Risky Emma Delta bond still on course despite market jitters
* Jefferies sets price guidance on Greek lottery bond
* Buyers line up despite unusual margin loan structure
* Structure dependent on Emma Delta controlling the board
By Robert Smith
LONDON, Sept 30 (IFR) - Emma Delta looks set to pull off a bond despite using a risky margin loan structure dependent entirely on dividend upstreaming.
The issuer set official price talk and confirmed timing on the transaction backing its OPAP acquisition early on Monday, having begun the marketing process for the trade last Tuesday.
Buyers for the paper are waiting in the wings despite the fact that Emma Delta will be unable to control the dividend stream if it fails to seize control of OPAP's board.
The EUR400m unrated paper is split into EUR250m first lien and EUR150m second lien senior secured four-year notes, and will finance the Czech-Greek fund's acquisition of a 33% stake in Greek lottery firm OPAP.
The fund is issuing the notes through its Cyprus-based subsidiary Emma Delta Finance.
Sole bookrunner Jefferies set price talk on the first lien tranche at 8.5% area, while the second lien tranche is talked at 12%, in line with the whispers heard by investors last week. Books closed at 5:00pm UK time on Monday for European accounts, and will close 10:00am EST on Tuesday for US accounts.
Although a fresh political crisis in Italy saw the iTraxx Crossover widen out by more than 15bp on Monday morning, the new issue has not been blown off course, as its order book is understood to have been heavily covered ahead of launch.
"I understand they had the minimum essentially covered already, and they're just trying to bring others in to create some liquidity in it," said one syndicate banker.
An investor who had looked at the deal agreed, saying: "On a deal like this, the second lien especially will be covered already, allowing you to drive demand for the first lien."
He said pricing looks expensive but added: "I doubt they can afford more than 10% weighted." The weighted average interest if the deal prices in line with talk will be 9.8%.
MARGIN LOAN STRUCTURE
The deal has drawn a lot of attention for its unusual structure, with another investor describing it as "a margin loan with opco covenants and LTV tests".
The margin element is there because, although the debt is secured against the acquired stock of OPAP, the company itself is not guaranteeing the debt.
There is a loan-to-value (LTV) covenant of 45% for first lien and 75% for second lien on the 33% of stock bought by Emma Delta that is tested every two weeks and can be cured within seven days if violated.
The first investor said these structural elements - as well as the highly stable and remunerative nature of OPAP's business - made the deal attractive.
However, this was still not enough to justify the suggested pricing, he said.
Another real money investor was more scathing: "I saw Jefferies and Greek gaming and that was all I needed to see."
Several market participants associate Jefferies with high-risk but high-reward deals. One such trade was a successful pricing of a second lien bond for freshly restructured Kloeckner Pentaplast last year.
LITTLE WRIGGLE ROOM
OPAP is quasi-monopolistic, holding more than an 80% share of Greece's regulated gaming sector in terms of revenue last year.
OPAP generated EUR674m of Ebitda last year and declared more than EUR900m of dividends to shareholders from 2010 to 2012.
The investor said that for debt service to work, however, the company has to be running at very high dividend levels. Emma Delta paid a EUR181m dividend last year, which after accounting for the 25% withholding tax would translate to a EUR45m distribution to a 33% shareholder.
As Emma Delta has to pay EUR3m a year in deferred payments for the acquisition, this leaves little wriggle room given that the bonds will bear an interest cost of roughly EUR40m a year.
Emma Delta has stated that it will have to gain control of OPAP's board in order to ensure that a high dividend is paid out, and the bond contains a put option if Emma Delta does not gain control. The bond's offering memorandum states that if the board is not controlled within 75 days of the issue date, then Emma Delta will redeem the bonds at a price of 102.
"The high put price tells you that they are very confident they will gain control of the board," said the investor.
"If they don't, however, the question is: where will they get the money to buy back the bonds from?" (Reporting by Robert Smith, editing by Helene Durand, Alex Chambers and Marc Carnegie)
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