By Danielle Robinson
NEW YORK, Jan 13 (IFR) - Beam's bonds ratcheted in
by as much as 15 basis points on Monday after Japan's Suntory
Holdings made a USD16bn bid for the US spirits maker.
Beam's 3.25% June 2023s were trading around 60p bid/55bp
offered this morning, from around 70/65bp on Friday. Its 1.75%
2018s tightened to Treasuries plus 30bp mid-morning from around
Treasuries plus 45bp at open.
The tightening is based on hopes that a successful bid from
Suntory will trigger a change of control (CoC) covenant aimed at
protecting investors against credit event risk.
"We know very little on Suntory to be able to draw this
conclusion (that CoC language would be triggered) with
certainty, but this is what's currently driving the bonds," said
a sell-side credit strategist.
Beam is currently rated Baa2, BBB- and BBB by Moody's, S&P
and Fitch respectively, but the strategist warned that the
acquisition would raise leverage sharply - and Moody's quickly
weighed in with a warning that it could downgrade Suntory.
The ratings agency placed the Suntory Holdings A3 rating on
review for downgrade, based on the expectation of "a significant
increase in debt and financial leverage for Suntory".
As another strategist put it: "The combined company
certainly doesn't look like an investment-grade rated company."
Suntory is paying USD13.6bn in cash and assuming Beam's net
debt, bringing together the latter's Jim Beam and Maker's Mark
bourbons, Courvoisier cognac and Sauza tequila with its own
Yamazaki, Hakushu, Hibiki and Kakubin Japanese whiskies, Bowmore
Scotch whisky and Midori liqueur.
Moody's said the acquisition was aggressive, noting that pro
forma for the acquisition, leverage could climb to a multiple of
six times earnings before interest, tax, depreciation and
amortization (EBITDA), based on the earnings of the two
companies for the 12 months to September 2013.
This metric alone would not be consistent with an
investment-grade rating. But the ability to reduce debt going
forward - as well as synergies that could offset the high
leverage - would be crucial factors, Moody's said.
"Potential for leverage reduction could come from the
increased earnings opportunities presented by the acquisition,
and the current cash flow available from Beam and Suntory to
reduce debt," it said.
Of particular interest is the impact of the acquisition on
some USD900m of bonds issued by Beam prior to Fortune Brands
spinning off its Home & Security business in 2011 and renaming
Those bonds - which do not contain CoC language - include
USD400m of 2016s; USD57m of 2021s; USD112m of 2023s; USD184m of
2028s; and USD162m of notes due 2036.
They were relatively unchanged on the takeover news,
however, mainly because they are illiquid.
The Suntory buyout of Beam at USD83.50 a share would make
the Japanese company the world's third-largest maker of
distilled drinks and would be the third largest Japanese
outbound M&A deal of all time, according to Thomson Reuters
Suntory intends to fund the acquisition through a
combination of cash on hand and fully committed financing from
the Bank of Tokyo-Mitsubishi UFJ.
Mitsubishi UFJ Morgan Stanley is acting as financial advisor
to Suntory, while Cleary Gottlieb Steen & Hamilton LLP is acting
as legal advisor.
Centerview Partners and Credit Suisse are serving as
financial advisors to Beam, with Sidley Austin LLP is serving as