By Robert Smith
LONDON, Jan 29 (IFR) - Liberty Global is curtailing capital
markets acquisition financing risk for its purchase of Ziggo,
via a bond exchange for the Dutch cable company's 2018 senior
notes for new paper that potentially transform into 10-year
bonds later this year.
The structure of the deal has never been used for a European
leveraged buy-out before. Liberty neatly circumvents the risk of
raising a new bond that would have to be paid back to
bondholders if the acquisition stalls. It also limits the market
risk of setting a coupon later this year when conditions could
be worse than at present.
The bulk of Liberty's financing of Ziggo is covered by a new
EUR3.735bn-equivalent term loan B, which is taking out Ziggo's
senior secured bonds and loans.
The innovation is in Ziggo's offer to holders of its
EUR1.2bn 8% 2018 senior notes to exchange into EUR934m of new 8%
senior notes also due in 2018.
If they agree, bondholders will receive a guaranteed
allocation on a new 10-year non-call five (10NC5) high-yield
bond, with a May 2024 maturity. This 10NC5 bond will only come
into existence if and when Liberty's acquisition of Ziggo is
As these bond investors have no precedents to work from,
however, it makes it even more difficult to evaluate a fair
price for the instrument.
"There are so many moving parts," said one Ziggo bondholder.
"It's a headache."
The real headache is the kind faced by Ardagh when it was
forced to return USD1.6bn to bondholders earlier this month as
it failed to meet a crucial deadline with US regulators on its
Verallia North America acquisition.
In this instance, Liberty has eschewed this route of raising
an acquisition bond and placing it in escrow until the
The EUR934m amount of the 2018 paper takes Ziggo's total
leverage to 5x Ebitda, on top of the EUR3.735bn term loan B
which puts senior secured leverage at 4x.
The new 2018 notes should act as placeholders for the 10NC5
bonds, but if the acquisition is not approved, then bondholders
would keep the 2018 notes. Liberty has a long stop date of 15
months and two weeks from the public announcement of the
acquisition to close the deal, but the acquisition is expected
to take six to nine months to close.
GET OFF THE FENCE
The coupon on the 10NC5 paper is scheduled to be set next
week, according to three market sources, meaning that the price
will be determined by a similar process to a new bond issue.
Leads are due to set price talk on the bond on Wednesday
February 5, according to two of these sources.
There is some time pressure for bondholders, however, as if
they tender their notes by February 7 they receive an early
participation premium. This is a cash payment of EUR40 for every
A second Ziggo bondholder said that leads had indicated that
the 10NC5 paper will carry a coupon of at least 6%.
"I see fair value at 6.5%, with 6.75% being a more
attractive price," said the bondholder.
"The thing is, they have to pay us to get off the fence."
The Ziggo 2018 notes are callable in May of this year at a
price of 104, so were previously held by investors anticipating
this call. Banks managing the tender will have to coax accounts
into potentially taking on long-term Ziggo paper instead.
"I imagine a lot of short-duration funds hold the paper at
present, who will have absolutely no interest in holding
long-term Ziggo paper," said the first bondholder.
The source close to the deal said there was already
"repositioning" happening between short-duration and
buy-and-hold funds in the Ziggo paper.
"If you want long-term Ziggo debt and want to reposition, it
means buying the notes at virtually zero yield to call," said
the first bondholder.
As the new 10NC5 bonds do not come into existence until the
acquisition closes, investors will only be able to trade the
"The 2018 exchange notes will trade as a proxy for the 2024
paper, and where they trade will reflect 10-year Ziggo risk,"
said the second bondholder.
He said he expected price action in the 2018s to become
apparent next week, as price whispers on the 10NC5's coupon leak
out into the market.
Credit Suisse is the dealer manager and structuring adviser
on the exchange.