NEW YORK (IFR) - A new bond offering from insurance broker AssuredPartners became the second junk-rated deal in two days to come under fire for provisions that critics say undermine bondholder protections.
Research firm Covenant Review accused lawyers and private equity firms behind the two deals of setting a dangerous precedent for the bond market.
"With all of the new loopholes being inserted in high-yield bond deals recently, it seems that law firms are intensifying their war on covenants," Covenant Review said on Tuesday.
The warning on AssuredPartners, a portfolio company of private equity firm Apax Partners, came less than 24 hours after Covenant Review took aim at Blackstone-owned Vivint, a home technology company also in the market with a new bond sale.
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Investors contacted by IFR said the Vivint deal - a US$400m seven-year non-call three marketed by its holding company APX Group and originally expected to price on Tuesday - was likely to be delayed following the controversy.
"It seems like tomorrow's business at best, at this point," one portfolio manager said late on Tuesday afternoon.
"We are obviously not fans of (this) everlasting quest to continue to chip away at protections."
Vivint had been sounding out investor appetite at a yield of around 8%, but could now be forced to choose between offering more and scrapping the controversial provision.
"If you are going to keep that covenant in, bondholders will want to get paid," said Dave Battilega, a portfolio manager at Three Peaks Capital Management. "Then it gets down to price."
The AssuredPartners bond - a US$450m eight-year non-call three intended to refinance outstanding debt and marketed at a yield of 7.50%-7.75% - is also expected to price this week.
WHOLE OR NOT
Covenant Review said the provisions, though slightly different, could allow both companies to be sold in an LBO without having to redeem the bonds at the make-whole price.
That price is meant to compensate bondholders for missed future interest payments in the event the bonds are redeemed early.
"As a bondholder, part of the concern is that a new sponsor leverages it back up," said Battilega.
A source close to the AssuredPartners deal told IFR that similar terms have been used sporadically before - and act as a test of investor confidence.
"I don't see it as a dangerous precedent," the source said. "When markets are strong, investors tend to be more comfortable - and in this case they are comfortable with the business."
In the AssuredPartners bond language, the possibility of a buyout where bondholders are not paid the make-whole is somewhat offset by parameters on post-buyout leverage and ratings.
But Covenant Review said that was not good enough.
"If egregious loopholes like the ones being marketed in Vivint and AssuredPartners become precedent, this will make it easier for high-yield bonds to remain in place in an LBO in situations where the bonds previously would have had to be called with a make-whole," it said.
Bank of America Merrill Lynch is the lead underwriter on the Vivint offering, while Morgan Stanley is leading the AssuredPartners bond sale.
(Reporting by Davide Scigliuzzo; Editing by Marc Carnegie)