James Packer should come clean about his intentions for Crown Resorts. And if he won’t or doesn’t feel he has any obligation to do so, then the Board of Crown Resorts must tell the market exactly what they understand of his plans, what they propose to do about it, and how they will act in the best interests of shareholders and noteholders alike.

The treatment of Crown Resorts noteholders has been absolutely appalling. The independent directors of Crown Resorts, and the ASX, should hang their heads in collective shame.

In case you haven’t caught up with the story, Mr Packer resigned as a director of Crown Resorts in December. He had previously stepped down as executive chairman in August 2015, to “devote his energies to a number of key development projects in Sydney, Melbourne and Las Vegas as well as Crown’s online platforms.” Mr Packer’s Consolidated Press Holdings (CPH) owns 53.01% of Crown Resorts, and a rumour spread that CPH was in talks with parties about a joint bid for the rest of Crown Resorts which would take the company private.

When the rumour hit the market, Crown Resorts ordinary shares jumped from a close of $10.65 on 15 December to trade as high as $12.23 on 16 December. This prompted an immediate price query from the ASX to Crown Resorts, which responded with a statement that included a letter from Consolidated Press Holdings noting that while “CPH has confidential discussions with third parties regarding its investments, including its shareholding in Crown resorts”, it ”has not put forward any proposal of the nature speculated in the media”.

Crown shareholders weren’t complaining about the speculation. However, Crown noteholders were about to get belted.

Crown Subordinated Notes

Back in 2012, Crown issued $532 million of Crown Subordinated Notes. A hybrid security, these notes are quoted on the ASX under stock code CWNHA. They pay interest which is reset every quarter at a margin of 5.0% over the 90 day bank bill rate (currently 7.34% for the current quarter), and technically, don’t mature until 14 September 2072.

Last year, Crown issued $630 million of Crown Subordinated Notes II. These are quoted on the ASX under stock code CWNHB. Identical in most respects to CWNHA, they pay interest at a margin of 4.0% over the 90 day bank bill rate and mature on 23 April 2075.

Apart from the attractive interest rate, investors flocked to these notes because they are  classified as ‘intermediate equity credit’ by the ratings agencies, meaning that they are counted for a period of time as capital rather than debt in assessing the creditworthiness of Crown. The net effect of this is that investors assume that Crown will call the notes (redeem them at their face value of $100) at the first available opportunity, which in the case of CWNHA is on 14 September 2018 and CWNHB is 23 July 2021. Not a 60 year investment, rather a 6 year investment.

They also carry protections for investors while rated. Crown has to report against overall interest cover and leverage ratio covenants, and while it can defer an interest payment on the notes, it is then prohibited from paying a dividend on Crown ordinary shares (dividend stopper).

James Packer also put his money behind the notes. CPH has invested $50 million in each issue.

Finally, there is a change of control provision, which requires that the notes are either redeemed immediately, or the interest rate is increased by a further 5%, if control of Crown Resorts changes.

If Crown goes private, the notes may extend 60 years

As the privatisation notion sank in during late December/early January, investors were alerted to the idea that a newly privatised Crown Resorts many not care for or require a credit rating from a recognized agency, and hence classification as ‘equity credit’ would not be worth anything. If Consolidated Press (and friends) chose to increase the gearing of the unrated company, they probably wouldn’t call these notes as they would be attractively priced debt, so investors could have to wait until 2072 or 2075 to get their money back.

Further, the dividend stopper didn’t apply if the company was unrated, and the change of control provision had a specific carve out for Mr Packer, Consolidated Press and related entities.

The prices of CWNHA and CWNHB got trashed. CWNHA fell from over $100 to touch a low of $81.25. It closed yesterday at $84.30.

Daily Price – CWNHA (source: ASX)

It was even worse for CWNHB. It fell from a high of $93.00 on 16 December to touch $70.00, almost 25%. It closed yesterday at $75.50.

These sorts of price movement, for a fixed income or debt security of over 15% in capital price, are absolutely massive!

What has the company said?

Nothing. No further statement about the plans of Mr Packer and his partners, nor how they may respond as a Board if such a proposal did come to fruition.  Nothing about how the Board might seek to balance the interests of shareholders with the interests of noteholders. If they recommended a bid, would they require that the privatised entity maintain a rating?

And deathly silence from the ASX as well. Despite CWNHA and CWNHB being listed securities on the ASX market, no price query or effort to make Crown comply with its continuous disclosure obligations.

Listing Rule 3.1 is pretty clear. It requires an entity to immediately provide any information concerning it that a reasonable person would expect to have a material effect on the price of the entity’s securities.

These price changes are material and noteholders are being left in the dark. Does the Board, or individual directors, really know nothing more?

And it is not as though the Board of Crown Resorts hasn’t got quite a bit of explaining to do. Less than 12 months ago, they signed off on a prospectus for the second issue of Crown Subordinated Notes (CWNHB). They were able to foresee 35 different investment risks, but didn’t care to nominate a “privatisation” risk or “non-rating” risk. Why not?

It is time that the independent directors of Crown Resorts - Benjamin Brazil, Helen Coonan, Rowena Danziger, Andrew Demetriou, Geoff Dixon, Professor John Horvath and Harold Mitchell - step up to the plate and ask some more questions of Mr Packer and his associates, and provide some answers to noteholders.

Finally, a very important disclosure. I am a shareholder in Crown Resorts, and my family’s SMSF owns shares in Crown Resorts and is a noteholder in CWNHA and CWNHB.