Bonds see burst of CoC clauses to soothe wary investors

Tue Mar 4, 2014 5:57pm EST

NEW YORK, March 4 (IFR) - Six of the eight investment-grade corporate bonds that priced Tuesday included change-of-control (CoC) language, as wary investors demand more protection after some recent close calls.

Rattled by Safeway Inc's decision to sell itself - and the spectre of Time Warner Cable nearly tumbling into junk status - bond investors are pushing for more CoC clauses.

Entertainment giant Viacom - which didn't include CoC puts in its bond issue in August - included them today, as did Gilead Sciences, Potash Corp of Saskatchewan, Aetna, Pitney Bowes and Burlington Northern Santa Fe.

Air Lease Corp, in the financial sector, also included CoC language.

Although CoC language is common enough in the investment-grade market, it's not often that virtually all of the corporate deals on a single day have included it.

Investors were shocked to see how close Time Warner Cable - with roughly US$24bn of outstanding debt, none of it with CoC language - came to being bought by junk-rated Charter Communications.

"Time Warner really increased investors' concern about the event risk in the investment grade market so now the first thing you look at in a new issue is whether it has CoC protection," Rajeev Sharma, portfolio manager at First Investors Management Co, told IFR.

Companies which can still add debt without piercing their leverage targets are the most obvious candidates for CoC language

"Looking at recent bond issues, investors have asked for CoC language in deals from companies that have leveragable balance sheets, which makes them attractive targets for private equity," said one senior credit strategist.

Demand for CoC is also required for certain corporates that are rated single A by one agency - such as the trades today from Potash (A3/A-) and Gilead (Baa1/A-).

Some investors demand payment of as much as 20bp more in new issue premium if a bond doesn't have CoC language.

"We've historically avoided deals without that language unless the spreads were really compelling," said a senior portfolio manager.

"So much so that [the issuers] adequately compensated us for the absence of that language."

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