(Bloomberg) -- London Stock Exchange Group Plc plans to sell $10 billion of high-grade bonds for its $27 billion takeover of Refinitiv, in a deal that will lift the data provider out of the depths of the corporate debt market and potentially hand some creditors a juicy payout that few saw coming.
The bond sale will help LSE repay $13.5 billion of junk-rated debt that Refinitiv, formerly a unit of Thomson Reuters Corp., issued less than a year ago to finance Blackstone Group Inc.’s acquisition of a majority stake in the business -- the largest leveraged buyout since the financial crisis.
LSE expects the refinancing to “materially reduce” the interest expense of the combined company, even though it will cause its net debt to climb to 3.5 times a measure of earnings, above its long-term target of 1.0 to 2.0 times, according to an investor presentation. LSE said it plans to maintain a “strong” investment grade rating.
Expectations that the Refinitiv bonds will be repaid sent the company’s unsecured notes to record highs this past week, turning them into one of the best performing in the U.S. junk bond market this year even as covenants on the notes may put a cap on higher returns.
Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc have agreed to backstop the refinancing with $13.5 billion of bridge loans for the LSE acquisition, according to one of the people, who asked not to be named because the details are private.
The new bonds will replace the bulk of the bridge loans, while LSE could use a mix of new term loans and cash to cover the difference, the same person said. More banks are expected to be invited to take part in the bridge financing as soon as next week.
The bond offering could be several months away as the acquisition is not expected to close until the second half of next year. Timing will also be dependent on LSE’s progress in obtaining regulatory approvals for the deal and on conditions in the credit markets, the people said.
Capped gains
Some holders of Refinitiv bonds are already taking profits given uncertainties over the size of the payout once the debt is retired. That is because so-called equity claw provisions in the bond documents could allow LSE to repay the bonds at a lower price if it injects fresh equity into Refinitiv.
“There is certainly potential for Refinitiv to use the claw and we are worried that they’ll do this,” said David Newman, global head of high-yield at Allianz Global Investors.
Without an equity claw, all of the bonds would likely need to be redeemed at their make-whole price, which is meant to compensate investors for missed future interest payments.
With a full make-whole, Refinitiv would have to pay a cash price of around 119 cents to bondholders to redeem the debt. By fully exercising the equity claw, they could pay about 114 and therefore substantially reduce the payout, according to some of the bondholders.
Refinitiv was one of a string of leveraged buyouts last year that were criticized for offering some of the weakest creditor protections ever seen at that time.
Representatives for LSE, Refinitiv, Goldman Sachs and Morgan Stanley declined to comment. A spokesman for Barclays did not respond to a request for comment.
Bloomberg LP, the parent of Bloomberg News, competes with Refinitiv to provide financial news, data and information.
To contact the reporters on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net;Laura Benitez in London at lbenitez1@bloomberg.net;Natalie Harrison in New York at nharrison73@bloomberg.net
To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net, Vivianne Rodrigues
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