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 closed.
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 acquisition completes.
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.
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 EUR1,000 held.
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 2018 paper.
“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.