8 International Financing Review September 8 2018Top news
High-yield bond flexibilities start to bite
n Bonds Firms pay sizeable dividends using 2017 covenant flexibilities
BY YORUK BAHCELIEuropean high-yield investor
resistance to aggressive lending
terms could be stiffened by
seeing several issuers take
advantage of the flexibility
in deal documentation
granted at the market’s peak
in 2017.
The latest issuer to do so is
German retailer CBR FASHION,
which is paying a dividend to its
new sponsor, just months after it
changed ownership, without
having to pay back holders of its
€450m 5.125% bond due 2022.
In the third quarter, the
company will upstream €50m of
cash to sponsor Alteri Investors
in the form of a shareholder
loan, it said during an investor
call in late August.
The dividend is fairly sizeable
when compared with the firm’s
cash and cash equivalents of
€100m and adjusted Ebitda of€62m for the first six months of
2018.
“They did it because they
could,” said a fund manager. “If
you were doubtful at all about
what sponsors could do with
these loosened covenant terms,
or if you doubted they would
ever use them, here’s a great
example.”
The fund manager was
referring to a point syndicate
bankers often make in
defending flexibility granted to
issuers in the deals they market:
that they are unlikely to be used.
Other aggressive terms
investors signed up to in recent
times allow companies to pay
dividends without meaningful
deleveraging and when in
technical - and sometimes actual- default. Some deals have also
loosened restrictions on how
much companies can invest in
subsidiaries that are not bound
by their lending terms.
But investors have shown
increased resistance to
aggressive terms in 2018, with
the majority of deals backing
buyouts seeing their terms
amended before pricing.
“The more investors get
burned by documentation, the
better it is for instigating some
pushback,” the fund manager
said.PORTABILITY SPOOKS
CBR’s dividend announcement
comes after former owner EQT
sold the company in March 2018
to Alteri, which is backed by
private equity firm Apollo.
The company was sold
without taking bondholders out
with a 101 put, as the bond’s
terms allowed it to exercise
portability without
deleveraging, a point covenant
analysis services had warned
investors about during the sale
of the bond.High-yield investors are
particularly irked by portability,
as judgements about a
company’s management and
ownership - and their strategy -
plays a significant role in the
decision to invest in its bonds.
“The change-of-control
provision is intended to give
investors the opportunity to put
their bonds back at the point that
a third party buys the business, in
the event they’re no longer
happy with the ownership
structure,” said Christine Tadros,
head of European research at
Xtract Research.
For some, CBR’s dividend
payment raised doubts about the
new sponsor’s strategy for the
company.
High-yield issuers also build
capacity to pay dividends tied to
profit levels, another risk for
investors who hold portable
bonds for companies that
perform well.HSBC adds calls on TLAC Samurai
n Bonds Bank finds strong demand from Japanese investors for new structure
BY DANIEL STANTONHSBC HOLDINGS introduced callable
TLAC bonds to the Samurai bond
market last week, and investors
flocked to the deal despite the
new structure and a clash with a
US dollar offering halfway
through the marketing process.
The UK-headquartered bank
on Friday priced a ¥160bn
(US$1.4bn) three-tranche
Samurai offering that will count
towards its total loss-absorbing
capacity.
Orders were heard to reach
¥200bn, but the total size was
capped at ¥160bn. HSBC had
said it might drop one or two
tranches, subject to pricing and
demand, but the strong response
meant it was able to go ahead
with all three.
A ¥79.3bn six-year non-call
five tranche was priced at par toyield 0.575%, equivalent to five-
year yen offer-side swaps plus
40bp. Guidance had started at
40bp–44bp on Tuesday before
narrowing to 40bp–42bp.
A ¥13.1bn eight non-call
seven-year piece was priced at
par to yield 0.797%, equivalent to
swaps plus 55bp. Guidance
started at 51bp–55bp before
being revised to 53bp–55bp.
A ¥67.6bn 10-year non-call
nine tranche was priced at par to
yield 0.924%, equivalent to
swaps plus 60bp. Guidance
started at 56bp–60bp, before
narrowing to 58bp–60bp.
If the notes are not called,
the coupons will be reset to
six-month yen Libor plus
40bp for the 6NC5 and 50bp
for the 8NC7. If not called, the
10NC9 will be reset to the one-
year offer-side swap rate plus
60bp.HSBC held a non-deal
roadshow a few months before
announcing the transaction, and
discussed the callable structure
with investors. In response to
feedback, a different structure
was used for the 10NC9 tranche,
as investors preferred a
fixed-to-fixed reset at that tenor.
The callable structure was
used because such bonds no
longer count towards TLAC
when there is less than a year to
maturity.
This was the first callable
TLAC trade in the Samurai
market, but Credit Suisse
pioneered the structure in
yen when it launched a
¥57bn Pro-Bond Euroyen
transaction in October 2017,
meaning that Japanese
institutional investors already
had some familiarity with the
format.HSBC last visited the Samurai
market with a ¥181.8bn TLAC-
eligible transaction in 2016 that
used bullet maturities.
Most investors were said to be
comfortable with the callable
structure, with only a limited
number passing on the deal as a
result. The Financial Services
Agency’s revised guidelines in
April, which clarified that
regional banks would only face
higher risk weightings on TLAC
bonds bought after April 1 2019,
also cleared the way for more
investors to come in.
A broad range of investor
types participated, including
trust banks, asset managers, life
insurers, property insurers,
regional banks, shinkin banks,
corporate investors, foundations
and central cooperatives.
“They like the pick-up and
they thought there was a4 Top news 2250 p4-11.indd 8 07/09/2018 18:27: