By Josie Cox
LONDON, Aug 2 (IFR) - Midsummer monotony in the corporate bond market was broken this week when Air Products and Chemicals first euro bond issuance in six years was knocked off track by an unexpected swoop on the business by activist shareholder Bill Ackman.
The US chemicals company was forced to pay up for what was looking like a slam-dunk deal, after Ackman said he was acquiring a near 10% stake, just minutes before books on the seven-year bond were due to close.
That prompted more than half of the accounts to pull out, according to market sources, with investors spooked by the uncertainty about what power Ackman and his Pershing Square Capital Management company now had, and what he would do with his new voting rights.
“Any shareholder activist move is unlikely to be bondholder-friendly,” one syndicate banker said. “And I’ve never really heard of a shareholder move like this that has been positive for ratings.”
Air Products is currently rated A2/A by Moody’s and Standard & Poor‘s.
The shock move meant that the bond deal priced at the wide end of price talk that had been set at plus 45bp-50bp by lead bookrunners Banca IMI, BNP Paribas and Deutsche Bank - and some 7bp wider than where the deal had been expected to price after guidance was revised to 43bp-45bp over.
“The deal was multiple times subscribed before the news hit and we were on track to print 300m euros at 43bp over swaps,” one lead said.
“By the time we printed, the book was still comfortably subscribed but had understandably taken a major beating.”
Pershing Square Capital Management now owns 9.8% of the company, but analysts said it may have bought even more if the company had not adopted a so-called “poison pill” that is designed to make hostile takeovers more difficult.
Although the leads on the bond deal were caught off guard, the company had an inkling that something like this could happen. It introduced the pill just last week, following speculation on Wall Street that Air Products was in Ackman’s sights.
“It certainly was a saving grace for the deal,” one of the leads said, emphasising that change of control clauses in the bond documentation had also been crucial in ensuring the deal got done despite the unforeseen circumstances.
Under the terms, if a change of control-triggering event occurs, the company will be required to make an offer to purchase the bonds at a price of 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest.
This is the first time Air Products has included such language in its euro bond issuance documentation. Bankers said that it had turned out to be advantageous, even though the chances of Ackman taking a controlling stake in the group were deemed minimal.
“It certainly encouraged some investors who may have pulled out to stay on board,” one lead said.
Leads said strong French support for the deal was one of the key motivations to push on with the transaction.
Although official distribution statistics were not available at the time of writing, sources said that French accounts had taken more than two-thirds of the paper.
One banker said this was likely due to the high proportion of French insurance companies looking for rare top-quality paper to buy and hold following thin supply in recent weeks.
“Despite everything that happened, risk-averse investors still see the credit for what it is - a high-rated, good-quality name,” the banker said.
Investors looking for some yield in low-risk products may also have been attracted by the deal. The coupon of 2% is still higher than the 1.75% paid by Unilever on its 750m euros seven-year deal earlier in the week, for example.
This support was also reflected in the bonds’ secondary market performance on Thursday, where they were bid around 3bp-4bp tighter, according to several traders.