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Opinion

The stand-off begins: M&A risk increases for bond investors

Bond investors are starting to clamour for extra protection as buyout risk increases.

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.

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