Subordinated bonds fly for G8

Philip Bayley
FIIG arranged a six-year bond issue for G8 Education Limited, which closed on Wednesday after raising A$70 million. The issue, of unsecured, unlisted and unrated bonds, was launched on July 17, with a minimum of A$30 million.

This is the third and most successful FIIG-arranged bond issue to date. FIIG's first deal was a A$30 million, six-year bond issued by Silver Chef Limited in September last year. Then it brought out a A$50 million, five-year bond issue, by Mackay Sugar Limited, in March.

The issues are placed with FIIG's more sophisticated and institutional investor clients, who are prepared to undertake their own assessment of the credit risk of the issuer and the relative value offered by the issue. FIIG's clients are also accepting an investment whose liquidity is limited by FIIG being the only secondary market-maker for the bonds.

The bonds will pay a fixed coupon of 7.65 per cent, which on Wednesday amounted to 408 bps over the six-year swap rate. Moreover, the bonds are callable after three years at 103 per cent of their face value; at 102 per cent of their face value after four years; and at 101 per cent after five years.

G8 Education will allocate A$20 million of the proceeds to repay debt owing to Bankwest. The remainder will be used to fund acquisitions.

The fact that the issue raised A$70 million, when a minimum of only A$30 million was sought, suggests investors liked the deal very much.

G8 Education is an S&P/ASX 200 listed company. It was admitted to the index in June.

The company operates 205 owned and 51 franchised childcare and education centres, and employs 4200 staff. Brands include Community Kids, World of Learning, Kindy Patch, Headstart Early Learning Centres and Early Learning Services.

The company began in 2007 as Early Learning Services Limited and merged with Payce Child Care Pty Limited to become G8 Education in 2009. For the year ended 31 December 2012, G8 Education generated earnings of A$19.2 million after tax, on revenues of A$179 million.

The company has total assets of A$269 million, of which A$202 million is goodwill. Debt prior to the bond issue amounted to A$49 million, and shareholders' funds totalled A$182 million.

Over the last two years, its share price has gone from a low of A$0.41 to a recent high of A$2.78. Its market capitalisation is A$743 million.

Based on a financial analysis alone, and without any consideration of the qualitative factors that go into a credit rating, the company appears to be a solid BBB credit. On this basis, the company may have paid quite a premium to sell its bonds, which would explain the enthusiastic reception from investors.

On the other hand, the bonds are effectively subordinated to the exposure of Bankwest. The bank holds fixed and floating charges over all of the assets of G8 Education.

Allowing for subordination would eliminate much of the apparent premium. Nevertheless, it seems investors got a good deal.

Given time and a formal credit rating, G8 Education may be able to refinance its debt in the investment-grade wholesale or retail corporate bond markets