-- Neil Collins is a Reuters columnist. The views expressed are his own --
By Neil Collins
LONDON, July 3 (Reuters) - Here is a message for all those institutions who subscribed 500 million pounds for Resolution plc 6.5864 percent Fixed/floating rate Perpetual Reset Capital Securities: what on earth did you think you were doing?
These notes, as aficionados of the Clive Cowdery versus Hugh Osmond soap opera will know by now, have been a disappointing investment, and currently trade at a fraction of the November 2005 issue price. Osmond's Pearl Group, which bought Resolution from Cowdery, says he doesn't have to pay the interest on them. Not our problem, since we sold the business, retorts the Cowdery camp.
The small print lends support to both viewpoints, and provides precious little comfort to the holders of these miserable instruments, stuck at the bottom of the creditors' pecking order.
There is no fixed maturity date, or even a date beyond which the reset rate becomes penal. There is no obligation to pay the interest. On its own, this should have been enough to deter anyone paying anywhere near the 100 percent issue price, but there's more.
If the interest is not paid (annually, on April 25 each year) then the issuer can operate the "alternative coupon satisfaction mechanism". This obliges the trustee to sell enough new shares to raise the 33 million pounds needed to cover the payment.
Resolution's current owner, an Osmond acquisition vehicle, has no public listing, so this mechanism doesn't work. The 136-page prospectus does propose a remedy which entails substituting another piece of paper, and now that Osmond wants to bring Pearl to market, the discussions with the distinctly cheesed-off bondholders can begin.
Many of them will have bought this distressed debt at 20 percent of face or less, so they won't be looking for a resolution to restore them price to par. Those who paid it might pay more attention to the small print next time they are offered a stock which appears to pay a bit more than the market rate.
(Edited by David Evans)