By Davide Scigliuzzo

By Davide Scigliuzzo


NEW YORK (IFR) - Investors showed some discipline this week in an overheating U.S. bond market, pushing back on aggressive structures and loose covenants from two junk-rated issuers.


IT services company Change Healthcare and data center infrastructure provider Vertiv were forced onto the defensive, as they sought to push the envelope in different ways on new bond sales.


Vertiv's private equity owners were struggling to find buyers for a bond that would allow them to take cash out of the company just two months after closing their buyout of the business.


Change Healthcare – backed by private equity heavyweight Blackstone – bowed to investor pressure and scaled back a controversial equity claw provision that had ruffled the feathers of many portfolio managers.

"There is a bit of a stretch with regards to [credit] quality, covenants and protections," said James Keenan, global head of fundamental credit at BlackRock. "[Investors] who spend a lot of their time looking at the structures have been very disciplined at pushing back."

To many, Vertiv's US$600m five-year non-call one PIK toggle note appeared a tough sell from the get-go.

Investors are usually wary of such subordinated bond structures because they allow company owners to load up on debt and skip cash interest payments if needed.


Even more concerning for some was Vertiv owner Platinum Equity's plan to use the vast majority of proceeds – around US$500m – to pay itself and other co-investors a special dividend.

The rest of the cash, or around US$100m, would be used to pay off some of the US$2.3bn term loan that the company sold in September to finance Platinum’s US$4bn buyout of the business from Emerson.

In a call with investors on Monday, Platinum partner Jacob Kotzubei stressed that after the debt sale was completed, the equity investment in the business would still remain the largest Platinum has ever made in a portfolio company.

"Why are we back here so soon after closing the transaction? There is very strong momentum in the business, in particular with our operational initiatives that are being delivered faster and in greater magnitude," Kotzubei said on the call.

But that did not seem enough to entice buyers.

People familiar with the sale said Bank of America Merrill Lynch had started to sound out investor appetite for the deal at a yield of 10.50%–11%.

By Thursday morning, however, some accounts were demanding 11.50%–12% to get involved while the call protection was moved from one to two years, one of the people said.


Change Healthcare's journey through the market with a US$6.1bn bond and loan package to finance its merger with a unit of McKesson appeared smoother.

Bowing to investor pressure, the company scaled back the notes' so-called equity claw provision, which allows a bond issuer to use proceeds from an equity offering to buy back the debt before it becomes callable.

In its original form, the clause would have allowed Change Healthcare to use the proceeds of a potential equity sale to buy back up to 100% of its new bond – significantly above the 35% to 40% typically seen across US junk bond offerings.

The original structure also allowed the company, which is planning to go public over the next 18 months, to pay par plus a fraction of the coupon to redeem the notes during the first two years.

Several investors appeared reluctant to expose themselves to the risk of an early redemption without a more generous compensation.

"There is no way we play Change with that claw structure," one portfolio manager told IFR early on Thursday morning.

Later that day, however, lead underwriter Goldman Sachs tweaked the provision and reverted to a simple equity claw of up to 40% of the bond at par plus 100% of the coupon during the first three years – in line with market standards.

It also tightened the yield offered on the trade to 5.875% from initial whispers of 6.25%–6.50% while reducing the size of the offering to US$1bn from the US$1.235bn initially targeted and shifting the difference to the term loan that is also part of the financing.

High-yield bond spreads have compressed by nearly 500bp over the past year thanks to a recovery in commodity prices and risky assets, encouraging riskier credits to tap the market.

"The process of borrowing money is always a negotiation," said Jon Duensing, deputy chief investment officer at Amundi Smith Breeden.

"Obviously the fact that a company is willing to try is indicative that there has been interest in the slightly more aggressive transactions."

(Reporting by Davide Scigliuzzo; Editing by Matthew Davies)