value and opportunity

“Homework”

My last post about Praktiker contained some mistakes especially about he required votes for any change in the provisions of the bonds. I have to admit that I didn’t read the paragraphs before. So let’s do the homework and look at the “Schuldverschreibungsgesetz – SchVG“.

One of the mistakes I made was the following:

Technically, they need at last the mojority of 50% of the bondholders in the first round. If this doesn’t work, in the second round, the majority of a minimum 25% of bondholders (effectively 12.5% plus one bond) could then agree to the changes on behalf of all bond holders.

The German law says however:

Beschlüsse, durch welche der wesentliche Inhalt der Anleihebedingungen geändert wird, insbesondere in den Fällen des Absatzes 3 Nummer 1 bis 9, bedürfen zu ihrer Wirksamkeit einer Mehrheit von mindestens 75 Prozent der teilnehmenden Stimmrechte (qualifizierte Mehrheit). Die Anleihebedingungen können für einzelne oder alle Maßnahmen eine höhere Mehrheit vorschreiben.

So this means the following: In order for the requested changes to become effective, 50% of the Bondholders have to participate in the first round and 75% of the particpants have to approve the proposal.

The same applies to a second round, if 50% particpation is not reached in the first instance, again, 75% of the partcipants have to agree to the proposal. So in an absolute worst case 18.75% of the bondholder could make the requested “hair cut” effective.

Further thoughts:

I still struggle making sense of the sequence of the events. However I came up with one (maybe unlikely) scenario:

I think no one is really interested in putting money into Praktiker as a “minority” investor. However, due to the CoC “poison pill”, a purchase of a majority would be very expensive. So in theory, a prospective buyer wants to buy as many bonds as at a discount as possible in ordert to lower his total purchase price.

The “offer” of cutting the coupon could therefore be a “tool” to get as many bonds at a discount to make a majority acquisition (i.e. through a highly dilutive capital increase) without paying out 250 mn EUR to the bondholders. For someone potentially owning both, a majority position in the shares and a large block of bonds, the cut in the coupon could be value enhancing.

It doesn’t change my approach (Don’t invest if you don’t know the motives of the players involved), but it makes good entertainment and hopefully a good learning experience.