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The future of Royal Mail is set to be hamstrung by surging interest payments following Daniel Kretinsky’s debt-fuelled takeover of the postal service.
The £3.6bn offer from Mr Kretinsky – known as the “Czech sphinx” – for Royal Mail’s parent company International Distribution Services (IDS) risks trebling its borrowing costs as a result of the billions of pounds being taken on to finance the deal, calculations show.
The revelation will fuel concerns that Royal Mail’s modernisation and investment plans will be jeopardised by its ballooning debt burden, and that its service obligations could be affected as well.
The deal will result in close to £2.9bn of fresh loans being loaded on to IDS’s balance sheet, which is already weighed down by more than £2bn of existing debt.
Sources close to Kretinsky’s EP Group have indicated that it expects the finance package that has been clinched with four large investment banks to come with an average borrowing rate of just under 6pc a year.
That would leave the UK company grappling with as much as £170m of additional interest payments, on top of nearly £100m that it accumulated last year.
Yet bond analysts fear EP is being too conservative in its estimates. One debt market expert pointed out that IDS is currently paying 6.7pc a year on £250m of outstanding bonds. “Clearly this [the bid financing] is a riskier structure than that,” the person said.
Credit rating downgraded
Meanwhile, it is thought that a slew of one-off fees on the lending facilities could add tens of millions of pounds more to the final bill. The two sides have also disclosed that IDS’s credit rating is expected to be downgraded as a result of it being swallowed by EP Group – a move that is likely to further push up its cost of borrowing.
Ratings agency S&P has said it is minded to lower the rating on IDS a notch to BBB-, leaving it one level above non-investment or speculative grade.
Mr Kretinsky’s swoop will result in the Royal Mail falling into private hands for the first time in its 508-year history.
The full extent of Mr Kretinsky’s reliance on the international credit markets to fund his audacious bid was revealed in hundreds of pages of documents filed with the London Stock Exchange last week. To finance his raid, Mr Kretinsky has turned to some of the world’s largest financing houses: BNP Paribas; Societe Generale; Citibank; and Unicredit.
Together, the quartet has agreed to provide four separate loans. This includes a £1.1bn loan, a bridging loan of £750m, another bridging credit line of £500m and a revolving credit facility of £500m.
Although interest rates are starting to come down from the peaks of last summer, they remain the highest they have been since the global financial crash more than 15 years ago.
IDS has also warned that change of control clauses in the company’s lending agreements mean more than £1.4bn of existing bonds may have to be repaid and a £925m loan facility could also be pulled. Analysts think it is unlikely lenders will call their debts in but EP has said it stands ready to provide a funding backstop, highlighting the uncertainty created by its buyout.
The tie-up is set to cost the two sides a combined £146m in fees to an army of bankers, brokers, lawyers, PR professionals and other consultants who helped negotiate the deal.
IDS’s German chief Martin Seidenberg, who took charge only last year, is in line to scoop more than £5m if the sale goes through. A maximum payout of up to £5.4m is dependent on the takeover completing and Mr Seidenberg hitting performance targets.
An EP spokesman said: “Our offer is structured to maintain IDS’s investment grade credit rating. IDS and Royal Mail will be backed by the significant financial resources of EP Group and we have made legally binding commitments which completely ringfence the Royal Mail business.”
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