13 December 2012
Many retail investors will have seen offers for the new debt securities by MYOB – the accounting software company recently taken over by a private equity group led by Bain Capital. The securities are subordinated notes with a term of 5 years and an eye-popping yield of 6.7% above the bank buill rate (and set at 10% for the first 12 months).
High yields should generally ring alarm bells and these MYOB subordinated notes are no exception.
Investors should ask three basic questions for any new issue:
- Who is the issuer?
- Why are they issuing?
- What is the structure of the issue?
If the answers are not sufficiently favourable, the issue should be avoided no matter that yield is on offer.
The answers here are:
- the issuer is a private equity controlled entity – never a good sign
- they are issuing in part to pay down MYOB’s senior debt facility but more importantly to repay some equity to the new owners of the company – definitely not a good sign
- the issue is structured as subordinated debt, ranking behind all senior debt (quite substantial) with very limited ability to trigger an event of default if things do not go to plan – also not a good sign.
In our view, three strikes and you are out – no need to go any further. This is not a deal for the faint hearted and one best avoided despite the attractive yield.
For those who need further convincing, we urge you to read this article from the Eureka Report highlighting the perils of being a subordinated debt holder in a highly leveraged company where 94% of the assets are intangibles!