Oh, what a credit crunch will do. Gambling giant Tabcorp finds itself in need of a lazy $200 million. What’s a company to do? Head off to its bankers, right? Wrong! Why don’t we get the public to lend it to us — totally unsecured.

Something doesn’t add up here.

An email has landed in my inbox from Commonwealth Private Banking, proudly offering me the opportunity to invest in Tabcorp Bonds, expected to issue on 1 May. The bonds are spruiked as Standard & Poor’s rating BBB+ with an interest rate of somewhere around six per cent (depending on the bids received during the book build). You even get bonus interest of another 25 points if you promise to hold on to the “bonds” for at least twelve months. Whoopee!

The Sydney Morning Herald has this article yesterday cheering the deal on. Gimme a “T” — T! Gimme an “A” — A! You get the idea…

Let’s look at the fine print.

First of all, these “bonds” aren’t really bonds at all. They’re just unsecured debt. Normally bonds carry some kind of preference over unsecured debt since bondholders don’t participate in equity upside. To call them bonds is simply misleading to Mum and Dad investors.

Secondly, the disclosures are woefully inadequate. Who has the secured debt of the company? How much is that secured debt? What’s the likely outcome for bondholders if Tabcorp goes to the wall?

It’s interesting to note that Tabcorp lodged a prospectus for the offer with ASIC on 24 March, and then lodged another one on 1 April. What additional disclosures were required in the second prospectus? What was said in the first prospectus that shouldn’t have been? Is this whole thing just an April Fools Day prank gone wrong?

The CBA is spruiking the deal. Here’s a thought — why doesn’t the CBA lend Tabcorp $200m, unsecured, at six per cent and make a huge margin? Does the CBA know something that Joe Public doesn’t? Oh, I see why now — the section 1.3 of the Prospectus states the funds raised will be used to repay bank debt! So the bank just wants to quietly transfer the risk to the public. Or, as is stated in the Prospectus, “lengthen the Tabcorp Group’s debt maturity profile”. Hmmm.

Speaking on condition of anonymity, a lawyer familiar with capital raising had this to say:

Tabcorp claims no secured debt at the time of the issue of the Bonds. But they can subsequently secure the debt to banks without having to go back to Bondholders, thus diluting Mum and Dad positioning (and shoring up the bank’s position). I bet that within twelve months of reducing their exposure by $200m, the Banks seek to secure their debt, leaving Mums and Dads at risk in the event Tabcorp starts to falter.

The key is to get through to the glossary which describes relevant indebtedness and permitted encumbrances. For the sake of simplicity, it means that Tabcorp can offer security to their bankers and US Private Placement which ranks above Bondholders. If it takes someone like me to dig through the prospectus and analyse the glossary to get to the heart of the “security provisions” what hope does a Mum and Dad lender have?

If you take away Intangible Assets this company actually has negative equity. There are covenant ratios in play here which could put Tabcorp into default with debt then becoming repayable immediately! What a wonderful system — not only does Tabcorp gouge the uneducated through pokies and 17 per cent deductions on racing, they now seek to screw the investor class by conning them and enriching the Banks.

Las Vegas giants MGM and Harrahs are facing their toughest times ever right now. Hotel rooms are being given away to locals for free and are selling to tourists for just $22 a night. There’s good reason to think that the Australian gambling industry is facing woes of a not dissimilar nature.

Tabcorp simply wants Joe Public to lend it $200 million somewhere around six per cent, a rate that you were getting on a cheque account balance six months ago. No equity upside, no security. Do these people have no shame?

Is something not quite right with the debt servicing here? That bonus interest of 0.25 per cent for holding on to the bonds for at least twelve months smells fishy to me.

Caveat emptor.

Peter Fray

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