Bonds beat Disney blues: One class of creditor has come out smiling from crisis

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The Independent Online
EURO DISNEY bondholders are celebrating this weekend after emerging unscathed from Monday's restructuring plan - in sharp contrast to the heavy concessions made by banks and ordinary shareholders.

Clever manoeuvring by bondholders ahead of the outline agreement paid off and they may have taught the financiers some lessons.

The Fr4.3bn (pounds 500m) worth of 6.75 per cent convertible bonds rose in price about Fr6 to Fr120 this week, following the announcement. But the big rise had come earlier, as bondholders realised they had a good chance of fighting any dilution of their assets in the French courts. At their low, in November, the bonds were priced at Fr79.

Georges Berlioz, senior partner of Berlioz & Co, the Paris legal firm commissioned to advise the bondholders' defence group, said they would have had a case against Walt Disney if they had been forced to take a reduction in their bond coupons. He said Disney made over-optimistic assumptions about the number of visitors to the park and was responsible for other management mistakes that have made a refinancing necessary.

One well-informed source said Walt Disney was 'petrified' at the prospect of being pursued in the French courts.

In a normal restructuring, banks, bondholders and shareholders would all expect to see their interests diluted, or interest payments reduced. Indeed the bondholders often end up with their interests more diluted than those of more senior creditors.

When Heron International, the property to petrol pump group, finalised a pounds 1.4bn restructuring last May, bondholders were asked to convert each pounds 100 of bonds into pounds 29.80 of senior debt, pounds 7.28 of junior debt, and 6.7949 new shares - a hefty dilution. This week, it warned that payments on even this reduced interest might be delayed.

The Euro Disney restructuring saga is one of the most spectacular successes for the vulture funds that have flown from the US to Europe in search of scraps. Many of them bought the bonds after they fell from prices of about Fr140, when the extent of Euro Disney's problems became evident in October and November.

Renaud Saleur, the French investment manager of Fidelity Investments' European Income Fund, who does not normally participate in 'distressed' investments, bought a large holding in the bonds - equivalent to 1.5 per cent of his fund - in December for an average price of Fr83.

'A lot of Anglo-Saxon investors were saying that the convertible was junior to the bank debt and therefore would not be worth a lot,' he said.

'I think in this case you had to be a bit more critical in the analysis. My analysis was that you had Fr23bn-24bn of debt with 60 banks. On the other hand you had more than 1,000 bondholders with only one being able to force the company into bankruptcy.'

Mr Saleur believes the bonds are still an attractive investment. At Fr122, they have a yield to maturity of about 11 per cent and are due to be redeemed in 2001 at Fr154. This means they are yielding the same as a low-rated junk bond. Yet as Walt Disney and the banks demonstrated this week, they are secured by virtue of their legal position.

But while Disney, the banks and advisers may be a little wiser after all this, they have a lot left to learn. According to Mr Berlioz, the restructuring will reduce Euro Disney's capital, entitling the potentially troublesome bondholders to vote on the proposals.

Mr Berlioz said: 'When you look at the number of lawyers and so on working for them, it looks like the intelligence of the group is equivalent to that of the least intelligent divided by the number of people in the group.'

(Photograph omitted)