ISS had to withdraw its deal for at least 24 hours after the rating agencies threatened to downgrade it when lead managers Citigroup and Goldman Sachs sounded out the market for an increase to Eu1.3bn. They had already enlarged the bond on Monday from Eu975m to Eu1.109bn.
That disorderly result made a sorry contrast with fellow Danish issuer Nordic Telephone Co's fortunes. Nordic priced the second biggest high yield bond ever in Europe to finance its takeover of telecom incumbent TDC. The deal was seven times oversubscribed and tightened after the break.
The high yield market has been starved of deals in recent weeks and both these big deals amassed sizeable interest during the bookbuilding phase.
That support encouraged ISS to increase the bond the first time, but when it tried a second time, Moody's and Standard & Poor's threatened to cut ISS's B3/B- ratings.
The company is 7.5 times leveraged and taking on much more debt could push it into triple-C territory.
However, this morning (Friday), S&P announced it would not cut ISS's rating even after the increase to Eu1.3bn. The agency said proceeds would refinance debt and be invested in the business, not be used for shareholder returns.
Citigroup and Goldman Sachs are expected to discuss the move this morning and hope to price the deal before the close of business and before the UK bank holiday weekend.
An official at Citigroup rejected the suggestion that the deal was in trouble, insisting only that there was an issue with documentation and that the leads were seeking clarification from the rating agencies. She refused to give any further details. Goldman Sachs did not return EuroWeek's calls.
Some in the market suggested that if the deal was downgraded it could be delayed further. "They have certainly irritated a number of investors," said one high yield syndicate official in London. "If they increase the size of the transaction again, they increase the overall leverage of the company, which is already bursting at the seams. If the issue is downgraded to Caa1 the price talk from earlier this week will not have value any more."
Others suggested ISS's leads had followed the NTC deal and sought to increase the bond without properly considering the potential rating action.
"They got caught speeding," said another syndicate banker. "The management of this trade needs to be questioned."
Others away from the transaction believed it would still be priced later today. "They have to sound out a number of investors in the morning," said a banker yesterday (Thursday) evening. "They will give them a couple of hours to confirm orders after any ratings action has been decided and if there is enough support for the deal, they will want to get it done — there is no benefit in keeping the trade open over the bank holiday weekend."
One investor, who had decided not to buy the bonds before yesterday's problems, questioned ISS's ratings before any new increase.
"I don't understand why ISS is a single-B credit in the first place," he said. "It is pretty shocking to have a credit that is in reality about 8.5 times leveraged and is still acquisitive, rated where it is. It should be a triple-C irrespective of any increase in the size of the issue."
A syndicate official agreed: "There is no way these guys are going to delever any time soon. This is a triple-C credit all day long."
The bond is expected to come in floating and fixed rate tranches. About Eu850m will be issued as a floater, with initial price guidance set at 700bp over Euribor area. A Eu450m fixed rate tranche was marketed with guidance of 8.875%. Both tranches were expected to come at tighter levels, supported by strong demand.
Before news of the problem broke, investors were upbeat about the deal, with some expressing a preference for ISS over the NTC transaction. "I liked ISS, the management performs very well and I was certainly braver on this than I was on NTC," said one.
The bond issue has been mired in problems since last May when private equity firms Goldman Sachs Capital Partners and EQT bought ISS for $3.8bn. That led its then investment grade bonds to be junked, provoking howls of pain from investors.
The new high yield bond had been expected to be issued last autumn but was prevented by a legal wrangle, in which existing bondholders argued that their bonds, which had been issued when ISS was investment grade, would effectively be subordinate to the new issue. An out of court settlement was reached.
"It appears that this transaction is cursed," said one high yield lead manager yesterday.
NTC hits the right chord
Nordic Telephone Co priced the second biggest European speculative grade issue ever and won almost universal praise for the deal, from all sectors of the market.
Barclays Capital, Credit Suisse, Deutsche Bank, JP Morgan and the Royal Bank of Scotland led the trade. The B2 rated deal came in three tranches, worth just over Eu2bn.
A Eu800m 10 year non-call five fixed rate bond was accompanied by a $600m non-call five and a Eu750m 10 year non-call one floater. Each of the tranches came at the tight end of price guidance and was trading at 103.00 by the close yesterday.
The deal was on average seven times oversubscribed, with the floater the most popular at 10 times covered.
"Given the prospect for further interest rate hikes in Europe and the possibility for prepayment of the floating rate note over the near to medium term, investors found the floating rate note attractive," said Bruce MacKenzie, vice president, high yield capital markets at Deutsche Bank. "At Eu750m, it is by far the largest subordinated floating rate note ever done in the European market and it priced at Euribor plus 550bp, 25bp through initial price guidance of 575bp-600bp over."
The biggest high yield deal so far is UK chemicals group Ineos's Eu1.75bn and $750m deal earlier this year. That bond performed disappointingly and has traded as low as 93.00.
The leads on NTC's deal attributed its good early performance partly to there being a lot of enthusiasm for the issue. "In deals of this size investor sentiment is very important to aftermarket performance," said Eric Capp, head of high yield at JP Morgan in London. "It is crucial to ensure that investors are very comfortable with the terms of the transaction and the deal momentum heading into the pricing. We accomplished that in this trade, while at the same time achieving a sharply priced deal for the issuer."
NTC was formed when five private equity firms — Apax Partners, Permira, Blackstone, Providence Equity Partners and Kohlberg Kravis Roberts —bought TDC, the Danish telecom incumbent, last year for Eu15.3bn.
