4 International Financing Review April 4 2020Top news
Asda deals blow to lenders
Loans Banks were looking at Asda buyout financing and are still preparing for other large M&A dealsBY CLAIRE RUCKINBanks were preparing to raise up
to £3.5bn of underwritten debt to
back a potential buyout of British
supermarket ASDA before owner
Walmart decided to put the sale
on hold last week in light of the
coronavirus pandemic.
Walmart, the world’s largest
retailer, has been in discussions
with potential buyers Apollo, Lone
Star and TDR Capital for some time
and banks were assessing appetite
FORûAûJUMBOûlNANCINGûINûAûleveraged loan market that has
been frozen by the pandemic.
Bankers were disappointed by
Walmart’s decision to put the
sale process on hold until the
coronavirus effect lifts, but they
will be cheered by the fact that
DISCUSSIONSûFORûTHEûlNANCINGû
were positive.
While the Asda sale has now
been put on the back burner,
lenders are still looking at other
M&A situations.
“Obviously there is a willingness
from most of the banks to beconstructive and if you are asked to
do something you’ll try and do it
for your client,” a banker said.
“Banks are still looking at
some other M&A situations and
there is still a willingness to
consider things ... Asda is more
sensitive at the moment because
of the vital role it is playing in
what’s going on, as its workers
are key workers and it is trying
to get food out to the country.”
Banks would typically jump at
the chance to fund a jumbo buyout,
BUTûlNANCINGûANYûDEALûCOULDûPROVEûproblematic in the current climate
as risk-adverse lenders have all but
stopped underwriting leveraged
lNANCINGS
“Banks have been looking at
Asda and a few others out there.
Banks have to think about how
long do they have to sit on risk
and ... do they have protections in
place even if the market reprices
to a new level? That’s what banks
are going through at the moment
on a few new deals out there,” a
second banker said.
The talks around the AsdaCarnival ships in US$6.25bn rescue
Bonds/Equities It’s not exactly ship-shape but strong covenants and recovery value see investors take a puntBY STEPHEN LACEY, DAVID BELLCARNIVAL CORP has been forced to
pay up dramatically for a
US$6.25bn debt-plus-equity
recapitalisation that is designed
to keep the holed cruise ship
OPERATORûAmOATûFORûTHEûNEXTûYEAR
Carnival secured US$4bn from
the sale of three-year debt and
another US$2.25bn from equity-
linked securities on Wednesday
to raise slightly more than the
US$6bn combined it had
targeted as it re-sized the
lNANCINGûTOûLIMITûHEFTYûDILUTIONû
to its shareholders.
“The point of this raise is to
give comfort to shareholders and
other stakeholders that Carnival
will have enough liquidity to see
them through however long it
takes,” said one banker involved
INûTHEûlNANCING
“No one knows for sure when
the coronavirus pandemic will
end. Two months, six, 12? That
decision will be driven by
government authorities.”
JP Morgan, Goldman Sachs and
Bank of America had sought to de-
RISKûTHEûlNANCINGûBYû
CONlDENTIALLYûMARKETINGûTOû
institutional investors on Monday,
ahead of the formal launch.
Those efforts were complicated
by the fact that Carnival is dual-
listed on the NYSE and the LSE
and the complexities ofcomplying with UK watchdog
FCA’s market abuse regulations
meant limiting participation at
that stage to US institutions.
The marketing effort was
focused on ensuring a successful
outcome by making the deal
super-attractive for investors.
Carnival publicly launched the
three-year non-call life bullet senior
secured bond offering on Tuesday
at an initial sizing of US$3bn, with
talk in the 12.5% area and a 98–
OID. The equity tranches were
initially divided into US$1.75bn of
three-year convertible bonds and
US$1.25bn of common stock, with
the CB talked at a coupon of 5.75%–
6.25% and a conversion premium of
17.5%–22.5%.
4HEûlNANCINGûTERMSûANDû
structure underscored an “eye’s
wide open” approach by
Carnival management regarding
the impact of coronavirus on
their business. The CB issue, for
example, was modelled six to 10
points cheap, based on the Libor
plus 1,400bp credit spread
imputed by the straight bonds
and a 40 implied volatility.GRIM REALITY
The attractive terms were necessary
as Carnival is in effect a non-
operational company. It voluntarily
suspended operations globally on
March 13 as the coronavirus crisis
deepened and as a non-US companyis not able to participate in
US$500bn of US government
programmes being directed toward
distressed businesses.
Over the two days of public
marketing on Tuesday and
7EDNESDAY û#ARNIVALûlVE
YEARû
CDS blew out to 1,000bp from
490bp, and its NYSE-listed shares
tanked 33.2% to US$8.80,
ACCORDINGûTOû2ElNITIVûDATA
Carnival responded by upping
the straight debt component
from US$3bn, while reducing
the amount of stock sold to
US$500m and keeping the CB
issue at US$1.75bn.
4HEûMOVEûREmECTEDûBOTHûTHEû
strength of investor demand for
the new debt and a desire by
Carnival management to limit
stock dilution.
Carnival’s three-year secured
notes printed at an 11.5% coupon
and a 99 OID, terms suggestive of
a company in distress. The
company sold 62.5m shares at
US$8.00 apiece, a 9.1% discount
to last sale, with the CBs priced at
a US$10.00 conversion price, a
25% premium to reference on the
common, with a 5.75% coupon.
Moody’s and S&P had twice
downgraded Carnival’s corporate
credit ratings in the past month.
Its ratings are now one notch
above junk at Baa3/BBB–.
“Demand was surprisingly
strong from high-yield investors,”said one banker involved in the
underwriting. “We haven’t seen
this type of company access the
debt markets for a rescue
lNANCINGûINûAûLONGûTIME
“That demand alleviated the
need for more junior capital. While
the debt is certainly not cheap it is
certainly a lot cheaper than equity
if the stock price recovers.”
As it stands, Carnival sold
about 12% of itself on the base
equity offering with additional
dilution possible from the CBs at
prices above US$10.00.
The outcome is a shocking
testament to how far and fast
conditions have deteriorated for
the company. For perspective,
Carnival raised €600m from the
sale of 10-year bonds at a 1%
coupon last October, when it
was rated A3/A– and its shares
fetched closer to US$50.SECURITY PACKAGE
While still technically investment
grade, Carnival’s US$4bn secured
debt offering was marketed as
high-yield bonds and featured a
covenant package to match.
Carnival pledged the lion’s
share of its assets, including the
MAJORITYûOFûITSûmEETûOFûSHIPS ûASû
COLLATERALû-ARKû"ENBOW ûAûlXED
income investment manager at
Kames Capital, estimates the
collateral is worth somewhere in
the range of US$28bn.4 IFR Top news 2327 .p 2 - 12 .indd 4 03 / 04 / 2020 19 : 29 : 26