NEW YORK: Vodafone fell victim to the picky corporate bond market this week, opting to pull its deal rather than relent to investor demands for chunkier spreads and greater risk protection.
The investment-grade deal, expected to be up to US$2bn in size, was the second multi-billion dollar issue yanked from the market in a week - and largely for the same reasons.
The sticking point appeared to be the absence of a change-of-control (CoC) provision - a covenant that forces issuers to redeem bonds, usually at 101, in the event of a takeover or merger, and which helps limit bondholder losses.
Bookrunners Citigroup, Goldman Sachs, JP Morgan, Mizuho and Morgan Stanley began marketing the 30-year issue at Treasuries plus 250bp area - but it struggled to gain traction. Investors decided the event risk was too big to ignore - especially as Vodafone's talks with junk-rated Liberty Global fell apart less than two months ago - and asked for a CoC clause as well, a senior banker on the deal told IFR.
But Vodafone declined, the banker said, instead trying to sweeten the terms by offering coupon step-ups in the event of a downgrade to junk from Moody's or S&P. One investor said the coupon would have increased by 25bp per notch of downgrade per agency, with a 200bp cap.
In the end, the two sides could not agree and after investors began asking for more spread - roughly up to 100bp more - Vodafone decided enough was enough.
"The issuer played their hand and the investors played theirs," the banker said. "(Vodafone) probably did not want to set a precedent by agreeing to a CoC or compensate investors with a much wider spread," said the banker. None of the issuer's outstanding dollar bonds have such clauses, according to Covenant Review, an independent research company. "When they eventually come back to the market, they will be pushed to spell out a clear strategy," the banker said. POWER PLAY Investor push-back has been fierce of late.
In the junk market, a US$5.6bn debt offering backing Carlyle Group's leveraged buyout of Veritas collapsed in spectacular fashion last week, leaving the eight underwriting banks hurting from a deal gone horribly wrong.
The high-grade market - where pulled deals are more of a rarity - has also had its fair share of bumps in the road.
Earlier this month, Chile's Tanner Servicios Financieros postponed a US$300m deal, and insurance company Allied World dropped a 30-year tranche.
While issuers such as oilfield services provider Halliburton have included CoC clauses on bonds to finance M&A, such protections actually work in the issuer's favor by giving them the option to pay the debt back if the M&A doesn't happen.
Including a CoC is more unusual in the high-grade space when it comes to protecting investors against an unknown credit event, though some in the market believe it will soon become more commonplace.
"After the LBO wave of 2006/07, investors started to pay close attention to CoC," said Alex Diaz-Matos, an analyst at Covenant Review.
"We expect more IG bonds to include them as market conditions change."
From an investment-grade bondholder perspective, an acquisition by a high-yield company is one of their worst nightmares. Without CoC protection, the acquirer has the option of leaving cheap investment-grade debt outstanding, and piling even more debt on top of it - and such scenarios have played out this year.
Holders of Cablevision's bonds, for example, were left licking their wounds earlier this year when junk-rated European telecoms company Altice bought the company.
Time Warner Cable bondholders were also exposed to volatile trading in the debt when high-yield credit Charter Communications said it was buying the business. Charter eventually structured the financing without layering the high-grade bonds - but that decision was highly unusual.
Yet with event risk on the rise, the buyside has cause to be leery, and more issuers may have to relent to their demands.
"This issue of having CoC in structures may become more pervasive in an environment where investment grade clients have become a strategic choice for acquisitions," said the banker.
"IG issuers are not used to agreeing to such demands from investors, so it will be interesting to see how this pans out."
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