Pensions levy set to drive debt markets

The booming debt markets are set for a further boost, as companies look to
trim the deficits of their defined-benefit pension schemes and reduce their
exposure to the Pension Protection Fund (PPF) risk-based levy.

The PPF levy, which is calculated according to the size of a company’s
pension deficit, will be charged for the first time in the 2006/07 financial
year.

With figures from actuaries at Deloitte indicating that the FTSE100’s
combined deficit currently sits at £110bn, leading companies could face
substantial levy-based payments to the PPF.

Companies with the largest deficits, such as BT and BAE Systems, will be
particularly affected by the risk-based levy charge.

Debt experts at KPMG believe that one of the measures companies will consider
to manage the levy is raising debt to pay down pension deficits, even though
lending is at a historically high level.

‘We anticipate pensions strategy will drive significant debt market activity,
especially ahead of the financial year end and commencement of the first risk
based PPF levy,’ KPMG’s real estate and debt advisory team said in a briefing
document.

According to the Big Four firm, lending is booming independently of pension
activity, with lenders prepared to lend ever larger amounts on higher earnings
multiples.

Traditionally banks would not have lent money beyond a ratio of five times
earnings before interest, tax, depreciation and amortisation (EBITDA), but
recently banks have been happy to provide debt up to seven times EBITDA.

In the fourth quarter of 2005 in Europe, for example, there were more than 30
100m-plus euros (£68.4m) deals where net debt to EBITDA exceeded five times.

In some cases there were even eye-watering ¤1bn-plus deals that hit seven
times EBITDA level, such as the £1.27m Blackstone and Lion Capital paid for a
Cadbury Schweppes drinks unit.

Despite the high-leverage, high-volume deals, the interest pension funds are
starting to show in debt could pump further steam into an already hot market.

Harvey Hoogakker, assistant director of debt advisory services at Ernst
& Young, said with pressure mounting on companies to address their
defined-benefit deficits, raising debt was becoming an attractive solution.

‘The ratings agencies already treat pension deficits as debt, so companies
can raise debt to pay down pension deficits without any impact on their credit
ratings. This is definitely a growing trend,’ said Hoogakker.

The obvious benefit for companies is that they can reduce their deficits
without weakening their credit ratings.

COMPANY REPORTS

MFI reaches an agreement with the taxman, as HMV considers an approach from a
mystery buyer

FTSE100
Royal Dutch Shell is set to report record profits of $23bn (£13m) at a
results presentation today. The Anglo-Dutch oil giant is also expected to
announce that it has scaled back its operations in the North Sea as a result of
the North Sea oil tax increase introduced by Gordon Brown in last year’s
pre-Budget report. The company may also reveal further details about the
multimillion-dollar lawsuit launched by Dutch pension fund ABP against the
company’s auditors, PricewaterhouseCoopers and KPMG, and former directors.

FTSE250
Furniture retailer MFI has reached an agreement with HM Revenue
& Customs over a long-running VAT dispute over its insurance-backed
structural guarantees. The furniture retailer paid all of the relevant VAT which
was shown as a receivable on its balance sheet of £60.5m. However, HMRC has paid
MFI £21.8m, with the rest written off its accounts. MFI anticipates receiving
the cash in mid-February.

Investec’s corporate governance and compliance director
Bradley Tapnack sold 2,000 of his shares at 2,680p to take home £53,600. FD
Glynn Burger also sold a large tranche of shares last month. In its last set of
results, Investec reported a 58.2% increase in pre-tax operating profit to
£152.8m in the six months ended 30 September 2005.

HMV, the embattled music retailer that issued a profit
warning earlier this year, is believed to have roused the interest of private
equity firm Permira. Permira is said to be willing to pay £800m for HMV although
it has yet to approach the group. HMV, which also owns Waterstones, confirmed
that it had received an approach but would not say whether Permira was the
interested party. The retailer’s share price was languishing at a two-year low
of 164.5p at the end of last week, but news of the takeover approach saw the
stock climb 17.3% to 192.7p.

ALL-SHARE
Spanish oil giant Repsol was punished by the market as
it losta quarter of its market value after cutting its proven reserves by1.254
billion barrels. The reserve cut will reduce 2006 profits by between 170m euros
(£116.3m) and 180m euros. Analysts were forecasting profits of 3bn euros for the
companythis year.