Institutional investors got slaughtered in the pre-credit crunch leveraged buyout boom. Many saw the value of their loans and bonds plunge as buyout barons leveraged their victims to the eyeballs, causing their ratings to plummet and turning investment grade loans into junk overnight.
Investment-grade companies looking to tap the robust US and European bond markets today are finding that these investors have long memories. Bond offerings that do not come with some form of LBO protection – usually a change of control put – are receiving a frosty reception.
This makes sense, since an LBO announcement usually will lop 10-20 percentage points off a bond’s price right away. And, if the buyout bosses attempt to shoehorn in new layers of senior secured funding, or change the assets that secure an outstanding bond or loan – as they did during the credit boom – prices can drop further. If the whole episode ends in tears with a bankruptcy filing, bondholders face recovery rates that have been falling for years.
Investors have therefore pushed back in a number of recent offerings, including those by Air Products & Chemicals and Emerson Electric, where the issuers did not include adequate change of control language. Both deals got done, though.
Even junk-rated companies are writing change of control puts on their bonds. Ashland sold $2.3 billion of bonds in a multi-tranche offering, part of which contains a make-whole provision and a change of control put at 101, according to S&P Leveraged Commentary and Data.
Prior to the credit boom, management was happy to tack on change of control puts, especially those with exercise prices set at a premium, since they repelled raiders. But in the credit boom, raiders (rechristened “private equity” by some clever flack) found that they could do deals more efficiently by stuffing managers’ wallets full of “incentives” to make them roll over. This time around, lenders might finally put their collective foot down.