YIT Oyj (YTY1V) bond investors say a proposal by the Finnish builder to compensate them for a split in its operations is inadequate as the move leaves the company’s debt junk rated.
YIT plans to raise the annual interest by as much as 55 basis points on notes due 2015 and 2016, it said May 21. In exchange, bondholders won’t have claims on assets in a new company created through a spinoff, in the event of a default. Creditors vote on the plan today. At least half of the bondholders must be represented and a two-third majority is needed to pass the changes.
“The compensation is absolutely inadequate,” said Juuso Rantala, portfolio manager at Aktia Asset Management, who helps manage about $10 billion in bonds and stocks and has already sold some of his YIT debt. “While it may be enough to compensate for the drop in market yields, it doesn’t compensate for the weaker credit quality of YIT after the spinoff. The company should pay twice as much.”
The bondholder revolt coincides with efforts in the region to improve companies’ access to debt markets as bank credit grows more costly and businesses in the northernmost euro member are struggling to find growth. Finland has yet to adjust to the decline of its flagship company, Nokia Oyj (NOK1V), while its forest industry continues to flounder. A gauge measuring Finnish business confidence has remained below zero since August 2011.
In its split, YIT will keep construction services, which accounts for about 40 percent of its 4.7 billion euros ($6.1 billion) annual revenue, and spin off maintenance into Caverion Oyj. Shareholders get one Caverion share for each in YIT stock.
“The reason why this split stings so much is that the story YIT has been telling bond investors -- that they’re a company with two business lines balancing each other -- has now shattered entirely,” said Juhana Heikkilae, senior portfolio manager who helps manage 3 billion euros of fixed-income investments at Evli Bank Oyj in Helsinki, including YIT bonds. “The offered compensation isn’t enough or very attractive.” The company should pay out 150 basis points, he said.
As compensation, holders of YIT’s 2015 notes will get 50 basis points more annual interest as the coupon is raised by 86.8 basis points to 5.691 percent, according to the company’s proposal. Owners of the 2016 bonds will get 55 basis points more annual interest and an increase of 81.7 basis points in the coupon to 5.567 percent. A basis point is 0.01 percentage point.
YIT also offered to buy back outstanding floating-rate bonds. About 42.6 percent of holders of bonds due in March 2014 tendered their holdings, leaving 28.7 million euros outstanding, while 24 percent of those with about 25 million euros of September 2016 securities grabbed the offer, the company said yesterday. About 0.2 percent of YIT’s August 2014 notes were tendered, leaving 49.9 million euros outstanding.
YIT’s bond yields jumped after the plan was announced on Feb. 5 as the Helsinki-based company initially offered no compensation to creditors.
YIT declined to comment, according to Hanna-Maria Heikkinen, vice president of investor relations.
“It’s hard to predict if it will go through,” said Asbjoern Purup Andersen, a senior analyst at Danske Bank A/S. (DANSKE) Since the compensation proposal, “spreads have tightened, so the market reception appears to be positive.”
The difference in yield on YIT’s 4.75 percent 2016 bonds and the euro swap curve widened to 309 basis points on May 13 from a low of 231 basis points on Jan. 17, before the spinoff was announced. It narrowed to 285 basis points on May 30, after YIT offered compensation. Its 4.823 percent 2015 notes trade at a spread of 263 basis points to the euro swap curve.
YIT, which doesn’t have a rating with Standard & Poor’s or Moody’s Investors Service, will lose its investment-grade shadow rating at Danske because of the spinoff, Andersen said.
“We placed the rating on negative watch following the demerger announcement,” he said. “We expect to lower our indicative credit rating approximately one notch to BB+ from BBB-.”
Bondholders have no say on the demerger, which shareholders will vote on at an extraordinary meeting on June 17. The planned listing of Caverion’s shares on Nasdaq OMX Helsinki is July 1. Juhani Pitkaekoski will become chief executive officer of Caverion, while Kari Kauniskangas takes the top job at YIT, the company said on May 3. Not all creditors are planning to fight the offer.
“The floating-rate notes traded below par before this announcement, so it’s certainly an upside to those bondholders,” Purup Andersen said. “Opposing bondholders could get redemption at par according to Finnish regulations and the redemption price of the tender offer is slightly higher than that.”
The payout for the fixed-rate notes is adequate as the loan maturities are short, said Pontus Soramaeki, portfolio manager at Alandsbanken Asset Management, who helps manage 1.7 billion euros in investments, including YIT bonds.
“We will vote in favor of raising the coupon,” he said by phone. “It’s a step in the right direction.”
Investors can either pass or reject the proposals at the meetings today, and won’t be able to make a counter offer.
“The big problem is there is no room for negotiation,” Rantala at Aktia said. “The company should have discussed an appropriate level to pay out with investors beforehand.”
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