Loan to Lenders ratio

The big finance and business story on the Lloyds/RBS bailout and its consequences has rather overshadowed the intriguing story about Yell’s planned £500m rights issue.

Yell, the publisher of Yellow Pages and yell.com is heavily indebted, to the tune of £3.8bn. It urgently needed the rights issue and an extension of debt maturities to avoid the risk of a covenant breach.

However what really caught our attention is that Yell’s debt involves over 1,000 lending commitments! Can you believe that, over 1,000 for a business with current market capitalisation of just £390m! However when you consider how the sum per lender looks so much smaller than the total indebtedness perhaps the rest of us are missing a trick here.

There are a number of financial ratios used in the lending to assess the viability of a lending proposition, loan to valuation, multiples of earnings etc. Yell seem to have come up with a new one here, loan to lenders ratio. For example if you could achieve the same number of lenders as Yell on a mortgage of £100,000 you would only owe £100 per lender, hardly worth any of them asking you repay it!

Or, taking the average unsecured loan figure (credit cards, overdraft etc) in the UK of £3,000 this same ratio means you would only owe £3 per lender. However carrying around 1,000 credit cards each with a credit limit of £3 would be a challenge.

What also surprised us is that there was very little comment on the number of lenders, other than to give the figure of 1,000, in any of the articles we have read on this story. Are we only ones to think this is all a bit odd, that it doesn’t make sense? Did the lenders themselves not notice how the room was getting a bit crowded and was this such a good idea?

What about Yell itself. Did they wake up to just how many there were when they started the negotiations on the rights issue? If they actually deliberately accumulated this number of different loan commitments what possible rational reason was there for doing so? It not only complicated the rights issue process. - “ …. collecting their acceptances has been a huge logistical exercise” (John Davis Yell Financial Director) – it threatened to derail the issue completely and with it the company.

So this may be an example of capitalism at work, but does it make sense? Simple is always better but of course complicated demonstrates how clever you are. A final thought though.

Amazingly Yell have managed to gain 95% acceptance from their lenders of the terms they needed to allow the rights issue to proceed. Whoever achieved this is wasted in a publisher of directories and should be transferred immediately to sort out the Israeli/Palestinian problem. Move over Tony and let someone who really knows how to negotiate the impossible from the improbable take over!

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