VNU delivery causes CDS chaos

Dutch media company VNU caused turmoil among CDS investors last week as it announced structural details for the US$1.67bn of new bonds backing its LBO by Valcon Acquisition, via bookrunners Deutsche Bank, JPMorgan, Citigroup, ABN AMRO and ING.

In contrast to most LBO situations, where debt is issued by a vehicle that is senior to the operating elements of the business, the two-part notes issue is at the level of operating subsidiary Nielsen Finance.

While this is good news for investors in the new bonds who will be closer to the cash flows generated by Nielsen, it spells bad news for the holders of VNU’s CDS, as the language used in the cross-guarantees between Nielsen and its parent indicate that the new debt will not be deliverable into the current contracts.

Moreover, the downgrade implicit in the move to an LBO structure further weakens the deal’s credit rating, causing a further widening of the price.

Although CDS holders requested the inclusion of wording in the deal’s terms that would ensure the deliverability of the new bonds into their contracts, the bookrunners pointed out that such a move was unnecessary as VNU’s existing sterling bonds due 2010 have four more years to run and bank debt is also deliverable into the CDS contracts. While lawyers for all parties busied themselves with the implications of the wording, the uncertainty led to a sharp widening in the CDS value, printing as wide as 380bp, over a hundred points wider on the week.

The new bonds, which are junior to the existing debt, are split between US$835m equivalent eight-year non-call four senior notes denominated in US dollars and euros, and US$835m equivalent ten-year non-call five senior subordinated discounted notes, also split into US dollar and euro portions.

Ratings are to be decided. The structure also includes senior secured credit facilities comprising a €4.316bn term loan and a €574m revolver. VNU also intends to purchase and/or cancel its preferred shares and complete bond tenders by Valcon Acquisition totalling €1.095bn, and amounts not tendered will be redeemed at par.

The European roadshow ran in London, Paris and Frankfurt last week and runs this week in the US. Pricing is expected in the week commencing July 24.

Valcon is a company controlled by a private equity group consisting of affiliated funds of AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co and Thomas H. Lee Partners.