Wipeout: Disaster of big refinance deals

Marconi's debt-for-equity swap is the latest refinancing to leave investors with nothing

With Marconi on the cusp of announcing its long-awaited financial restructuring, shareholders in the troubled telecoms equipment maker look almost certain to join the growing list of investors walking away from refinancings empty-handed.

While so-called debt-for-equity swaps, where the company's creditors agree to swap some or all of the money they lent for shares, might ensure the company has a future, they also ensure that shareholders have little or no part in it.

When Marconi unveils its restructuring plan, probably before the end of this week, it will be treading a path already trodden this year by the cable firm NTL and the telecoms outfit Energis. Rival cable company Telewest is also likely to follow suit later in the year.

And Marconi's plan, like NTL's and Energis' before it, will, more than likely, result in long-suffering shareholders seeing the value of their equity all but destroyed.

The only good news seems that, excluding a 'force majeure', analysts aren't expecting any more UK companies to go down that route.

"Any company can get itself into serious trouble," said Robin Hardy, an analyst at WestLB Panmure. "But the chances are if you can't already see it, then it isn't there. The big, serious problems you probably already know about."

The bad news is that analysts reckon there is now no other rescue alternative, apart from a debt-for-equity swap, for either Marconi or Telewest.

Yet some analysts believe the current crises that Marconi and Telewest are facing could have been avoided altogether had remedial action been taken far sooner.

"Marconi has got to the point where there is no alternative. But it didn't have to come to this," one analyst said "If they had had a big rights issue in the autumn of last year, for example, then we wouldn't be in this situation."

While that line of thinking has left some shareholders assessing whether they can take legal action, the grim reality is that the companies' creditors will seize control.

And banks, in particular, are becoming ever more aggressive in the strong-arm tactics they employ to make sure they come out tops in restructuring negotiations.

"They [the banks] have prior claim over the assets and are ahead of both other public debtholders and equityholders. So all they are interested in is the best route for recovering the debt," one City source said.

"Banks are becoming very aggressive in deals like this and becoming much more proactive in the way they handle them. They're much less inclined to sit back and admit to making a mistake and are looking at how they can restructure businesses and get value out of them at the end of the day," the source added.

That certainly looks to be the case at Marconi. While the company's management is said to be holding out to ensure shareholders get something, perhaps a measly 1 per cent of the equity, things are not looking good.

The company's banks, owed about £2.3bn, are said to be holding out for as much of the company's £1.4bn of cash as they can get their hands on. Bondholders, meanwhile, are pushing to get their hands on the bulk of the equity, by converting £1.7bn of debt, at the expense of shareholders.

Under the terms of the deal, expected on Friday, Marconi is likely to be put into voluntary liquidation, while shares in Marconi Corporation, a unit of Marconi, which owns the bulk of its assets and liabilities, will be re-listed.

The company is expected to keep some of its cash and some of its existing £4bn of debt while some debt will be written off and some will be converted into equity.

That grim tale for shareholders is all too familiar. The complex financial restructuring of the telecoms group Energis recently carried out has also ensured shareholders are left out in the cold.

Worse still, it is far from clear what its shareholders might get even though it has been suggested they could be entitled to 7.5 per cent of any excess value above £1.8bn in seven years time.

Until the company's administrators have put forward a proposal to creditors, which the latter have voted on and agreed to, nothing is certain for Energis shareholders.

Chelys, a company controlled by Energis' banks, bought the UK arm of Energis, invested £150m of cash and rehashed the terms of its £690m of debt. Chelys is, roughly speaking, 85 per cent owned by banks, with bondholders making up the balance.

Again, the company's banks were playing hardball to protect their exposure, although given that they had only recently signed off a new facility before the problems blew up, it also became a face-saving exercise.

"Many people on the bank committee were those same people who had granted Energis a loan just a few weeks before," another source said. "There were therefore a lot of politics at work behind the scenes, with bankers refusing to take a hair cut to make sure they kept their jobs and their status."

At the cable group NTL, the first major UK company this year to announce a debt-for-equity swap, similar tactics by creditors were clearly in use.

Creditors clearly played a game of timing. "With restructurings, everybody knows there is a big hole out there somewhere. You get agreement when people really think that, otherwise, they will have to jump into it," one banking source said.

Under the terms of NTL's highly complex deal, which is still contingent on getting court approval early next month, about $10.6bn of debt will be converted into equity.

The company will be split in two and NTL's bondholders will own all of NTL UK and Ireland and about 86.5 per cent of the European operation NTL Euroco. NTL's shareholders will, at best, end up with 32.5 per cent of the European operation in eight years time if all rights and warrants are exercised.

For shareholders in rival cable business Telewest, the prognosis does not look good either. While the company, which has just more than £5bn of debt, continues to look at all its options, analysts reckon a debt-for-equity swap looms.

Analysts at Merrill Lynch recently predicted Telewest shareholders would end up with just three to four per cent of a restructured company if all its high yield and convertible debt was swapped into equity.

Industry sources reckon management teams always fight hard to protect their shareholders. "It is a very serious issue. You have a duty to all stakeholders and you fight very, very hard indeed," one said.

But that will be of little comfort to shareholders in NTL and Energis, where the damage has been done. While there seems a glimmer of hope that investors in Marconi and Telewest might fare slightly better, it is little more than a glimmer at this stage.