THINKING OUT LOUD

Neither a borrower nor a lender be

The genius of James Packer continues.

The genius of James Packer continues.

Crown Resorts is a BBB rated company and they have raised $600 million in debt through the public markets at 4% above the bank bill rate, which means currently the total coupon will be 6.27% range.

The paper matures in 2075 but Crown can redeem them in 2021. Lenders own debt which is subordinated. They will rank below preference share holders and other capital market debt but above ordinary shareholders. The money is going to be used to finance projects within Crown Sydney & Crown Towers Perth.

So what they have achieved is to reap a stack of long dated capital at a cheap price without the onerous banking liens and it was raised easily because investors are simply chasing any yield.

Investors should consider not whether they are being “paid” enough to take this risk as a lender but whether they have considered the risk/return (even the risk of underperformance) of owning the shares of Crown Resorts rather than its debt would a better proposition. I’m not writing about Crown’s risk or ability to pay its coupon or return your capital but whether the herd has simply filed into another hybrid income product without thinking about it.

Think of it in terms of the return shareholders may receive as a rate of return over the cost of the capital once they complete the expansion of the various casino projects?

I forgot to say that James Packer’s family company, Consolidated Press Holdings (CPH), also bought $50 million of this debt. I’m sure this gave the new debt investors added confidence that he has backing it personally.

That’s fine, but CPH also owns at least $4 billion of Crown Resort shares.

Sometimes analysis is difficult and sometimes it can be simple.

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