It's 2006 Again for Ex-Millennium Trader Sniffing LBO ExcessBy
Ex-Millennium trader set up fund to benefit from rising stress
TDC’s leveraged buyout is echo of similar deal before crisis
For trader Georges Gedeon, it’s just what he’s been waiting for: a debt-laden buyout like he saw on the eve of the global financial crisis.
Danish phone company TDC A/S is being taken over by a group of pension funds -- a deal that’s likely to push its investment-grade rating to junk, according to Bloomberg Intelligence analyst Aidan Cheslin.
It’s red meat for Gedeon, a former Millennium Management trader who started Antler Capital Partners in December, aiming to capitalize on the rising distress he anticipates from a wave of late-cycle leveraged buyouts.
“Interest rates are going up, markets are feeling more bullish and therefore private equity is sitting on a lot of cash and looking to invest it -- that’s what happened in ’06 and ’07,” Gedeon said. “For me, that’s the trade.”
The echoes of the past have also struck a chord with Bank of America Corp. strategist Barnaby Martin.
“Today, many things in credit feel eerily similar to this 2004-2006 period,” Martin wrote in a Feb. 16 note to clients. “December 2005 marked peak re-leveraging in Europe, when Danish telecoms company TDC was LBO’ed. Once again, TDC has received a takeover bid from a consortium of infrastructure and pension funds.”
With bondholders on the losing side of shareholder-friendly actions, Martin recommends that credit investors turn away from corporate bonds to those of banks that are limited by regulation in the risk they can take on.
TDC, with about 3.1 billion euros ($3.8 billion) of debt outstanding, would join the ranks of Europe’s next “fallen angels,” companies demoted to speculative from investment-grade. Downgrades spiked in the 2015 oil-price crash, euro sovereign crisis, and global financial meltdown, according to a recent study by Axa IM that tallies up losses under a cyclical downturn.
S&P Global Ratings told Bloomberg it will include the holding company’s debt plans in its review of TDC’s ratings. S&P, like Moody’s Investors Service, already ranks the Danish company at the lowest investment grade.
According to BI’s analysis of offering documents released Wednesday, TDC’s buyers will pay for the acquisition with as much as 6.7 billion euros of new debt that will be issued by holding companies. But it may still count toward overall debt from the perspective of ratings agencies. That will bring leverage, or net debt relative to cash flow, to 5.8 times from 2.4 times, triggering downgrades, Cheslin said.
Gedeon owns bonds with coupon interest that would jump 1.25 percentage point to almost 7 percent following a downgrade to speculative grade. It’s a trade he’s hedged with credit-default swaps -- contracts whose price has roughly doubled over the past month.
“I have already made almost 2 points on the trade, I think there is more than 5 points in total to make,” Gedeon said.
— With assistance by Christian Wienberg, and Sarah Husband