Small companies tap into debt markets

Soho House is best known as a private members’ club for London’s media and creative types that was founded in 1995.

But the hospitality company, which is expanding internationally, also caught the attention of the capital markets recently when it issued a high yield bond for just £115m – despite having earnings before interest, tax, depreciation and amortisation (ebitda) of only £19m.

This was unusual because conventional market wisdom suggests an individual bond issuance should be at least £200m to have sufficient liquidity in the secondary market and issuers require ebitda of at least £50m to avoid excessive leverage.

Although Soho House was an extreme example, last year saw several small companies with ebitda of about £30m tap the bond market, including Marlin, a financial company that issued a bond for £150m; Bond Mission, an aviation company with a £200m bond; and Study Group, an education company that raised £205m.

Shaun O’Callaghan, head of debt advisory at Grant Thornton, the business and financial advisers, says: “The European bond markets are open to a new group of borrowers who until now were too small to consider bonds as a viable complement to bank lending.”

Guy Williams, chief commercial officer of Soho House, says issuing a bond that only pays interest allowed the company to raise a larger amount than through a traditional bank loan, which would have required some of the principal to be paid off, as well as the interest.

“It is also covenant-lite, which gave us much more flexibility as a rapidly growing company on how we use our capital,” he says.

Mr Williams says that issuing the five-year bond, which pays investors interest of 9.125 per cent, cost about £6m, including breaking existing arrangements, as most of the proceeds were used to pay off loans.

Moody’s gave the Soho House bond a Caa1 rating, which indicates substantial risks, but gave the company a positive outlook

“We also incurred the cost of an international roadshow, but that gave us a 50-50 split between investors in the UK and US, which was very welcome,” he says. “In the longer term, it will be not that much more expensive than traditional loan payments.”

Grant Thornton says the small size of Soho House’s bond makes it an outlier, rather than the first of a rash of new issues of this size, but the costs of arranging a bond compare favourably with a loan unless the bond is very small.

“In most cases issuers can expect to pay 3-4 per cent all in for issuing a £200m bond,” says Mr O’Callaghan. “Fees for large bonds and repeat issuers will be comparatively cheaper.”

Moody’s gave the Soho House bond a Caa1 rating, which indicates substantial risks, but gave the company a positive outlook. The rating agency added that the credit profile would improve to a (still speculative) B3 rating should the company’s expansion programme be successful and earnings grow as forecast.

Taron Wade at Standard & Poor’s says: “Since 2009, the high yield market in Europe has become more mature with a broader variety of issuers and in this low interest rate environment, investors are looking for higher yield and will judge each issuer on its merits.”

Choosing the bond market “has been a very positive experience”, says Mr Williams. “We might go again to top it up. Fortunately for us it was heavily oversubscribed and we were able to increase the amount raised. I would thoroughly recommend it.”

However, Mr O’Callagahan warns that this opportunity for smaller companies to issue bonds might not remain open indefinitely. “If interest rates rise, this market could disappear.”