UK flooring company Victoria outlined its royal connections in a document accompanying its proposed debut bond sale last week, explaining to prospective investors that it had “supplied the red carpet for the wedding of Prince William and Catherine Middleton”.
The high-yield bond market did not roll out the red carpet for the 120-year-old company which until this summer had enjoyed a stunning run on London’s Aim market.
Instead, debt investors demanded yields far in excess of Victoria’s expectations, after an accompanying warning on falling margins sent its stock plummeting as much as 37 per cent that week.
Victoria opted to pull the €450m bond deal on Tuesday, releasing a statement in which executive chairman Geoff Wilding pinned the share price collapse primarily on unclear communications, but added that this had “left an open goal for those with less than pure motives to spread outrageous untruths”.
Investors took this as a not-so-veiled reference to hedge funds betting against Victoria’s stock, with Soros Fund Management building up the biggest short position this year.
George Soros’s fund is not alone, with more than 8 per cent of Victoria’s free float now on loan to short sellers, according to Markit data, having risen sharply from less than 0.25 at the start of the year.
These short sellers have questioned whether a deal spree spearheaded by Mr Wilding — Victoria has bought 13 business since 2013 — has overly inflated the company’s share price.
Mr Wilding, a former investment banker from New Zealand, took the helm as executive chairman of Victoria after an acrid six-month boardroom battle in 2012. He then built a large stake in the company after investing the proceeds from a contract-for-difference on the stock agreed with the board.
Under his stewardship, Victoria has grown from a £15m business to a more than £550m market capitalisation today, although this has halved from the peak above £1bn hit in the summer.
While the share price was still around these highs in June, Mr Wilding raised a new loan facility secured on part of his stake. Victoria’s executive chairman then sold 5m of his 26m shares in August.
Mr Wilding told the Financial Times that this loan with JPMorgan’s private banking division has not been drawn, however, describing it as a “personal facility that has nothing to do with the business”. He added that he sold the stock to meet demand from “two very substantial investors” that had initially approached him.
He attributed the soaring yields investors demanded on the ill-fated bond — which saw the banks running the deal raise guidance on the coupon from 4.5 per cent to as much as 5.75 per cent — entirely to the stock price collapse.
“As the share price went down, the yield the debt investors wanted went up,” he said.
Bond fund managers and credit analysts also had concerns about the impact of the rapid string of acquisitions on Victoria’s financial reporting. In a note titled “Magic Carpet or Dirty Old Rug?”, analysts at CreditSights said last week’s margin guidance revision was a “red flag”, in the context of prior multiple adjustments to reported earnings.
“We take issue with the size and frequency of these adjustments, which in turn led to questions over what the true level of leverage for this credit is,” the analysts said.
Victoria pegged its net leverage at three times in its bond offering documents, but this figure was based on a £112m “adjusted pro forma ebitda” figure that includes £80m of exceptional items and other adjustments.
One high-yield bond portfolio manager said investors were more concerned about this than any rumours from short sellers.
“Bond investors made up their own mind, as they always do,” he said. “They saw a roll-up strategy, which are always difficult deals, in a sector they don’t like.”
Some investors have also raised concerns about Mr Wilding’s record, as he was previously at the helm of New Zealand business CommSoft that ran into difficulties when the dotcom bubble burst.
“CommSoft got caught by a number of very large bad debts from a number of dotcom companies it had sold software to,” Mr Wilding said. “It certainly wasn’t as successful as we hoped.”
Bond investors are now asking if and when Victoria will try to return to the debt market, as the deal was intended to refinance a bridge loan from Barclays and HSBC, the two banks that led the aborted bond sale.
“When the dust settles we’ll sit down and look at options for future financing,” Mr Wilding said. “But at the moment we’ve got a solid two-year facility with our existing banks, at a reasonable cost, and we’re quite happy to live on that facility for a period of time.”
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