Bluestar Group (BLU020)

[Enumerate]

Latest announcements offer complete transparency on the state of the banking covenants.

Any interest in a further discussion?

[Alan3285]

What are the latest announcements?

Do you have a link to the specific thing(s) you want to discuss?

Thanks,

Alan.

[Enumerate]

What are the latest announcements?

Analyst presentation:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

Halfyear result:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

The material details the nature of the senior loan covenants and reiterates the covenants in the BLU020 trust deed.

It is clear that they need to pay down more senior debt and improve revenue before the BLU020's will resume interest payments.

However, they are generating cash from the business, even in these dark times. My view is that the deep discount to face, offered in market, has more to do with the lack of liquidity than a reasonable estimate of counterparty risk.

[Alan3285]

Hi Enumerate,

Analyst presentation:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

Halfyear result:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

The material details the nature of the senior loan covenants and reiterates the covenants in the BLU020 trust deed.

It is clear that they need to pay down more senior debt and improve revenue before the BLU020's will resume interest payments.

However, they are generating cash from the business, even in these dark times. My view is that the deep discount to face, offered in market, has more to do with the lack of liquidity than a reasonable estimate of counterparty risk.

I had a look through the analyst's presentation.

I assume the interest on the bonds, which is not being paid, is not accumulating either?

Alan.

[Enumerate]

I assume the interest on the bonds, which is not being paid, is not accumulating either?

Not only is the interest accumulating ... it is compounding!

[GTM 3442]

Yowzah ! ! !

"Blue Star also confirms that when interest payments resume, interest will be
paid to the persons who are registered holders of the capital bonds on the
record date for the relevant interest payment date, being the Friday
proceeding the tenth business day prior to that interest payment date,
regardless of who might have been the holder of the bonds during any of the
interest suspension period prior to that record date. "

So not only are they cheap, but they've got backdated interest ?

Or am I missing something obvious ?

[Enumerate]

Reasonable volumes of BLU020 traded today at about 60%

Well done guys!

[Jaa]

I had a look at BlueStar and while generally I agree with your analysis I found one thing in their report I didn't like/understand.

There is a significant amount of inter-party lending going on with I believe the owners being paid back both similar principal amounts as the banks and at an interest rate the same as the bonds penalty rate (13.1%)!!

How did they manage that one? Instead of injecting real equity they inject in another company and get paid out on their loan before current debt holders and receive a very good rate of interest on it.

Also this bit in the accounts:

NOTE B This loan has been made by Blue Star Group (New Zealand) Limited (formerly Blue Star Print Group (New Zealand) Limited) to BSGIL to assist in funding senior debt obligations under
the SSCFA. As mentioned at note 4, each Group member is a guarantor under the SSCFA.
Interest on this loan is accruing at the interest rate applicable to the Subordinated Capital
Bonds under the Subordinated Capital Bonds Trust Deed, which is currently 13.1% per annum.
The loan is unsecured and is subordinated to all external indebtedness of BSGIL but will rank pari
passu with all other intra-group indebtedness of BSGIL. The repayment date for the loan is 26
August 2012, although that date may change if the maturity date for the Subordinated Capital Bonds, or the maturity date under the SSCFA, or both, is amended.

As I understand it the company has no right to amend the maturity date for the Subordinated Capital Bonds?

[Enumerate]

For me, there are two key observations.

1) Bluestar Group is is thinly capitalised - as you may expect with a leveraged management buyout. The main category of assets supporting the equity capitalisation is "goodwill". This would normally cause alarm bells to ring but the mitigating factors are that CHAMP (the Australian private equity concern behind Bluestar) must be regarded as a secure foundation. After all, a private equity firm will seek to restructure long before contemplating bankruptcy.

The recent McMillan deal is a case in point - this unit was brought in as 100% owned, with a modest equity injection (and the increase in the secured interparty loans). This is actually good for the BLU020's as it increases the net revenue generated by the firm (in accounting terms) and moves the firm closer to satisfying the secured loan banking covenants (and hence resuming BLU020 payments).

2) The BLU020 Trust Deed is very good. There are covenants on the secured loans that contributed to the halt of BLU020 interest payments - but there were also terms of the Trust Deed that would have forced a higher interest payment on the BLU020's.

Hence, I think the way to look at Bluestar is to focus on the cashflows. The situation is reasonable - they managed to pay down about $20million in senior debt/leases in 2009. The prime metric of interest to BLU020 holders is total revenue to senior debt - it has to be 1:3, presently it is about 1:3.5. It really all boils down to the trading conditions - if the rebound from the GFC stimulates a return to more normal revenues then we may see a resumed interest flow - the company is suggesting this will be early 2011.

My feeling is that Bluestar will recover without the need for serious financial surgery. The market is pricing them at less than an expected recovery value as if they had already failed! Hence, while there are serious risks - there are compensating serious rewards.

[Alan3285]

Hi Guys,

Quick thought:

If I were to buy some BLU020s, would I be charged the unit price per market, plus an amount for accrued interest even though the interest has been suspended?

For example, if I buy some SCF010s today, I would pay for the accrued interest since the last interest payment date. But does this still happen with the BLU020s?

Thanks,

Alan.