* 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
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
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.