Ardagh prices debt tighter despite weakened VNA deal

Fri Jan 31, 2014 7:17am EST

* New debt package cheaper for Ardagh despite concessions

* Yield-starved investors ignore weaker metrics

* Bondholders hope for renewed IPO discussions

By Robert Smith

LONDON, Jan 31 (IFR) - Ardagh's second Verallia North America (VNA) acquisition debt financing priced at tighter levels than the original deal, despite its concessions to the Federal Trade Commission (FTC) diluting the takeover's merits.

Ardagh raised USD1.6bn in high-yield bonds 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.

While a shrewd deal with VNA's seller St Gobain allowed Ardagh to largely cover the USD95m in interest costs with VNA's cashflows, it had to pay bondholders a USD16m premium and the deal's fees and expenses ballooned from USD74m to a whopping USD119m in the space of the year.

Ardagh also expects its fourth-quarter Ebitda to be around 10% lower year on year, but hot debt markets allowed the firm to slash its funding costs despite weaker credit metrics.

"Ardagh are lucky that they're in a market where yield-hungry investors might bite their lip and buy the bonds no matter what," said a high-yield investor.

"In a disciplined market, if management lost credibility in this way it would definitely pay up."

WEAKER DEAL, TIGHTER PRICING

In the rejigged acquisition deal, Ardagh funded the senior secured portion with a USD700m term loan B, along with USD415m 2019 senior unsecured paper and USD415m 2021 senior unsecured paper. Once again, Citigroup was sole bookrunner.

Ardagh began roadshowing the bond on Monday and, according to an investor, went out with price whispers of 6%-6.25% on the 2019 tranche and 6.75% on the 2021 tranche. Citigroup formalised price talk on Wednesday a touch wider, at 6.25%-6.5% and 6.75%-7%. The bonds then priced at par to yield 6.25% and 6.75%.

With the loan portion paying a 300bp margin over Libor with a 1% floor, Ardagh's weighted average cost of debt is less than 5.4%. The weighted average cost of its 2013 bond package was 6%.

The investor said that leads attributed the tighter pricing to "reverse enquiry", but said it was well inside fair value.

While another investor pointed out that the US high-yield market has tightened generically by about 80bp since Ardagh priced last January, the first investor said that the yield on the seven-year US Treasury has risen by 100bp in the same time.

"I've never understood the love affair that European high-yield has with this credit," he said, pointing out that negotiations with the FTC have significantly weakened the deal.

The credit quality of the senior notes has deteriorated, now rated Caa1/CCC+ compared to B3/CCC+ a year ago, and Ardagh has agreed to dispose of six glass factories to appease the FTC.

These disposals have hurt the deal. The last 12 months' Ebitda would have been USD845.3m, but has now been reduced by USD78.9m, to USD766.4m. Originally, synergies were pegged at USD70m over four years, but 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.

One of the key original selling points has also been lost. By combining VNA with Anchor Glass, Ardagh would have leap-frogged Owens-Illinois as market leader in US glass container manufacturing. After the proposed disposals, however, Ardagh will be second.

STALLED EQUITY RAISE

Ardagh said in a statement it is "very pleased with the continued support it has received from debt investors".

This support is crucial, as Ardagh has largely grown through debt-backed acquisitions. In last year's results presentation, it boasted that with the VNA deal it had increased revenues by 135 times since 1998, after 11 major acquisitions.

"They're acquisition junkies, but Ardagh is good at overhauling declining businesses by bringing in more efficient systems and renegotiating contracts," said an Ardagh bondholder.

While the debt markets have happily funded this growth, bondholders are hoping that an equity raise will finally emerge.

"The assumption was that Ardagh would IPO before making such a large acquisition, and the stalled equity raise has been a big disappointment," said another Ardagh bondholder.

A source close to Ardagh said it is under no pressure to IPO, but the company's presentation to bondholders this week reassured it would "restart pre-IPO equity raise discussions".

Equity markets are strengthening but Ardagh needs a substantial EV multiple given its 5.5x leverage. US market leader Owens-Illinois has an EV multiple of 7.5x.

"Two turns of equity is pretty thin," said the second bondholder.

After a long history of using the debt markets to its advantage, Ardagh will now have to focus on deleveraging if it is to transition into the public equity world.

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