June 30, 2017 / 3:23 PM / a month ago

Manutencoop: crazy name, crazy deal

5 Min Read

* Italian company pays up for bond

* Terms amended to get over the line

* Investors wary of legal risks

By Yoruk Bahceli

LONDON, June 30 (IFR) - Manutencoop paid a hefty price to get a troubled trade over the line.

The deal, which came four days later than originally planned, became the year's highest yielding junk bond in euros from a Single B borrower when it priced on Thursday.

The bond came with a 9% coupon but at a two-point discount to par, giving a yield of 9.519%. Manutencoop had to widen pricing substantially during the execution process.

Investors on Tuesday said the transaction would come with a 9% yield, already the wide end of the 8.75%-9% range heard on June 23 - the date the deal was originally slated to price. The only official guidance put out by leads was the final yield.

That yield was a good 150bp more than the previous highest this year from a Single-B name: a five non-call three senior secured from Travelex in late April.

As with that Travelex trade, Manutencoop - a facilities management outfit - also had to sweeten the terms of its deal in favour of investors, who pushed back on the original structure given the Italian company's involvement in three lawsuits.

The five-year senior secured notes were cut to €360m from the initial €420m proposed when the deal was mandated on June 21, and call protection was extended to three years from two.

The deal's covenants were also amended, with a 10% call at 103 and portability clauses removed from the documents. Other leverage-dependent covenants were amended to cut the level of debt the company will be allowed to take on.

Challenges

A banker at one of the leads said the main challenges were investor concerns around the lawsuits.

Certainly, many investors told IFR that they were avoiding it due to these legal risks.

"How can you be sure that it isn't the tip of the iceberg?

It's endemic," one said, while a second investor recalled that the company has had major contracts pulled in the past.

The company is involved in two investigations for alleged antitrust violations and bribery. Manutencoop also said last month that it had been formally excluded by Italian procurement agency Consip from cleaning tenders for barracks and public hospitals.

It is appealing a third antitrust violation decision, having been fined €14.7m following an Italian competition authority decision in 2015.

Misread Sentiment

The deal was announced following an investor meeting to provide clarification on the lawsuits. But sources said the leads had misread investor sentiment in bringing the deal.

"Maybe the banks had a bit too much confidence in the market," said a third investor.

Sources also found it odd that the company proceeded with the deal despite ending up with a higher coupon than the bond that is being refinanced.

"Given their bonds have a 2020 maturity, why would you replace it with a higher coupon today?" asked the first investor.

The refinanced deal - a €300m 2020 senior secured issue - carries an 8.5% coupon.

However, the lead said such criticisms were misleading due to the additional leverage being added by the transaction, which is extending the issuer's curve.

As well refinancing the 2020s, proceeds will be used to buy back minority shares held by private equity sponsors, which the lead said was important to the company in order to pursue its long-term plans.

Pricing Power

The deal is a further sign that pricing power in the high-yield market on both sides of the Atlantic is slowly turning around.

Companies have been able to dictate terms in recent months as a general lack of supply has left investors as price-takers.

And while that generally remains the case, examples such as Manutencoop and Travelex in Europe, and Norwegian oil company Aker and cable operator Charter Communications in the US show that investors are fighting back in certain circumstances.

Aker downsized a proposed US$500m deal to US$400m this week, while Charter Communications pulled a US$1.5bn deal last week, returning instead through a split-rated entity.

JP Morgan (B&D) and UniCredit were joint books. (Reporting by Yoruk Bahceli; editing by Philip Wright, Sudip Roy, Julian Baker, Matthew Davies)

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