Bond market plays chicken after Boparan exposé

Thu Jul 24, 2014 6:11am EDT

Related Topics

* Boparan bonds plunge after Guardian investigation

* Notes recover as investors regain cool

* Food scares par for the course in high-yield

By Robert Smith

LONDON, July 24 (IFR) - Boparan's high-yield bonds issued in June plunged to new lows on Thursday, after a national newspaper published a scathing exposé alleging hygiene failings at the company's poultry factories.

"The Boparan bonds are very volatile this morning, as their 2 Sisters Food group is accused in a Guardian investigation," said Stephen Baines, an investment manager at Kames Capital.

"Boparan have made some quite firm rebuttals of the allegations made in the article, however."

Boparan sold a £820m three-tranche transaction on June 25. The bonds have been trading weakly since new issue, as has much of the sterling high-yield market recently. The £330m 5.5% 2021 senior notes priced at par in June, but the bid plummeted to a 90.50 low on Thursday morning following the Guardian's allegations, versus 96.25 on Wednesday, according to Tradeweb.

The Guardian's investigation focuses on the contamination of chickens with campylobacter, but Boparan has said this is an industry-wide problem it is at "the forefront" of reducing.

"There's always a risk of these events with credits in this sector, and if you ran a thorough investigation into the business practices of any large industrial producers you'd often get similar results," said Rob Orman, a credit analyst at Henderson Global Investors.

"It's all about whether this escalates into a wider exposé or not."

Boparan certainly spelt out these risks when it issued the bonds. In the offering memorandum, it lists reputational damage over food safety in the risk factors, explaining that "food safety and the perception by our customers and the general public that our products are safe are essential to our image and business".

STORM IN A TEACUP?

While the investigation has knocked the bonds, the bid has recovered over the course of Thursday morning. The sterling 2021s were back up to 93.625 by 09:00am, according to Tradeweb, with one investor seeing dealers quoting prices a shade higher at a 94-95 bid-offer by 9.30am.

"The bonds have already recovered most of their losses, and it looks like it could turn out to be a bit of a storm in a teacup," said Orman.

"Campylobacter has always been present in chickens, so this could resemble Edwina Currie's salmonella scare over eggs in the 1980s."

Boparan is owned by British businessman Ranjit Singh Boparan, dubbed the "Chicken King" by a number of UK newspapers. The company has the number one position in the UK chicken sector, processing approximately 6.0 million birds per week.

Businesses like Boparan have gained as UK consumers have moved towards locally produced foods, with chicken imports declining as a result. Several investors pointed out the irony that a move back to imported chicken could actually compromise food safety standards, as happened with last year's horsemeat scandal in the beef industry.

Companies implicated in the horsemeat scandal have had no trouble issuing high-yield bonds. On Wednesday, Findus sold a risky payment-in-kind bond, at a cash pay yield of just 8.625%. (Reporting by Robert Smith, Editing by Helene Durand; Alex Chambers)

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