Ardagh picks up the pieces on misjudged VNA financing
* Bondholders could charge Ardagh more for relaunched deal
* Sunk costs of postponed VNA deal run above USD100m
* Term loan should offer cheaper funding, however
By Robert Smith
LONDON, Jan 27 (IFR) - Ardagh launched a rejigged debt package backing its long-stalled acquisition of Verallia North America (VNA) on Monday which it hopes will wipe the slate clean with bondholders after it misjudged its previous deal.
Ardagh raised USD1.6bn in high-yield bonds to finance the acquisition in January 2013, but was forced to return this cash to bondholders earlier this month after it failed to meet a crucial deadline with US regulators, burning through the best part of USD100m in interest costs on ultimately useless bonds.
While the company is now funding USD700m of the new USD1.53bn deal in the loan market, USD830m will be funded by new senior bonds with 2019 and 2021 maturities.
"It's been expensive for them and the merits of the acquisition have now been diluted, but above all management have lost credibility," said an Ardagh bondholder.
"Ardagh's management are good but they overreached themselves on this deal."
Ardagh priced the three-tranche bond just days after announcing its acquisition of glass maker VNA in January 2013, arranged by sole bookrunner Citigroup, even though the acquisition still needed the US Federal Trade Commission's (FTC) approval.
The bonds had a deadline of January 13 2014 by which they had to be returned if the deal had not closed. The FTC first raised its objections to the deal in July, and still had not approved the deal by the deadline.
Ardagh, hoping to save face before the January deadline, launched a consent solicitation to extend the bond's escrow period by six months. This backfired however when a group of large bondholders opposed the offer.
"Even if investors don't like a consent, they often take it on the chin from large issuers as they don't want to be cut off from new bond deals," said a source involved in opposing the consent.
"In this instance though, Ardagh miscalculated their mood."
As well as reputational costs, the economics of the deal have changed since last year, potentially giving investors a stronger bargaining position.
"I would demand higher yields this time," said an investor, pointing out that Ardagh is selling the six plants earmarked by the FTC at lower multiples than they agreed to buy them for. He added that given that other Ardagh bonds are call-contrained, they cannot be used as a pricing benchmark.
The disposals have certainly diluted the merits of the deal. Last twelve months Ebitda would have been USD845.3m, but has now been reduced by USD78.9m to USD766.4m according to the memorandum. While the original deal pegged synergies at USD70m over four-years, this figure has now been reduced to USD60m.
The disposals also mean that leverage is higher this time around, at 5.5x compared to 5.3x. Ardagh is also issuing off the back of a weaker fourth-quarter figures, with the memorandum explaining that group Ebitda is expected to be 10% lower year-on-year.
The costs of the stalled deal have also been significant. The USD1.6bn of bonds have a weighted averaged cost of 6%, meaning that they accrue around USD95m in interest a year. On top of this, Ardagh paid investors a USD16m premium to return the bonds early. The fees and expenses for the deal have since climbed, from USD74m estimated in the 2013 bond's memorandum to a whopping USD119m estimated in the new memorandum.
Ardagh minimised some of the interest costs through a shrewd deal with VNA's seller St Gobain. St Gobain agreed that Ardagh would receive a portion of VNA's cashflow even before the deal was approved, according to sources with knowledge of the matter, allowing it to largely cover interest costs.
"They've still eaten costs in the economics of the deal," said the bondholder, however.
"This is just how they've funded it; it's still the best part of USD100m in wasted equity value."
Despite the weakened metrics, a second investor pointed out that US high-yield market has tightened generically by about 80bps since Ardagh last accessed the market. The first investor agreed that Ardagh could be saved by the high-yield bull market.
"Ardagh are lucky that they're in a market where yield-hungry investors might bite their lip and buy the bonds no matter what. In a disciplined market, if management lost credibility in this way it would definitely pay up."
The fact that Ardagh is no longer fully beholden to bond investors will also help the company, as the new Term Loan B will be cheaper than the senior secured bonds according to the banker.
"When Ardagh raised the acquisition debt the first time it had not accessed the loan market before, and did not want to do so as a debut issuer on a large acquisition," said the banker.
"By raising the term loan in December, however, Ardagh is known in the market and has something that trades out there."