Dish angers bondholders with yet another multi-billion debt sale

Tue May 14, 2013 5:21pm EDT

May 14 (IFR) - Dish DBS Corporation angered existing bondholders on Tuesday when it announced plans to raise USD2.5bn in the high-yield market as part of the funding for its proposed acquisition of Sprint Nextel.

Dish is battling Japanese telecoms company SoftBank Corp, which reached an agreement to pay USD20.1bn for 70% of Sprint in October. Dish launched a counter-bid of USD25.5bn in mid April.

"Current holders of Dish are worried and disappointed," said one investor. "Holders seem angry as their current positions get diluted.

"[Dish Chairman Charles] Ergen knows the whole world is betting against him winning this auction. The lower probability the market puts on him winning, the lower the coupon on these bonds is supposed to be. So Ergen basically gets a free look at cheaper financing in case he actually wins. And if he loses, he suffers the coupon costs but just gives back the money," he said.

Dish said the proceeds of the offer will be placed into an escrow account. If the Sprint acquisition does not go through within one year, the company will redeem all of the notes.

"It's surprising that they would want to lock in a rate and pay breakage if the deal falls through," said a banker not on the deal. "Especially when there's no indication that they are in the lead. This is a very aggressive launch."

Existing bonds of Dish came under pressure following the announcement, with most falling by around a quarter to a full point on the news, although general market weakness may have contributed to the drop. The company's most actively traded notes, the 5.875% notes due 2022, fell a point to 101.50 by mid-morning.

Reuters reported last week that SoftBank had asked banks not to finance Dish's unsolicited bid for the company. Softbank was in the market last month when it sold USD3.3bn of bonds to help fund its rival bid.

PAYING UP

On Tuesday, Dish appointed Barclays as lead left bookrunner and Jefferies, Macquarie and RBC as joint books on the sale, which will be split between two tranches of four and 10-year notes.

According to market sources, the deal was heard whispered around 4.75% for the 2017 notes and 6% for the 2023 notes. The investor said that the new 10-year notes will need a 5.5% yield at a minimum.

This is Dish's fifth deal in the high-yield market since May 2012 and its second in just six weeks. Most of the proceeds have been earmarked for acquisition plans.

Dish tapped the market in early April when it sold a significantly upsized USD2.3bn (from USD1bn) two-part deal, split between a USD1.2bn 4.25% due April 1, 2018 and a USD1.1bn 5.125% tranche due May 1, 2020.

On Tuesday, the 4.25% notes slipped about a quarter of a point to 99, while the 5.125% notes were seen at 99.25-99.75, also down a quarter.

Those notes had also fallen when they first broke for trade, with investors at the time expressing frustration with the company.

"That deal came relatively cheap to the curve, but rather than it going up in price, it brought the whole security down because they upsized too much," said another investor.

The company was also vague at the time about the use of proceeds for that deal, saying it was for general corporate purposes, which may include wireless and spectrum-related strategic transactions. Two weeks after the deal, Dish unveiled its bid for Sprint Nextel.

"They really angered investors being sneaky like that," said the investor. "They'll have to pay up with this next deal in the market."

Pricing on the new deal was expected Tuesday or early Wednesday following an 11.30am call with investors, but price talk has not emerged, suggesting the deal is now tomorrow's business.

"It's not going to be an easy deal to get done," said a third investor. "There are two ways to look at it. One is that you can't lose any money, if this deal doesn't happen, you'll get your money back at par, but again there's no upside if this doesn't happen. You'll collect a coupon but that's it."

Investors are also worried about a bidding war and what that might mean for Dish's credit quality.

"If they both up their offers, how leveraged will Dish be? Can it keep its Double B rating or will it get notched down to Single B? And if you've got 10-year Single B notes with a 6% coupon, that doesn't look so great," he said.

To be sure, the USD2.5bn deal is not the end of the story.

"Dish will still have to arrange additional new acquisition financing (approximately USD13-USD20bn depending on price), so current holders are worried," said the first investor.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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