growth (and the ability to pay pensions) depends, funds are steady sellers of equities. Yet consider the postion of a pension fund entirely invested in gilts; its sole asset is a call on future taxpayers, on a par with the unfunded liabilities to, say, civil servants. What’s the difference?

This entry was posted by Neil Collins on Saturday, December 17th, 2011 at 7:21 and is filed under Capital markets, M&A, People. Tagged with Bradford & Bingley, Keith Morgan, northern rock, Pension Protection Fund, richard branson, thomas cook, UKFI. Edit this entry.