Late 2011 was not the best time for a leveraged buy-out. Financial markets were selling off and market confidence had all but disappeared. However, France Télécom had committed to sell its Swiss mobile phone and internet business Orange Communications by auction and on December 23 picked Apax Partners as the winning bidder.
Apax had put together a bank group comprising Credit Suisse, Deutsche Bank (global co-ordinators), Citi, JP Morgan, Morgan Stanley and UBS just days before the bid deadline to underwrite a Sfr1.4bn bond and loan financing. It was a lot less racy and less leveraged than other LBO transactions brought to market that year a reflection of the appalling conditions in the European high yield and leveraged loan markets at that time.
"When we focused on the difference in cost of capital between various credit ratings in November and December, we found that the incremental cost of capital associated with increasing leverage and downgrading the unsecured bond tranche from BB- to CCC+ appeared to be very high," says Mark Zubko, global head of financing at Apax Partners in London.
"Therefore, the capital structure we targeted was one that allowed us to maintain a B3/B- credit rating on the unsecured tranche, which generated a deal profile that offered a slightly better IRR and more attractive cashflow coverage ratios than incurring incremental debt that would have been rated triple-C."
Even the process of appointing a lead manager group proved tricky, as many banks were severely constrained, recalls Zubko. "There were some banks unwilling to underwrite any deal that presented legitimate triple-C risk and then there were some banks that were willing to lend but at relatively uneconomic terms.
"Finding a financing structure attractive from an underwriting perspective to our banks for Orange was more challenging than any other financing we have done recently."
Apax and its banks then had a stroke of luck. After the new year holidays, they found conditions in Europes debt markets had greatly improved, mostly due to the European Central Banks long term refinancing operations, the first round of which had been carried out on December 21, when banks took 489bn of cheap three year money.
Apaxs initial plan had been to sell two bonds a Sfr325m 2019 senior secured piece, issued through Matterhorn Mobile and rated Ba3/BB-, and a Sfr225m 2020 senior unsecured tranche through Matterhorn Mobile Holdings, rated B3/B-.
These would accompany Sfr850m of loans, comprising a Sfr100m revolver, a Sfr125m capex facility, a Sfr225m term loan A and a Sfr400m term loan B.
But the improvement in bond market sentiment allowed for a reconfiguration of the financing package, reducing the reliance on loans and giving Orange more flexible debt.
The leads quickly increased the senior secured piece to Sfr450m, selling it at 6.75%. The unsecured tranche was kept at 225m and priced at 8.25%.
The banks then added a third bond, a 150m 2019 floating rate note priced at Euribor plus 525bp at an OID of 99.00. Out went the capex facility, and the term loan B was cut to Sfr212m.
Demand for the FRN much of it from CLOs was so high that a week later Orange tapped the tranche for a further 180m, scrapping the term loan B entirely. Of the loan portion, only the Sfr225m amortising term loan A and the Sfr100m revolver, both paying Euribor plus 500bp, remained.
Apax even considered replacing the term loan A with bonds but compromised after its ratings adviser Credit Suisse suggested some amortisation payments and maintenance covenants were necessary to retain the unsecured B3/B- ratings.
But in early September, Apax was able to finish what it had started earlier in the year. With the bond market more stable and Orange Switzerland having improved its operating performance, the company returned to sell Sfr180m of senior secured floating rate notes with the same maturity as the euro FRN, to repay and cancel the companys term loan A.
The notes were sold with a coupon of 537.5bp over Libor more expensive than the term loan A, which paid 500bp over Libor but the transaction gave the company "incremental operating flexibility", explains Zubko and eliminated amortisation payments.
As of mid-September, Orange Switzerland is therefore an entirely capital market-financed high yield bond success story. It only retains the Sfr100m revolver, which was moved up a rank to be super-senior to Orange Switzerlands secured bonds.
In reaction to the capital structure changes, Moodys downgraded the senior secured bonds from Ba3 to B1, citing the "presence of priority debt in the capital structure in the form of a Sfr100m super-senior revolving credit facility".Standard & Poors did not change its ratings, but gave the super-senior revolver a BB rating.