LONDON, April 9 (IFR) - Wind pulled off a tour de force this week, refinancing legacy PIK debt with 2014’s largest European high-yield deal while getting ready for future consolidation within the Italian mobile sector.
The Italian telecom firm raised 3.75bn-equivalent of senior bonds that will refinance Wind’s 2.7bn-equivalent 11.75% 2017 senior notes and 1.3bn-equivalent 12.25% payment-in-kind (PIK) notes, in conjunction with a 500m equity injection from owner VimpelCom.
The refinancing of the PIK has settled one of the great unknowns in the high-yield market, as until very recently it was unclear if this debt would ever be repaid.
“We first started seriously looking at this around Christmas, and even then it looked very ambitious,” said a banker working on the deal.
“I don’t think the trade would have worked at any previous time. You not only needed strong markets, but you also needed the re-emergence of an M&A dynamic in European telecoms.”
Wind’s previous owner, Orascom, put in place the PIKs at the holdco level in 2009. The notes allowed interest to accrue on the principal at first, but became cash pay in January 2014, with the first cash coupon due on July 15 2014.
An investor said that the bonds would have required total cash interest payments of around 73m at this date and that Wind’s bond and loan covenants would have made it unable to service this coupon.
The notes saw wild swings in the secondary market, as uncertainty reigned over whether Wind’s owner VimpelCom would tackle the debt before this July deadline.
While the PIKs are callable at 106.125, they were bid below par as recently as last month, after VimpelCom said it was being investigated by the US Securities and Exchange Commission and Dutch authorities in connection with its operations in Uzbekistan.
The new deal is a victory for PIK holders, but an even bigger victory for Wind. Not only has the refinancing removed the very real threat of default posed by the PIKs, but it has also delivered Wind and VimpelCom tremendous optionality.
The portability clauses written into the senior secured debt should lower the barriers for badly needed consolidation in an Italian mobile market ravaged by a year-long price war.
The senior bond also allows unlimited dividends if leverage falls below 4x, and has a special 103 redemption using the proceeds of sales of Wind’s tower assets.
“These features are market firsts, and writing them into a subordinated piece of paper is even more impressive,” said a banker on the deal.
Wind cleared the decks for the deal with amendments to its senior secured loans and bonds that were approved by lenders and bondholders on April 3 and also wrote in portability clauses, allowing the issuer to announce the financing package on April 4.
Price talk came out on Monday at 7.25% area on the euro tranche and 7.5%-7.75% on the dollar, but by Tuesday afternoon this had been tightened to 7% and 7.375%, respectively.
An investor heard that a large US account dropped out of the dollar tranche when pricing was tightened, although a banker on the deal said it came back in as the deal gathered momentum.
The deal then printed in line with these levels, with a 1.75bn euro tranche and a US$2.8bn dollar tranche.
The transaction is also further proof that euros can beat dollar funding, even for large financings. Investors have traditionally charged an illiquidity premium for euros but this eroded over the course of 2013. Wind’s 0.375% differential versus dollars is the most impressive yet.
“On a Triple C deal of this size, it’s a huge differential,” said the banker.
“It definitely helped that we got a ton of demand out of European accounts.”
The bonds were already up a point in the grey market before books closed, according to a source, and both tranches were up to 101.50 on the break. The deal then performed massively on Wednesday, with both tranches trading up to 103.25 by midday.
Trading in the notes decoupled on Thursday, however. By Thursday afternoon, the bid on the dollars had slumped to 102.50, while the euros remained at 103.25.
“They priced tighter than the dollars, but on a spread basis the euros still look really cheap,” said a syndicate banker, explaining the changing performance.
“I think soon you’ll start to see euro tranches price 50bp tighter. People still mostly look at yield, but Europe is much more spread-focused than the US.”
While the dollar tranche offered a 511bp spread to Treasuries, the euro was a far healthier 597bp over Bunds.
Deutsche Bank was left lead bookrunner on the deal, and a joint physical bookrunner along with Credit Suisse. Global co-ordinators were BNP Paribas, Credit Agricole, and Banca IMI.
Joint lead bookrunners were Barclays, ING, Societe Generale and UniCredit, while Morgan Stanley and Natixis were joint bookrunners. (Reporting by Robert Smith; Editing by Philip Wright)