Jumbo financing for Ziggo looms as Liberty plots bid

Wed Jul 31, 2013 10:51am EDT

* Banks get ready, as Liberty Global ups stake in Ziggo

* Secured bonds could be junked, prompting refinancing

By Natalie Harrison

LONDON, July 31 (IFR) - Leveraged finance bankers are prepping for a fierce battle to win an expected mandate from John Malone's Liberty Global (LGI), which looks set to make a bid for Dutch cable company Ziggo.

Over the weekend, LGI raised its stake in Ziggo to 28.5% - just shy of the 30% that under Dutch law would require it to make a bid for the whole company.

With a takeover now widely expected, bankers are jockeying to get ready for a piece of the expected new business from the US cable giant, one of Europe's biggest and most frequent high-yield issuers.

"Liberty hasn't raised its stake this high for nothing," said one leveraged finance banker who has worked closely with both companies in the past on capital market transactions.

"It has been flagged so well in advance that banks are well aware that it is coming. It seems to be a case of when, rather than if," said a second leveraged finance banker.

BACK TO JUNK?

There would likely be plenty of new issuance to finance the Ziggo deal.

While Ziggo currently has a junk corporate rating of Ba1/BB, its secured bonds scrape into investment grade at Baa3/BBB-.

A takeover by LGI, though, would likely increase Ziggo's leverage from 3.41x now to something close to 4.5x-5x Ebitda - a level more typical of Liberty's other businesses.

And that could mean Ziggo's secured bonds slide into junk territory, triggering their change of control covenants.

A new capital structure would have to be put in place, though that would ultimately hinge on how much equity LGI injects and how much it pays for the Dutch company.

Ziggo's outstanding bonds include a EUR1.2bn subordinated maturing in May 2018, paying a coupon of 8%, and two EUR750m secured bonds that mature in November 2017 and March 2020, with coupons of 3.625% and 6.125%.

The 2020s, issued in March, are now bid around 98.5, languishing well below their launch price, so investors would welcome an option to sell them back to the issuer.

"If anything, those bonds should gradually move towards the 101 put price if investors think Liberty will buy the company," the first banker said.

He dismissed one investor's view that Liberty might want to keep the bonds in place because of their low coupon.

"Knowing the way that Liberty works, I don't think that is likely," he said.

"Leverage would have to stay in the low 3x area, while Liberty has a target of closer to 5x," said the banker," he said.

"That would mean it would have to find two turns of equity to bridge the gap, and for the sake of EUR750m, I don't see Liberty going down that road."

He said it was also possible to refinance Ziggo's 2017s, which become callable at 103 in November and are now bid at 103.6.

"Liberty has very few bonds outstanding across its whole group that have less than five years to mature, so I would assume these would also be taken out."

The subordinated 2018s would then also be in frame for refinancing, another banker said. Those bonds are bid around 106.5, which translates to a yield-to-worst of 4.5%, and become callable in May 2014 at 104.

ALL IN THE TIMING

As with any LGI bond, pricing will be key. LGI is well known for timing its deals to perfection, rarely offering investors anything in the way of concession.

Liberty-owned UPC, for example, printed a EUR600m 10-year bond in September 2012 with a 6.375% coupon.

At the time it was the lowest achieved on a euro-denominated unsecured bond from a Single B issue since 2007, according to a bookrunner.

The tight pricing - considered to be well inside fair value - led to poor secondary performance, prompting more generous pricing on the GBP2.3bn financing behind Liberty's purchase of Virgin Media in February.

That takeover was essentially the first step in Liberty's plans for a pan-European cable and broadband giant, and a Ziggo deal would be the next piece of the puzzle.

"In our view, Liberty Global's endgame is to acquire all of Ziggo and then merge it with UPC Netherlands," said ING credit analyst Malin Hedman.

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