Unique bond call feature lays the ground for M&A
NEW YORK, April 26 (IFR) - A unique call structure in bonds issued by high-yield rated companies in the oil and gas sector in recent months may grow in appeal amid expectations of a rise in acquisition activity in 2012.
The change of control or CoC call feature saves the issuer cash if the company is bought out within the first year. If there is a change of control to a third party the bonds can be called back at 110, rather than exercising the more expensive (especially now with Treasury rates so low) standard make-whole call at Treasuries plus 50 basis points, which could reach around 125 dollar price.
The feature essentially allows companies the flexibility of saving money at redemption if they are acquired, but if they are not taken over, they have at least raised funds to finance growth.
Conversely, it limits investors' total return if the issuer is acquired by a large, better rated company. But the structure, as issuer-friendly as it is, is still accepted by investors, particularly as its increase in use has coincided with heavy investment liquidity and an eagerness for products which yield more than most other instruments in the current low interest rate environment.
"There is a negative aspect in that it is capping your upside potential but in some cases the bonds are still priced with an attractive yield on a relative value basis," said one high-yield investor. "If you get a good carry and 10 points of upside then it can make sense in this market."
Issuers, particularly in the E&P space, are adopting these CoC call structures in anticipation of potential acquisition attempts by large investment grade companies.
Expectations are that these high-grade companies will use the current environment to pick up assets that are not transformational, but still would add earnings momentum to their balance sheets, all without drawing down too much of their cash pile.
This week, Laredo LARPTP.UL attached it to its US$500m 10-year non-call five senior notes offering (B3/B-), which priced at 7.375% at par through BofA Merrill, JP Morgan, Wells Fargo and Goldman Sachs joint books. Last week, Chaparral Energy CHARN.UL included the feature in its US$400m Caa1/B- rated senior bond offering.
Looking back, Kodiak Oil & Gas, Oasis Petroleum , Antero Resources ANTRSA.UL and Brigham Exploration all used the feature in their bond deals priced last year.
The addition of these CoC call structures is not a mere academic exercise. Brigham brought a Caa1/CCC+ rated US$300m offering that priced in May at 6.875% at par.
The company was subsequently acquired in October by Norwegian energy giant Statoil ASA for US$4.4bn. Meanwhile, Kodiak, Oasis and Antero all have been mentioned by investors as prime takeover candidates.
Going back to 2010, OPTI Canada had a similar feature on its US$400m bond offering. In this case, the CoC call was moot since the company went into bankruptcy before it was acquired last year by CNOOC Ltd, China's top offshore oil producer.
The feature has now occurred outside of the energy sector, suggesting that it could become more acceptable for the broader market.
Rite Aid's US$481m Caa3/CCC rated eight-year non-call four senior guaranteed deal, priced this past February, also included the CoC call feature at 110 the first year.
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