Media company Liberty Global has been at the forefront of innovative high-yield deals since 2009. That was the year Liberty acquired German cable company Unitymedia from its private equity owners BC Partners and Apollo Management for e3.5bn (£3.12bn), in a deal that required a massive e2.5bn of high-yield financing.
The deal was a major milestone in the European high-yield market – it was the largest secured bond in European high-yield history and the largest ever undertaken in the cable industry.
The deal also lay claim to being the biggest private equity exit in Europe in 2009, and the first major European deal in which high-yield bonds outweighed bank loans to fund an acquisition.
But Liberty did not stop there. The landmark Unitymedia acquisition whetted the company’s appetite for hitting the high-yield market, which only really began to take off in 2009. According to figures from Standard & Poor’s (S&P), companies issued more than $20bn (£12.3bn) in high-yield bonds in the second half of that year, compared with a lowly $4bn in the first half.
One of the big trends to emerge from those offerings was companies issuing bonds to refinance existing senior secured bank loans, rather than as subordinated debt. According to S&P more than 70 per cent of high-yield bonds issued since 2009 have been used to refinance bank debt.
The chief benefit for companies is that it gives them much greater flexibility when it comes to managing their debt maturities at a time when bank lending is effectively dead.
Liberty has stood out in using senior secured debt to repackage existing loans into notes to be sold to bond investors, and in January 2010 the company completed one of its most innovative issuances to date.
Liberty was able to use availability under its accordion bank facility (the UPC facility) to execute issuances via a special purpose vehicle (SPV) – UPCB Finance – of e500m senior secured notes.
“It was quite an undertaking, involving discussions and interaction between various legal and accounting disciplines,” admits Liberty’s head counsel for global finance Jeremy Evans. “At the time there were no other structures out there quite like this one and we had to be particularly mindful of the level of protection granted to the noteholders.”
UPCB was incorporated under Cayman Islands law in 2009, and was created with the primary purpose of facilitating the note offering.
The advantage for purchasers of the senior secured notes was that, because they funded a loan facility through the SPV, they benefited from maintenance covenants instead of the incurrence covenant package that is more common in the high-yield market.
That allowed the company to offer an attractive secured bond option to investors without the need to negotiate complex inter-creditor agreements with its bank lenders. It also allowed Liberty to avoid paying expensive amendment fees to permit pari passu debt.
The offering was structured to provide holders of the notes – indirectly through the SPV – with benefits, rights and protections similar to those afforded directly to lenders under the UPC facility. Under the arrangement, UPCB Finance acted as a lender under the UPC facility, and used the proceeds from the notes to fund a loan to the existing borrower under the UPC facility. The initial purchasers of the notes include Barclays Capital, BNP Paribas, Calyon, Credit Suisse, HSBC and RBS.
“The structure means bondholders get maintenance covenants and no inter-creditor agreements are needed,” explains Liberty’s senior corporate counsel Nina Alitalo. “The SPV is treated like any other bank lender in the wider syndicate and essentially has the same benefits, rights and protections.
“It also means that we can add incremental tranches to our bank facility any time we like, and can push out the maturity. We now have a senior secured facility that allows us to bolt on additional tranches without having to refinance our debt. It’s an extremely flexible agreement.”
Evans adds: “We have the ability to take advantage opportunistically of market conditions to add on incremental tranches under our bank facility and push out maturities without having to refinance all the existing debt. We can pick and choose which tranches to refinance.
“This structure came about since, at the time, bond markets were on fire, and we wanted to take advantage of that pricing quickly by putting them structurally alongside our senior bank lenders.
Liberty has since used the structure for two further senior secured note issuances and its majority owned subsidiary, Telenet, has also used the structure for note issuance in 2010 and 2011.