Tuesday, 29 January 2008
Mitchells & Butlers: an object lesson in risk management
More meaty news for risk management fans as Mitchells & Butlers take a £ 274m hit to close out their ‘inflation-hedge’ derivatives position – a 30-year RPI swap with a 3.1775% strike. As the FT says,
“M&B hung on to the hedges in the belief that the disruption would prove temporary and that a less ambitious deal could be pushed through”
Huh. Their MTM valuation on the swaps had fallen steadily, from £ 60m out-of-the-money in July when everything started to go wrong for them, through £ 140m by September, (though who calls an RPI forward curve right now is an interesting question), to the fateful £ 274m at the end.
In M&B’s favour, they’ve been unusually up-front about this throughout the piece: I could name several plc’s who have sat silently on far greater MTM losses in the (vain) hope they would go away.
On the less creditable side: whoever conned them into entering the hedge before the intended property deal was done ? Big financings tend to swap out simultaneously: admittedly more often in interest-rates and not the more obscure RPI ‘market’. And why didn’t they cut their losses as soon as the deal fell through ? They have a ‘no speculation’ policy on derivatives, as a humble pub-chain should. Carrying these monster-swaps against a putative ‘this year, next year, sometime never’ deal can only be described as spec.
(Also, given that they entered the swap in July - see their 2007 Report - how come it was immediately £ 60m out of the money ?? A bit fishy, that.)
In their formal risk reporting, their number one worry is the threat posed by supermarkets selling booze at discounted prices. Fair enough: they’re a pub chain ! This is an excellent illustration of the oldest risk management principle of them all: if you don’t understand it, don’t do it.
Meanwhile, I have some time on a plane coming up, and I may try a little back-calculation on that RPI valuation …
Posted by Nick Drew