March 7, 2017 / 11:50 AM / 7 months ago

Salt to test bondholder discipline with "aggressive" recap

* Swiss mobile owner seeks large dividend

* Bondholders asked to relax key covenants

* Fee structure creates added uncertainty

By Robert Smith

LONDON, March 7 (IFR) - Salt is asking bondholders to temporarily loosen covenants to allow it to pay a SFr500m dividend to the Swiss mobile operator’s owner, providing a fresh test of high-yield market discipline.

So-called “divi recaps” often prove controversial with investors and are typically seen as a symptom of a hot credit market.

Bond buyers successfully pushed back against a €500m payment-in-kind bond to fund a dividend at Verallia in October, for example, but then allowed a smaller €350m recut version of the deal to pass last month.

Salt’s dividend deal is not only larger than Verallia’s but also more aggressive, as it requires bondholders to suspend crucial protections.

“We’re in a market at the moment where future mistakes are being financed,” said one high-yield bond investor. “The Swiss mobile market fundamentals don’t appear to support this sort of deal - and this is not a small dividend we are talking about.”

French telecoms entrepreneur Xavier Niel acquired the company through his NJJ Capital investment vehicle in 2015, rebranding the business as Salt from its previous name Orange Switzerland.

Niel is now looking to pull off the dividend recapitalisation, planning to raise additional senior secured and unsecured debt at Salt to fund a SFr500m payment to NJJ Capital. This will leverage up the company significantly, taking it from 3.8x to 5.0x net debt to Ebitda.

NJJ is arguing that the dividend is justified because it has boosted free cashflow substantially since taking over Salt.

WILDLY INAPPROPRIATE

The size of Salt’s planned dividend and additional leverage from the debt raise would breach covenants on its existing bonds, so the company is offering to pay bondholders to temporarily reset these thresholds wider.

But a second investor described this consent solicitation as Salt “trying to have their cake and eat it too”.

“It’s absurd,” he said. “Covenants are there for a reason. This is a real test of the market.”

Salt is asking bondholders to increase its restricted payments capacity, to remove limits on cash the owners can strip and allow for the SFr500m dividend by the end of the year.

It is similarly looking to loosen debt incurrence covenants to allow the company to increase consolidated net leverage as high as 5.25x until August 11.

Covenant Review said that the changes to the restricted payments covenant were “poorly drafted in a way that could create far more dividend capacity than is initially apparent”, in a report published on Monday.

On top of this, the credit research firm flagged an alteration to the incurrence covenants that could allow use of a carve-out to make future debt-funded dividends, without making accompanying pro forma changes to the leverage ratio.

“This is wildly inappropriate, and this pro forma trick should be rejected,” Covenant Review’s report said.

RUBBING SALT IN THE WOUND

While Xavier Niel’s company is paying investors that accept these changes, bondholders do not know how much cash they are actually going to get until after the deal is done.

This is because Salt is using an unusual, but not unprecedented, fee structure that splits a set amount of cash between however many people consent to the changes.

This means that if the consent solicitation gets the minimum required “50% plus one” approval, senior secured and unsecured bondholders get 3% and 4% fees, respectively. But if all bondholders agree, these fees would be effectively halved.

This technique is used to make it more difficult for bondholders to form a group to block the deal, as an investor that breaks ranks to help the consent solicitation just scrape over the line would be rewarded handsomely.

The second investor said the fact the three different senior secured bonds will vote as one class would make it even more difficult to block. This is particularly true as Salt is undertaking a tender offer for its €265m senior secured FRN but requiring that these bondholders also agree to the consent solicitation.

High-yield bond issuers have increasingly exploited poorly drafted voting mechanics that allow for multiple bonds to be counted as one class of notes. Notably, Virgin Media launched an exchange on sterling notes last month that will also impose covenant changes on dollar bondholders.

Covenant Review said that investors should “reject the aggressive consent solicitation” and demand a higher fee.

“Without the proposed amendments, the issuers would need to refinance the notes with new bonds containing looser covenants in order for the dividend to be permitted,” their report said.

“Therefore, the consent fee for the proposed amendments should be equal to the call premium that would be required to redeem the notes.”

The tender offer and consent solicitation expires at 4:00pm London time on Thursday. Goldman Sachs, Credit Suisse and Societe Generale are running the liability management exercise.

A spokesman for Salt declined to comment. (Reporting by Robert Smith, editing by Helene Durand)

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