Investors left to sweat on ISS debt

Investor fears that EQT and Goldman Sachs would not redeem €1.4bn of existing bonds after completing their US$3.8bn buyout of Danish cleaning company ISS have been realised. The consortium is acquiring ISS through newco PurusCo.

Following the US$3.72bn (DKr22bn) unsolicited bid for ISS in March, the debt slumped and its rating dropped seven notches to junk. “PurusCo has no plans to refinance the existing European Medium-Term Notes prior to their stated maturity,” the company said in a Stock Exchange Release. The bonds were issued through ISS Global, an intermediate holding company owned by ISS. Citigroup and Goldman Sachs are arranging the LBO debt.

Although the consensus was that the €1.4bn bonds due 2010 and 2014 would not be redeemed, the news was still a blow to bondholders, some of whom had hoped there was a remote chance the notes would be refinanced. The bonds slumped on the back of the news as note-holders, who are not getting compensation for their losses because there is no change of control clause, moved to dump the bonds.

“You could see from the trading dynamics that some investors thought the 2010s would be taken out, but there was no legal obligation to do so and at the end of the day, this is cheap financing,” said one banker away from the deal. “This is the price high-grade investors pay for a lack of covenants.”

The bonds initially lost between 3 and 5 price points on the news.

The financing structure indicates total debt of about DKr23bn, which includes up to DKr6.2bn of secured term loans to repay existing debt and dividends; a DKr5.5bn partly committed acquisition facility; a circa DKr5bn revolving credit facility for general corporate purposes; and a cash bridge facility of DKr2.38bn.

In addition, PurusCo has entered into a DKr5.842m subordinated bridge to a high-yield bond, while PurusCo’s parent has entered into a DKr750m PIK bridge loan, PurusCo said. Adjusted for estimated operating lease commitments of about DKr2.4bn, total debt-to-Ebitda is expected initially to be about 7x–8x.

The issue is what the inter-creditor relationship between the existing bonds and the proposed senior secured facilities will be, given the time subordination of the 2010s. “The senior loan could have a longer maturity than the shorter-dated bonds, as long as investors are comfortable with the company’s deleveraging profile being strong enough given the maturity of the 2010s MTN notes which will remain,” the banker explained. There are also rumours that the senior facility could include an acceleration clause.

The final split between senior and junior debt will be determined by the amount of money that can be upstreamed from ISS subsidiaries, a banker at one of the leads explained, adding that the underwriters were undertaking due diligence to determine the distributable reserves available at the various operating subsidiaries.

Lead managers admitted that the financing looked aggressive, but added that the package had been tweaked to take into account market conditions.

Syndication of the senior debt is expected to be launched next month.