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FD quits after credit crunch plays havoc with hedges

Today, however, it’s been announced that Mitchells & Butlers FD Karim Naffah has resigned from his post after a hedging exercise went terribly wrong for the pub group.

And when I say ‘wrong’, I mean wrong to the tune of £274m.

Mitchells & Butlers partially got screwed by timing. In July 2007, it was in final negotiations with the banks to put in place a financial package for the proposed JV with investment company R20. Hedges were placed on interest rates and inflation rates.

According to Mitchells & Butlers, this was a “fundamental requirement of the banks to underwrite the junior debt facility and to achieve the appropriate ratings from the rating agencies on the senior debt”.

It couldn’t have happened at a worse time. By late July, debt market conditions had deteriorated, forcing the banks to withdraw the credit-approved debt terms. Mitchells & Butlers and R20 were left with hedge instruments in place and a transaction they couldn’t fund.

It was thought the transaction could still be undertaken if the original debt levels were scaled back. A REIT structure was considered but then the credit crunch worsened, scuttling the plans.

Recent instability across global markets has meant the mark-to-market deficit on the hedges has blown out. . Mitchells & Butlers says it was decided that “maintaining the hedge position to utilise in a property-based transaction, which was now highly unlikely to occur in the near future, became a risk that could no longer be justified despite the challenge of exiting in an illiquid market”.

The inflation hedges and the interest rate swaps no longer required have been terminated at a cost of £274m after tax. A bank facility will fund the settlement of the hedges while the additional debt cost will mean post tax earnings will be slashed by approximately £13m in the current financial year.

Mitchells & Butlers has been at pains to point out that no one acted rashly here. The company says: “Management, supported by advisers and the board, acted professionally and diligently in the preparation of the financial package for the proposed joint venture with R20 and the subsequent retention of the hedge, but fell victim to the global credit crunch which began in the midst of the final execution of the transaction.”

There is a big ‘but’ here. The loss of so much cash meant someone had to go and that someone was Naffah. Mitchells & Butlers CEO Tim Clarke also tendered his resignation but it was declined. All directors will forego their 2007 bonuses.


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