* M&A activity tipped to pick up with LBO prospects
* Change-of-control language still relatively rare
* Small and medium sized corporates most likely targets
By Natalie Harrison and Josie Cox
LONDON, March 8 (IFR) - Investment-grade bondholders may
find themselves unprepared and at the centre of an event risk
minefield if cash-rich corporates and private equity firms,
encouraged by a sustained equity rally, embark on an acquisition
After a dismal two years for M&A activity, bankers are
hopeful that two to three mega leveraged buyouts - reminiscent
of the 2006-2007 leveraged buyout boom - could materialise in
Europe in the second or third quarter, with each involving
EUR10-15bn of debt,
But while this is good news for fee-hungry bankers, it's a
chilling prospect for some high-grade bondholders.
Britain's biggest mobile operator Everything Everywhere and
French media giant Vivendi's SFR mobile unit have emerged as
targets, and there are plenty of potential buyers.
Vodafone, for example, has been linked to cable companies
ONO, Kabel Deutschland, and Yoigo in the past few weeks, and has
also shored up its funds via a huge USD6bn bond issue in recent
Rating agency Moody's warned on Thursday that the proposed
USD23.2bn buyout of U.S. food giant Heinz by Warren Buffett's
Berkshire Hathaway and 3G Capital could leave some Heinz
bondholders in a far weaker position in the company's capital
Almost USD900m of Heinz's current USD4.3bn of outstanding
bonds will remain in place after the deal closes, and could be
junked due a doubling in leverage, Moody's said.
"The deal is a reminder to investment-grade bondholders that
their often minimal covenant protection can leave them exposed
to a sharp decline in value after an acquisition is announced,"
said Moody's analyst Alexander Dill.
"It also illustrates the particular importance of
change-of-control provisions in bond covenants, though these
were less common in investment-grade indentures before the
leveraged buyout boom of 2006-07."
Despite clear signs that takeovers are picking up, only 37%
of high-grade non-financial issuance documents contained
change-of-control protection clauses last year, according to
Bank of America Merrill Lynch data. So far this year that number
has fallen to 31%.
Among recent investment-grade issuers that have included
change-of-control language are German auto parts supplier Hella
KGaA Hueck & Co and Everything Everywhere.
Spanish conglomerate Abertis Infraestructuras, however, did
not, and sold a EUR750m seven-year bond on the back of EUR4.5bn
orders, despite in 2010 having been at the centre of takeover
TAKING A LIBERTY
Change-of-control covenants will put a floor on the value of
a security - usually 101 - but this still leaves investors
exposed if the bonds are trading well in excess of that level.
Liberty Global's acquisition of Virgin Media last month, for
example, resulted in a 12-point drop in the price of the
latter's 2021 investment-grade rated secured bonds.
"In the high-yield market event risk is typically positive,
as you are more likely to be taken over by a company that is
higher rated than you, but in the investment-grade market,
negative implications can be significant," said James Gledhill,
investment fund manager at AXA IM.
Identifying acquisitive companies, by looking at their cash
holdings and liquidity, is quite straightforward. The problem
lies in identifying who might be the targets, investors say.
In high-yield, it tends to be the most cash-generative
companies, but Virgin Media bondholders clearly didn't see
The Heinz deal and Dell's USD24bn buyout are the first
proposed leveraged buyouts worth over USD10bn since the
financial crisis, and the odds are that the pace of takeovers
will quicken in Europe.
"Capital markets bankers are telling us that there will be a
large amount of leveraged loans coming our way. There's usually
a three-month time lag from the bid to financing, but the third
and fourth quarters could be busy," said one leveraged loan
"Bankers are certainly saying that this is the busiest they
have been in three years."
Corporate confidence is clearly on the rise too.
"We are...open to small and medium sized acquisition
opportunities to achieve this aim of diversifying from mobile to
fixed line," Hans Tschuden, chief financial officer of Telekom
Austria told IFR.
Leveraged financiers are saying there is a lot of gung-ho
M&A talk and banks are conducting discussions on underwriting.
"The Liberty Global Virgin Media deal got everyone excited.
The fact is there has been a relative lack of supply, and that
is pushing people to be more ambitious."