Investment-grade buyers are pouring over a slew of bond deals with leveraged buyout protection already attached. Last Tuesday, Home Depot brought a $5 billion offering to the market, a mix of seven-year and 30-year notes (A+/Aa3), with a change of control put. The retailer previously attempted to squash speculation it may be an LBO target.
According to Corporate Financing Week, a CIN sister publication, bond portfolio managers said it's strange to see a high-grade issuer arrive offering a covenant long reserved for speculative-grade deals. They've fought for LBO protection and won a few skirmishes this year, but it seems they no longer have to ask. "Bankers understand it now," said Kevin Murphy, an investment-grade portfolio manager at Putnam Investments. "If there's a well-discussed rumor most of these guys are coming with a change of control. We're starting to see a lot of low triple-B names come with that even if there's nothing under discussion."
Within the past month, a number of public and private investment-grade companies have issued debt with change of control puts, including Black & Decker, Wyndham Worldwide Corp., Federated Retail Holdings and Potash Corp.
The covenant forces the issuer to buy the bonds at 101 in the event of a buyout or another event which sinks the company into speculative-grade. The push for protection gained strength this year after bondholders were burned in bids for HCA, Clear Channel and Harrah's Entertainment.
"Investment grade, historically, never had to put any covenants," said Jim Nolan, a member of Babson Capital Management's fixed-income team in Springfield, Mass. But the biggest threat to investment-grade bondholders is the LBO, he said. And as private equity firms have assembled larger war chests, investment-grade companies previously off limits have come into their sights. "We're tired of getting burned by these events," Nolan said.
Lehman Brothers and Merrill Lynch led the sale of Home Depot's bonds. Calls to Lehman and Merrill spokeswomen were not returned.
The widespread use of change of control puts should eventually make LBOs more expensive. But Mark Fedorick, head of high-yield capital markets at Deutsche Bank, said it may take a couple of years for the trend to affect buyout deals because the process of replacing existing debt moves slowly.
