* Sterling exchange also alters covenants on dollar bonds
* Dollar bondholders offered no reward for changes
* Exchange expected to be successful, however
By Robert Smith
LONDON, Feb 13 (IFR) - Virgin Media is looking to exploit
weak covenants in legacy bonds to carry out an exchange on
sterling notes that will also impose covenant changes on dollar
The Liberty Global-owned UK cable company launched the
exchange offer last Wednesday, offering holders of its £628m
5.50% 2021 notes an exchange into new bonds maturing in 2025
with a 6% annual coupon.
This higher coupon is not the only incentive to roll into
the new issue. The new bonds have a first call on January 15
2021 - matching the maturity of the old notes - and if they are
not called at a 105 cash price, the coupon jumps dramatically to
In order to take part in the exchange, sterling bondholders
will also have to consent to the removal of "all restrictive
covenants" in the old bonds. This provides a stick, alongside
the carrot, to encourage participation - a technique usually
dubbed an "exit consent".
But language in the bond's documentation means that if at
least 78.7% of these sterling bonds are tendered, these covenant
changes will also be imposed on holders of Virgin Media's
equivalent US$448m 5.25% 2021 notes.
Yet, the dollar bondholders will neither be able to
participate in the new bond, have a say in the process,/ or have
a reward for participating.
One high-yield fund manager said this was "above and beyond"
aggressive tactics he had seen in previous liability management
"There's an inherent logical inconsistency in treating the
dollar and sterling notes as just two different tranches of the
same notes offering, and yet at the same time giving them
unequal treatment in the exchange," he said.
"I find it unbelievable that one group of holders can impose
their will on another, without equal compensation being passed
The bonds in question were issued in 2011 as
investment-grade-rated notes, at a time when the company's
equity was publicly listed.
Ratings agencies junked the debt when John Malone's Liberty
Global took over Virgin Media in 2013, with bondholders
suffering bad mark-to-market losses.
The notes had "suspended covenants" that came into play when
Virgin Media's secured debt lost its investment-grade rating,
however, meaning bondholders gained some additional protections,
cushioning the blow.
But research firm Covenant Review said that the omission of
"two key covenant protections" allow Liberty Global to leave
dollar bondholders out in the cold in the liability management
These are the "payments for consents" covenants and voting
provisions that require consent from each individual series of
"These covenant protections are standard in US high-yield
deals, and their absence from the 2021s indenture permits the
company to favour holders of the sterling 2021s over holders of
the dollar 2021s," said Sabrina Fox, an analyst at Covenant
Review, in a report published Friday.
Virgin Media has tempered its aggression to some degree,
however, as it is not using language in the documentation that
would allow it to strip the dollar bonds of covenants entirely.
Instead, it is putting the covenants in line with those on
Virgin Media's bonds issued after the Liberty takeover, which
notably employ a different calculation for the restricted
The dollar bonds have actually strengthened since the
exchange was announced, moving from a cash price bid of 106.625
prior to announcement to 107.50 on Monday, suggesting that
covenant changes are not seen as damaging.
But, in contrast, the sterling notes have rocketed in value,
jumping from 111.50 to 115 in the same time period, meaning
dollar holders have missed out on gains seen in the sterling
"Weak covenants cost money - strong covenants protect your
investment," said Fox at Covenant Review.
While the liability management exercise may have caused a
stir, several market sources say they expect the exchange to be
When Virgin Media announced the exchange, it said that
holders representing £230m of the £628m issue had already agreed
to the terms, meaning that it only needs another £265m to play
ball for it to succeed.
Virgin Media has offered sterling bondholders generous terms
in the exchange because the notes have a make-whole call, which
make them more expensive to refinance ahead of their maturity.
And a banker away from the deal said that the large coupon
step-up was designed to encourage short-duration investors that
hold the debt to participate. Whether these funds' mandates will
still block the new note due to its 2025 maturity remains to be
"They are taking a bet that there isn't going to be that
much cross-holding between the sterling and dollar tranches,"
said the fund manager.
"But they would have done their homework first and made sure
there isn't much overlap."
(Reporting by Robert Smith, editing by Helene Durand)