Deconstructing leverage

Debt-heavy structures are out of fashion and, with secondary prices stuck in the doldrums, borrowers are in an excellent position to reduce leverage. While debt buybacks have been a feature of the year, the process is set to become more formal and transparent.

Spanish travel reservations giant Amadeus is seeking to buy some €320m of its own debt via an agreed auction procedure. The process under way is in contrast to a string of bilateral transactions that have seen sponsors buy back debt in informal moves that have infuriated some debt investors.

“It creates a transparent mechanism where all debt holders are informed and aware of what is happening, and there is no obligation to sell,” said a source close to the situation. If successful, it could be the beginning of an institutional framework to manage the trend. Credit Suisse is acting as solicitation agent.

In 2007, Amadeus, through bookrunners Credit Suisse and RBS, arranged a record-breaking €1.2bn dividend recap as an add-on to a €4.3bn LBO debt package put in place only a year earlier through Barclays, CSFB, Merrill Lynch, JPMorgan and RBS. Sponsors BC Partners and Cinven own the business, alongside minority stakeholders Air France, Iberia and Lufthansa.

The documentation under discussion would allow the company to deploy excess cash, as defined under the terms of the agreement, to buy debt in the market and hold it to term.

The company has yet to finalise details of the plan, but sources say the debt, while not cancelled, will be held in a special subsidiary and stripped of voting and other creditor rights. It stops short of cancelling the debt, which would raise the tax burden on the creditor.

The specially created company will sit within the Amadeus group and its only function is to hold the debt.

The deal must be approved by 66.66% of the syndicate by the end of the month. Amadeus debt is widely held, which could make corralling a majority in favour of the deal difficult. If the request is positive, the company will launch a reverse auction process seeking offers from the syndicate to determine price and amount.

Sources suggest the reverse auction is likely to produce a bounce for the price of the debt from the current 82/84 context if the borrower hopes to have its bid hit in size.

Some banks will object to any effort to buy back debt below par, but the buyback is creating a bid for what is an increasingly illiquid asset, and, as such, more market-focused investors are receptive to the idea. Nonetheless, investors will push for a fee to approve the deal, though it is not prompted by any specific credit event or stress.

The effort to gain majorities could be complicated by syndicate agreements that mean many funds hold their paper through structures that limit their voting rights – on sub-participations, for instance, lenders are usually required to follow the majority.

The LMA is set to publish guidelines for lenders and borrowers that will formalise some of the elements now going through the market. Guidelines will focus in particular on transparency after a series of opaque transactions saw lenders only learn after the fact that TDC, FatFace, ProSiebenSat.1 and Lafarge Roofing had each bought up debt in the secondary market in the past 12 months.

Also seeking a debt amendment is Italian mobile phone operator Wind Telecomunicazioni. The leveraged corporate has asked lenders to approve an amendment that would allow it to use cashflow to finance a debt repayment totalling €412m. RBS/ABN is managing the process. It has deferred a consent request to repay junior debt to October.

The debt targeted for cancellation comprises subordinated and PIK facilities due to mature at the end of 2009 and 2010. The company said it had generated free cashflow in the first six months of the year, meaning it has some €460m of cash available to repay debt.

Yell is seeking a more straightforward covenant amendment as it looks to de-leverage. Lenders are being offered a 100bp spread increase and a 50bp fee to approve the deal.

The listed yellow pages publisher has seen its share price plummet more than 80% over the past 12 months.

In a bid to halt the decline, the company says it has suspended dividend payments until its leverage drops below 4x Ebitda and says it has begun a process to amend loan covenants to increase its financial flexibility. The company began the process by gaining pre-approval from its largest lenders before targeting the rest of the syndicate last week. HSBC is the facility agent.

Yell said it was operating within its financial covenants, and confirmed that its trading and financial performance continued to be on track to meet market expectations. Earlier this year, Yell reported that its net debt stood at £3.68bn, or 4.9x Ebitda.

The bulk of its debt was put in place in 2006 when it raised a £4.6bn crossover loan backing its acquisition of a stake in Spanish rival TPI. Mandated lead arrangers and bookrunners were Citigroup, Deutsche Bank, Goldman Sachs and HSBC.

The loan comprised a £3bn five-year term loan A paying 175bp over Libor, the £1.2bn 6-1/2-year term loan B at 200bp and a £400m five-year revolver at 175bp.

In syndication, bank lenders were invited to join on £100m for 70bp, £60m for 60bp or £30m for 50bp. This followed a senior phase in which mandated lead arrangers were invited in on a single £175m ticket for 100bp.

After the acquisition, leverage was 5.5x.