M&A event risk is back with a vengeance and bondholders are apparently reaching breaking point. They have grown increasingly wary of leveraged buyout risk over the past year. And recent events have pushed them over the edge.
UK airport operator BAA’s €2.85 billion bond transaction was going fine until Spain’s Grupo Ferrovial made its buying interest known. Then, with payment on the bonds not yet settled, investors demanded, and got, protection. Should a change of control result in the company’s paper falling into junk territory, bondholders have a put at par. Similar language was demanded and obtained on a deal for Swedish vehicle maker Scania – the rules of the game are changing.
The last time an attempt was made to provide bondholders with better protection, by the Association of British Insurers in October 2003, the lack of balance between supply and demand allowed issuers to ignore their appeal. In addition to the ABI’s request for greater protection over change of control, negative pledge and disposal of assets, other investors called for enhanced levels of disclosure and transparency.
Private equity funds are stalking cash-rich conservative credits, leaving investors uneasy. The wall of cash that private equity funds have at their disposal means that companies in most sectors are prey. Furthermore, investing in sizeable companies no longer offers protection; the development of club deals means no corporate is too big for a leveraged buyout.
At present the protection being offered is rather limited. A put at par is hardly onerous when many bonds are trading well above 100. In the case of a leveraged buyout, shareholders win, bank lenders are normally protected by exacting covenants but bondholders are left in the cold.
There have been some welcome developments. Bondholders were not taken advantage of in the LBO of Danish telecom TDC. Why? Because there is always the long term to think about. Issuers, or in this case private equity, know they have to come back to refinance. So bond investors are not to be trifled with. As Spanish firm Telefónica recently discovered, sentiment has changed and bond investors are less pliant than before. It had to pay a hefty premium to get its 02 refinancing away in January.
