Most TDC Bondholders Fear a Leveraged Buyout; But Not This One

The prospect of TDC A/S being bought by a private-equity firm has spooked most of the Danish phone company’s bondholders. But there are some creditors who would stand to profit.

Buyout firm Apollo Global Management LLC is considering making a higher offer for TDC after an initial approach was rejected in July, people familiar with the matter said last week. The news sent TDC shares soaring. But the yields on four of its five bonds rose, as prices sank.

“We saw a risk of a takeover that would increase the gearing and be bad for some of the bonds,” Michael Denbaek, portfolio manager at SEB Investment Management in Copenhagen, said in a phone interview. “We took a decision to only hold those of TDC’s bonds that aren’t at much risk in case of a takeover.”

The fund last year sold its 3.75 percent TDC bonds due 2022. Instead, it chose to focus on the 1.75 percent 2027 bond, which has a so-called change-of-control clause that entitles the investor to sell the bond back to TDC at par. Denbaek’s fund even increased its position in the bond in June, when it traded below the trigger price, because he saw a takeover risk. As of Wednesday afternoon the bond was testing par, and traded at about 99.9. TDC has more debt that is subject to similar terms, though it trades above par.

Y-axis shows indexed yields on TDC bonds

“We have owned TDC bonds for many years and we initially bought the bonds because of the strong cash flow,” Denbaek said. “Now, the TDC name has become a different case as the company is a takeover target.”

The fund also owns some of TDC’s 4.375 percent 2018 bond, which is shielded from most risks because it will soon mature, Denbaek said.

For more on Apollo’s interest in TDC, click here.

TDC currently has BBB- credit ratings at Standard & Poor’s and Fitch, and an equivalent Baa3 grade at Moody’s. The rating may drop to B+, or non-investment grade, in the event of a takeover by Apollo or another private equity fund, Danske Bank A/S said in a note to clients earlier this week.

“It is too early to speculate on a potential capital structure in such a scenario, but leverage would most likely increase significantly,” Mads Rosendal, a senior analyst at Danske, said in the note. While a leveraged buyout “would mostly be negative for TDC bondholders, outcomes vary extensively depending on the specific TDC bond in question.”

Danske has an overweight rating on the 2027 notes, whereas it has market-weight and underweight recommendations on the other three TDC bonds the bank covers.

“Previously, TDC bonds were stable and uncontroversial parts of our portfolio, but now we monitor the name a lot more closely to see what’s going on with a potential takeover,” SEB’s Denbaek said. “A leveraged takeover by a private equity fund can be a very drastic event for bondholders.”

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