* Swiss mobile owner seeks large dividend
* Bondholders asked to relax key covenants
* Fee structure creates added uncertainty
By Robert Smith
LONDON, March 7 (IFR) - Salt is asking bondholders to
temporarily loosen covenants to allow it to pay a SFr500m
dividend to the Swiss mobile operator's owner, providing a fresh
test of high-yield market discipline.
So-called "divi recaps" often prove controversial with
investors and are typically seen as a symptom of a hot credit
Bond buyers successfully pushed back against a €500m
payment-in-kind bond to fund a dividend at Verallia in October,
for example, but then allowed a smaller €350m recut version of
the deal to pass last month.
Salt's dividend deal is not only larger than Verallia's but
also more aggressive, as it requires bondholders to suspend
"We're in a market at the moment where future mistakes are
being financed," said one high-yield bond investor. "The Swiss
mobile market fundamentals don't appear to support this sort of
deal - and this is not a small dividend we are talking about."
French telecoms entrepreneur Xavier Niel acquired the
company through his NJJ Capital investment vehicle in 2015,
rebranding the business as Salt from its previous name Orange
Niel is now looking to pull off the dividend
recapitalisation, planning to raise additional senior secured
and unsecured debt at Salt to fund a SFr500m payment to NJJ
Capital. This will leverage up the company significantly, taking
it from 3.8x to 5.0x net debt to Ebitda.
NJJ is arguing that the dividend is justified because it
has boosted free cashflow substantially since taking over Salt.
The size of Salt's planned dividend and additional leverage
from the debt raise would breach covenants on its existing
bonds, so the company is offering to pay bondholders to
temporarily reset these thresholds wider.
But a second investor described this consent solicitation as
Salt "trying to have their cake and eat it too".
"It's absurd," he said. "Covenants are there for a reason.
This is a real test of the market."
Salt is asking bondholders to increase its restricted
payments capacity, to remove limits on cash the owners can strip
and allow for the SFr500m dividend by the end of the year.
It is similarly looking to loosen debt incurrence covenants
to allow the company to increase consolidated net leverage as
high as 5.25x until August 11.
Covenant Review said that the changes to the restricted
payments covenant were "poorly drafted in a way that could
create far more dividend capacity than is initially apparent",
in a report published on Monday.
On top of this, the credit research firm flagged an
alteration to the incurrence covenants that could allow use of a
carve-out to make future debt-funded dividends, without making
accompanying pro forma changes to the leverage ratio.
"This is wildly inappropriate, and this pro forma trick
should be rejected," Covenant Review's report said.
RUBBING SALT IN THE WOUND
While Xavier Niel's company is paying investors that accept
these changes, bondholders do not know how much cash they are
actually going to get until after the deal is done.
This is because Salt is using an unusual, but not
unprecedented, fee structure that splits a set amount of cash
between however many people consent to the changes.
This means that if the consent solicitation gets the minimum
required "50% plus one" approval, senior secured and unsecured
bondholders get 3% and 4% fees, respectively. But if all
bondholders agree, these fees would be effectively halved.
This technique is used to make it more difficult for
bondholders to form a group to block the deal, as an investor
that breaks ranks to help the consent solicitation just scrape
over the line would be rewarded handsomely.
The second investor said the fact the three different senior
secured bonds will vote as one class would make it even more
difficult to block. This is particularly true as Salt is
undertaking a tender offer for its €265m senior secured FRN but
requiring that these bondholders also agree to the consent
High-yield bond issuers have increasingly exploited poorly
drafted voting mechanics that allow for multiple bonds to be
counted as one class of notes. Notably, Virgin Media launched an
exchange on sterling notes last month that will also impose
covenant changes on dollar bondholders.
Covenant Review said that investors should "reject the
aggressive consent solicitation" and demand a higher fee.
"Without the proposed amendments, the issuers would need to
refinance the notes with new bonds containing looser covenants
in order for the dividend to be permitted," their report said.
"Therefore, the consent fee for the proposed amendments
should be equal to the call premium that would be required to
redeem the notes."
The tender offer and consent solicitation expires at 4:00pm
London time on Thursday. Goldman Sachs, Credit Suisse and
Societe Generale are running the liability management exercise.
A spokesman for Salt declined to comment.
(Reporting by Robert Smith, editing by Helene Durand)