UPC: From Startup To Bellwether

Investment Dealers' Digest, a sister publication to High Yield Report, published its Deals of the Year awards last month.

United Pan-Europe Communications was the high yield winner. The following is the accompanying article.As the U.S. junk bond market limps toward the 21st century, the brightest hope for high yield seems to be coming from Europe, where a burgeoning market this year helped United Pan-Europe Communications NV leap from startup to industry benchmark.

The success the $1.5 billion high yield debut of UPC, a company with no strong parental ties that relies on acquisition for most of its growth, helped propel the company to top-tier status in both Europe's telecom industry and its fledgling junk market. And although the deal was smaller than gargantuan U.S. offerings - like Charter Communications Group's $3 billion issue - the fact the UPC was able to strike gold shows how far the European market has come in its brief lifetime.

"It's rare to see a new entrant become a bellwether of the market, but UPC is now a bellwether European high yield issuer," said Robin Doumar, a managing director at Goldman Sachs & Co., which was joint lead manager on the deal along with Donaldson Lufkin & Jenrette. That UPC was able to raise $1.5 billion in mid-summer, when the market was barren on both sides of the Atlantic, is testament to both the growing comfort of European investors with high yield bonds and the skills of UPC's bookrunners in selling the deal.

Dutch cable provider UPC spent the last two years on an acquisition binge. In the year prior to its first high yield deal, UPC acquired 50% of the Hungarian cable holding company Kabelkom, agreed to purchase Time Warner Cable France, purchased Poland's top cable provider @Entertainment, and formed an alliance with SSB Broadcasting to develop new businesses in European countries, among other initiatives.

UPC already is the second-largest cable operator in continental Europe, behind Deutsche Telekom AG. Now, flush with the proceeds of two successful bond offerings (it prices a subsequent $1 billion deal via Morgan Stanley Dean Witter in October), it has the potential to become the key telecom player in Europe in the next decade, observers said.

The question facing European junk investors when they received the prospectus of UPC's initial deal was whether a single-B rated company whose revenues had been driven mainly by acquisition was suitable for investment.

"UPC was being sold on the merits of its own business plan," said Carolyn Aitchison, head of European high yield sales and DLJ. "This is a company that wasn't going to stand still and it wasn't clear what it was going to look like in 12 months."

So DLJ and Goldman embarked on a two-and-a-half-week roadshow to sell the deal, traveling throughout Europe. Their goal was to maximize European participation, as the deal planned to feature a euro-only tranche. And that meant having to thoroughly explain the company's strengths and future plans to investors who, in many cases, had only recently entered the junk market.

A solid credit rating would be an essential tool in selling the deal, so the bookrunners were pleased when the debt received a B2 rating from Moody's Investors Service and a B-minus from Standard & Poor's Ratings Service. Another factor that helped the deal's success was the fact that DLJ and Goldman offered the deal with an open structure, not setting any preliminary sizes on the tranches to better tailor the deal to fit investor demand.

In European Hands

Ultimately the deal came with an $800 million, 10-year tranche with a 10.875% yield; a 10-year, 300 million euro tranche with a 10.875% yield; and a $735 million, 10-year discount note that pays a 12.5% coupon after the fifth year. The discount notes were sold at a dollar price of 54.521 for proceeds of $400 million. The dollar-denominated senior notes were swapped into euros to minimize UPC's currency and interest rate exposure.

While pricing was slightly wider than initial expectations, bankers said the deal priced during a grim period in the international junk markets, which had been shaken up due to mounting interest rate fears in the U.S.

Across the Atlantic, many North American issuers faced with an unsettled market already had begun postponing their deals.

DLJ and Goldman were especially happy about the European participation in the deal, with 80% of the euro tranche winding up in European investors' hands. It marked one of the best European turnouts for a junk deal at the time, and further signaled that while lights may be dimming in the U.S., junk's future on the Continent looks bright.