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March 2009

Move to ease Countrywide debt burden

City Correspondent

PLANS to convert   borrowings into shares to  ease the heavy debt burden of Countrywide plc, the UK’s largest estate agency group,  have been put forward  by the major bondholders of its holding company Castle HoldCo 4.

The deal is a Scheme of Arrangement which  requires approval by over 75 per cent of Castle HoldCo 4 bondholders . It already has support from over 55 per cent and also from the Countrywide board. It  is expected to be put before the relevant courts later this month and may be completed by  June.

The scheme could slash annual interest payments by Countrywide plc from over £40 million to £17 million, according Jim Clarke , Countrywide plc chief finance officer.  (no alterations from now on)

He told Estate Agency News: “If  Castle HoldCo 4 bondholders agree to convert their debt into shares, then our annual interest payments under the new structure would fall from over £40 million to £17 million.”

The debt into equity plan was proposed by outside bondholders, rather than the Countrywide board, he added. Under a complex scheme of arrangement, holders of Castle HoldCo4 debt would provide £75 million extra equity for Countrywide but outstanding debt would be cut from £640 million to £175 million.

These financial restructuring plans were announced on February 17,  shortly before Countrywide was due to publish its 2008 results.

Castle HoldCo 4 said  the restructuring  would not only cut Countrywide’s business debt but make it more likely for existing debt holders to recover their funds . It would also put Countrywide in a better position to expand its operations by buying other estate agencies in a depressed market.

The announcement followed  two financial institutions, John Moulton’s Alchemy funds and Los Angeles based Oaktree Capital ,  building up substantial stakes in Castle HoldCo 4 debt securities . Both specialise in buying distressed debt where they see future returns. They support the plan as does Apollo LLP, the US buy out firm,   and hedge fund Polygon, the original backers of the £1 billion buy out of Countrywide in May 2007.

When I spoke to Grenville Turner ceo of Countrywide in  December 2008 after Castle HoldCo4 debt was downgraded by Standard and Poor’s,  he said the board would not sit back and allow losses to mount.The group was cutting costs in response to the current market. Now the bondholders are making a move which could turn round Countrywide’s finances. 

The resulting cut in debt payments could turn losses into profits and remove the prospect that Countrywide could sink under a burden of debt. The original bondholders will suffer initial losses on their investment, but will receive shareholdings in a business which when the housing market recovers   will be highly profitable –and valuable.

During the good years,  Countrywide plc as a quoted company made over £100 million annual pre tax profits. The deal is also a sign that savvy investors see an end to the current downturn in the UK housing market. 

This begs the question that at some later date, say five to seven years, Countrywide could be refloated on the stock market enabling the bondholders to realise their stake at a profit.