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NXP's Eu4.5bn bond shows new strength of high yield

The European high yield bond market moved smoothly into a higher gear this week as NXP Semiconductors raised Eu4.5bn in dollars and euros, in the biggest ever bond issue by a European speculative grade issuer.

"A year ago Eu1.5bn was a massive deal in this market," said an official at one of the lead managers. "We have had six Eu1bn-plus trades this year and now this, which was a great deal for the market."

With French speciality chemicals company Rhodia also issuing a Eu1.1bn high yield bond this week, this was one of the most important weeks in the European market's history.

NXP Semiconductors is the newly independent semiconductor manufacturing arm of Royal Philips Electronics, which sold an 80.1% stake in the company to five private equity firms at the beginning of August, at an enterprise value of Eu8.3bn.

NXP is a leading supplier of silicon systems for mobile communications, consumer electronics, digital displays and in-car networking and entertainment. It has 37,000 staff worldwide, producing Eu4.8bn of sales in 2005.

Large leveraged buy-outs in Europe usually include a high yield bond as part of the financing, alongside a larger package of leveraged loans. The financing for this LBO is skewed the other way.

In early August private equity firms Kohlberg Kravis Roberts, Bain Capital, Silver Lake Partners, Apax and AlpInvest Partners obtained a Eu4.5bn bridge loan from Morgan Stanley, Deutsche Bank and Merrill Lynch, as well as a Eu500m revolving credit facility.

Now those three banks, with Morgan Stanley as bookrunner on the left, have refinanced the bridge with a bond worth $5.7bn — only a shade shy of the biggest ever high yield bond, RJR Nabisco's $6.1bn issue in 1989.

That leaves just the Eu500m revolver in the loan market, and because most of the financing is being done as a bond, the loan defies leveraged finance tradition and carries looser, bond-style covenants.

Rather than being subject to quarterly tests that it is maintaining financial ratios at agreed levels, NXP must obey easier 'incurrence' covenants that prevent it incurring extra debt unless it satisfies certain requirements.

One attraction of the loan market for private equity funds is the flexibility to refinance the initial acquisition debt at better terms once the company has established a track record under new ownership — sometimes after only a few months.

NXP's bonds are not quite that flexible, but all of them are callable at various dates.

Long roadshow

NXP announced the issue two weeks ago and went on the road in Europe and the US until the books were opened earlier this week.

The transaction was priced in five tranches yesterday (Thursday). Three senior secured bonds rated Ba2/BB+ were supported by two unsecured tranches, rated B2/B+.

The $1.535bn senior secured seven year non-call two bond was priced at 275bp over Libor, right on the guidance level. The Eu1bn senior secured seven year non-call one bond also came at the marketed level, 275bp over Euribor.

The other senior secured tranche was a $1.026bn eight year non-call four bond — it also pays the guidance level of 7.875%.

The unsecured tranches were both priced at the wide end of guidance. The $1.25bn nine year non-call five note came at the outside of its 9.25%-9.5% guidance and the Eu525m nine year non-call five at 8.625%, against guidance of 8.5% area.

The leads hailed the deal as a success, saying demand totalled more than Eu8bn across all tranches when they closed the book, and that the issue reflected NXP's wish to raise two thirds of the money in dollars and a third in euros.

Complicated credit

The leads claimed the bond was the first by a semiconductor maker in the European market. "The process was a long and complicated one," said a banker who worked on the issue. "The size was obviously important to accounts, but there was also an educative process that included investors being comfortable with the sector."

Bankers away from the deal criticised the pricing as cheap, especially compared with Rhodia's deal, priced on Tuesday.

That issue was a Eu1.1bn senior unsecured seven year non-call one bond, priced at 275bp over Euribor — the same level as NXP's secured seven year tranche.

"The feedback I have received suggests that investors like the pricing on the deal," said a banker away from deal. "One says it is good value and that undoubtedly means they think it is generous. Compared to Rhodia it looks cheap, but [semiconductors] is a tricky sector, and a very big deal had to be done. The pricing had to reflect this."

Bankers at the leads dismissed the criticisms. "The deal was not too generous," said a member of the syndicate. "Yes, Rhodia priced tighter on the seven year euro tranche, but look at where it is trading — below par. All five NXP tranches have traded above par in the secondary market. NXP was also much more difficult, due to its size and the complexity of the [semiconductor] market."

The only comparable pricing benchmarks were US semiconductor firms, but the leads suggested that the deal had been priced according to feedback from investors on the roadshow, and that all five tranches were comfortably oversubscribed.

Rhodia prices tightly

Rhodia priced its Eu1.1bn issue on Tuesday at the tight end of its guidance of 275bp-287.5bp over Euribor.

Lead manager Credit Suisse said the seven year non-call one bond attracted more than 200 investors. The proceeds will finance a tender offer for Rhodia's outstanding bonds, to extend the maturity of its debt.

The deal pulled more than Eu2.5bn of orders and was praised as having priced to the borrower's advantage. However, according to bankers away from the deal, the bonds were not trading above par at the close yesterday afternoon.

Alistair Dawber

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