Travel reservations company Amadeus Global Travel Distribution’s plans to profit by buying back its leveraged loans at a discount in the beaten-down secondary market are riling investors.
Amadeus is understood to have asked its lenders to amend its €5.2bn (US$7.54bn) loan to allow it to buy debt back using excess cashflow of around €600m.
Loan buybacks have proved controversial as the companies owned by private equity firms take advantage of tough loan market conditions to buy back cut-price debt that will increase private equity firms’ interests and further boost profits.
Amadeus already paid a record dividend of €1.41bn to its private equity owners BC Partners and Cinven last year using additional debt, and funds are concerned that a loan buyback could weaken the company as the economy slows.
“The danger is that the cash is taken out of the company to buy back the debt and the company underperforms next year,” a leading fund investor said.
Investors are demanding a fee to approve a raft of changes for Amadeus. Questions have also been raised over the lack of a cap on the amount of debt that can be bought back, sources told Reuters.
Amadeus is owned by a special-purpose vehicle that is 52% owned by private equity firms BC Partners and Cinven. Airlines Air France, Iberia and Lufthansa – which previously controlled Amadeus – also hold a stake in the vehicle.
The debt will be bought by Amadeus and not its private equity owners, and will not be cancelled. Lenders to Amadeus have been asked to approve the buyback by the end of September.
It is not clear how much debt Amadeus intends to buy back, or at what price. Amadeus’s loans were trading at 83%–85% of face value in the European secondary loan market on Friday.
Amadeus declined immediate comment.
Industry body the Loan Market Association (LMA), which is poised to standardise the practice of buying back loans, supports Amadeus’s plans, which meet its guidelines for transparency with an open tender and the use of excess cash to effect the purchase.
Amadeus’s move to buy back discounted debt follows the purchase by KKR and Permira of €100m of senior debt in German broadcaster ProSiebenSat.1 last week from a single seller, banking sources said.
The practice has also been seen in the buyouts of Danish telco TDC, UK retailer Fatface and French buildings materials company Lafarge Roofing in the past 12 months.
Those purchases proved controversial as either the companies or their private equity owners quietly bought paper in the secondary market, prompting allegations of a lack of fairness as not all lenders were allowed to tender their debt.
Concerns were also raised that companies and private equity firms were using cashflow that had been earmarked for other purposes to buy the debt back.
The LMA guidelines are set to recommend that loan buybacks are made transparent by allowing all lenders to tender paper. Only excess cash on balance sheets should be used to buy back debt after all mandatory repayments including cash sweeps, as Amadeus is proposing.
Amadeus is the first buyback to meet both criteria. In addition, the voting rights acquired in the purchase will not give control as they will be obliged to vote with the majority of the syndicate should the company run into trouble, sources said.
“Votes subscribed to the debt will be obliged to vote with the majority of the syndicate,” a source familiar with the situation said.
Debt buybacks are credit-enhancing for leveraged companies that are fortunate enough to have excess cashflow at their disposal as they will save money on principle repayments.
Private equity owners will also benefit indirectly as paying down debt increases the equity value in the companies in which they have invested.
And while investors have objected to private equity firms making additional profits from their investments, cash-strapped bankers are also seeing regulated buybacks as a means of providing liquidity in a difficult leveraged loan market.
“People are not as strung up about it now; buybacks do provide a source of liquidity that can benefit credits,” a head of European leveraged finance said.