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Anti-CDS tactics enter European bond market as high yield pipeline builds

By Dan Alderson

Thursday, October 10, 2019

‘Anti-net short’, or ‘anti-CDS’, provisions are set to enter the European corporate bond market for the first time, as Merlin Entertainments and Kantar wrap up roadshows for deals financing their acquisitions by private equity firms.

And, as the high yield pipeline builds out, investors are alert for similar terms creeping into offerings by companies more widely referenced in the CDS market.

Kantar, the UK-based analytics firm, is being carved out of parent WPP at an enterprise value of $3.86 billion, as reported by Debtwire. Sponsor Bain Capital will buy 60%, with WPP retaining the other 40%.

Terms aimed at deterring lenders from taking a short position on the borrower through CDS or other instruments have found their way into Kantar’s offering of Summer (BC) Holdco B euro-equivalent of $250 million senior secured notes due 2026 as well as its Summer (BC) Holdco A euro-equivalent of $525 million senior notes due 2027.

Such provisions have become familiar to the US bond market this year, in varying forms, and been seen in US and European loans. But this could be the first European bond sale to make such demands.

Merlin Entertainments, the London-listed company behind attractions such as Legoland and Alton Towers, was the first European borrower to include net short provisions in its loans. Those thrilled lenders in July as part of a €4.26 billion-equivalent debt package to finance its acquisition by Blackstone, CPPIB and Kirkbi.

Merlin is similarly set to complete a roadshow on Friday for £635 million-equivalent senior notes due 2027, with documentation including provisions to deter net-short lenders.

Another of Creditflux’s sister publications, Xtract Research, has found anti net-short activism provisions cropping up in 20% of US high yield bonds this year and 14.5% of loans.

“This is an overwhelmingly US phenomenon,” wrote Valerie Potenza, head of high yield research at Xtract, in a recent article, “with just two private European loans including contractually shortened statute of limitations to call a default and one loan term sheet contemplating net short investor disenfranchisement. Eurobonds have not joined the party.”

To date, borrowers including such provisions have not been those widely referenced by CDS, making them a less complicated decision for would-be investors. But, with a burgeoning pipeline of high yield bonds touted to be on the way, there are already names starting to appear that could present much bigger problems if they chose to include anti-net short provisions.

Among those slated to bring deals soon by Debtwire are Cellnex Telecom and Stonegate, both of which are constituents of the iTraxx Crossover index.

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