Sponsors seeking to take advantage of depressed secondary prices mean leveraged debt buybacks are becoming increasingly common. However, while sponsors argue that buybacks bring liquidity to otherwise frozen markets, the procedure is not without its detractors.
In the week that saw Smurfit Kappa launch a Dutch auction to buy back debt, lenders to Mauser have sought legal advice, angered with that group’s plans.
Mauser, a DIC-owned plastics manufacturer, is seeking to use the proceeds of an equity cure to buy debt that the sponsor has already acquired in the secondary market.
Behind the scenes, buying of debt is now common as sponsors look to acquire assets in small sizes without moving what they believe to be an undervalued market. Mauser is seeking to go beyond this, with DIC proposing to sell on debt it has already acquired.
No matter what the outcome of Mauser’s procedure, low secondary prices mean debt buybacks are fast becoming popular. Last week Smurfit Kappa launched a modified Dutch auction to buy back senior debt with a face value of €100m. Deutsche Bank ran the auction process.
Similar to a buyback from Trader Media earlier this month, Smurfit does not require a waiver. Debt acquired will sit in an special purpose vehiclep.1, with limited voting rights, and will be ineligible for coupon payments. With Smurfit’s debt trading up from the mid 60s to low 70s on the news, price guidance will be issued this week.
These two deals differ from Wind Telecomunicazioni, which is out in the market with an offer to buy back junior PIK loans with a face value of €233m via a Dutch auction process that closed on February 23. Here, Wind was required to seek prior consent from its lenders in a waiver process managed by RBS last September.
Price guidance has suggested a range of 61 to 69 for the debt, which traded up from 60/62 to 65/67 in mid-February.
Despite some lender concern, bankers working on buybacks insist the transparency of the process and the numbers of willing debt sellers negate any controversy. Moreover, a spokesman for Smurfit Kappa added: “the buyback brings in liquidity for those who want to sell debt and deleverages the business for the equity holders and remaining creditors.”
Some bank and CLO investors reject that view, insisting that a borrower able to deleverage from free cash flow should launch a process to cancel debt pro rata across the syndicate and repay facilities at par. That said, mark-to-market investors tend to be happy to find liquidity for assets, often booking a paper profit on buybacks.
No matter what the arguments, the process is dependent on loan documentation and relies on willing sellers.
“This situation was not at the front of people’s minds when loan documents were drafted before the credit crunch,” said Tim Polglase, a partner with law firm Allen & Overy. “It is not a question of going to the relevant clause and finding an answer. Documentation has to be gone through finely, and it can be a question of making a judgment call on what the specific wording allows.”