Some Secured Liens More Equal Than Others
July 1, 2009
Spanish-language broadcaster Univision Communications was one of the many companies to successfully issue bonds in June. What distinguishes the New York-based company from its peers is the fact that the bonds were secured and that the intercreditor agreement puts the bondholders at a disadvantage to the company’s secured loan holders, according to analysts. And conflicts like this could become more commonplace, as the issuance of secured bonds is likely to climb.
On June 25, Univision issued $545 million in 12% senior notes due 2014, with an OID of 93. The deal was upsized from $500 million and netted the company $507 million after the discount. Univision plans to use the proceeds to finance a tender offer for its 7.85% senior secured notes due 2011. Deutsche Bank, Banc of America Securities, Wachovia, Mizuho, and Credit Suisse were joint bookrunners on the deal.
The intercreditor agreement—which becomes necessary whenever two different tranches of debt, such as first-lien loans and bonds, are secured by the same assets—has come under scrutiny by analysts thanks to language that restricts the rights of bondholders despite the fact that their debt is secured by the same assets as the loans.
This kind of language in an intercreditor agreement will likely be used more frequently, according to Chris Taggert, a senior loan strategist with Credit Sights. “It is a broad trend where the [bond] terms are not equivalent to the loans even though they have equivalent lien positions,” he said, citing a similar intercreditor agreement with the most recent bond issuance of hospital operator HCA. “We haven’t traditionally had a high degree of secured bond issuance. In the current market environment, we’re seeing more secured bond issuance and more by entities that also have first-lien loans outstanding.
“While intercreditor terms are nothing new, the prevalence of collateral secured by both bonds and loans has increased,” Taggert added. “We certainly expect that in the years ahead we’ll continue to see more secured bond issuance. In many cases the bonds are being issued to pay down secured loan and secured revolver borrowings.”
What Univision’s intercreditor agreement does is allow the company to invite bank lenders to participate in the DIP financing without bondholder objection, which means these lenders would get a super-priority lien ahead of other claims, Credit Sights analyst Jake Newman said in a June 28 report. Beyond that, the agreement gives bank lenders the chance to roll existing loans into the DIP facility. “In bankruptcy, we feel, there is a risk the bondholders with a first-lien could end up with lower recoveries than other first-lien lenders,” said Newman in the report.
The issue has caught the attention of other analysts as well. “In the wake of a bankruptcy filing that has DIP financing, this kind of agreement could have an impact, especially if DIP lenders get to roll up their pre-position exposure. It could create asymmetry among the creditors,” said a rating agency director.
A Standard & Poor’s recovery analyst added, “It’s not typical that [bondholders] would give up their rights to object to DIP financing. That doesn’t seem typical to me.” S&P analysts and attorneys, he said, are taking a closer look at the language of the intercreditor agreement. A spokeswoman for S&P pointed out that intercreditor agreements are not used to calculate ratings and that the effects of the agreement are difficult to quantify in any measurable way. The agreement has had no effect on the company’s ratings, including its recovery ratings. The new Univision senior notes were rated B2 by Moody’s Investors Service, B- by S&P and B+ by Fitch Ratings.
While the intercreditor agreement does not affect the ratings, it may have swayed the pricing of the Univision bonds. John Puchalla, a vice president and senior analyst with Moody’s, compared the pricing of Univision to that of XM Sirius subsidiary XM Satellite Radio, which priced $525.8 million in 11.25% senior notes due 2013. The bonds priced with an OID of 95.09, netting the company $500 million. The New York-based satellite radio company increased the offering from $350 million. “[Univision] is much stronger than Sirius XM, and Sirius was priced at or below what Univision did, that seemed somewhat surprising to me,” he said. “There are various possible reasons for this. One is that the secured lenders at Sirius XM Satellite are first in line and are the only secured debt in that entity. The new bonds at Univision are at the same level as a very large pool of secured debt. They’re not the only ones that are first in line.”
Newman points out that these agreements are being driven by the banks. “It may just be that the banks wanted to put it in there, and the bondholders didn’t object or have the opportunity to object,” he said.
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