Interest rate swaps give Hipgnosis certainty over debt costs

Hipgnosis Songs Fund: SONG

Further to its announcement of a new revolving credit facility (RCF) two days ago (click here to read more on this), Hipgnosis Songs Fund (SONG) has announced that it has now completed the interest rate swap agreements that it said were in negotiations when it made the RCF announcement. Crucially, at a time of rising inflation and interest rates, the interest rate swaps provide SONG with greater certainty over the cost of its debt. With the swap agreements in place, the effective interest rates that SONG will be paying on its debt are as follows:

  • Until 2 January 2023, interest on all the drawn debt is fixed at 5.71% (including debt margin).
  • From 3 January 2023, the company has entered into interest rate swaps to hedge US$540 million.  Of this, US$340 million is hedged for the duration of the RCF (until 30 September 2027) at a fixed rate of 5.67% (including debt margin); a further US$200 million is hedged until 3 January 2026 at a fixed rate of 5.89% (including debt margin). The balance remains unhedged to provide flexibility in the operation of the RCF facility.

It should be noted that the cost of arranging both the RCF and the interest rate hedge has been added to the principal amount drawn under the RCF. The interest rate hedging contracts are not subject to margin calls in the event of movements in underlying interest rates. Accordingly, the Company now has certainty as to the quantum of its fixed interest payment obligations over the term of those contracts.

Comments from  Mercuriadis, Founder and CEO of Hipgnosis Song Management

“Together with the completion of our new Revolving Credit Facility, executing these swaps concludes our refinancing.  As debt markets have become increasingly unpredictable during the course of 2022, these new agreements provide long term certainty and a stable platform to take advantage of the Music industry’s tailwinds.”

[QD comment: Looking at historic numbers, cash generated from operating activities in the year to March 2021 and year to March 2022 were around US$85m, on net assets of about US$1.46bn in March 2021 and US$1.58bn in March 2022. These put the cash yield at something around 5.5%, which would suggest that, on the effective interest rates post the swap agreement, SONG wouldn’t make any profit. However, cashflows last year were held back by a lack of touring revenue, because of COVID, and the recent agreement on the percentage of streaming revenues due to songwriters (click here to read more on this) should free up significant revenue that’s been accrued but not received. Nevertheless, it looks as though the margin that Hipgnois earns over its interest payments won’t be huge. With SONG trading at a hefty discount (circa 35% at the time of writing), raising additional equity to finance further catalogue acquisition is out of the question. The inability to buy songs, at least in the short term, is a positive as the picture on the accounts will become clearer. Specifically, we should be able to get a better idea of the yields that the portfolio is achieving.]

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