August 1, 2019 / 2:57 PM / 2 months ago

LSE's $27 bln deal rehabilitates Refinitiv debt

NEW YORK, Aug 1 (Reuters) - Financial data firm Refinitiv's $13.5 billion debt, once described as having some of the weakest-ever investor protections typical of the frothy peak of the credit cycle, is being rehabilitated by its $27 billion merger with the London Stock Exchange.

Prices of Refinitiv's bonds hit all-time highs Thursday after the LSE formally announced the acquisition and said Refinitiv's debt would be refinanced by a bridge loan of the same size. The combination with the investment-grade LSE would boost the credit profile of Refinitiv, which currently holds a speculative-grade rating.

Thursday's announcement comes less than a year after Refinitiv's bonds went to market with significant interest expenses and weak investor protections, issued to fund the carve-out of the Refinitiv business from Thomson Reuters , sold to private-equity giant Blackstone for $20 billion.

Thomson Reuters is the parent company of Reuters News.

The buyout had left Refinitiv with debt of more than five time earnings before interest, tax, depreciation and amortization, contingent on optimistic cost cuts.

Credit research firm Covenant Review decried the Refinitiv bonds as having some of the weakest investor protections since the global financial crisis a decade ago.

Covenants on two of the four bonds issued, which typically limit a company's ability to borrow in order to protect credit investors, were given the worst possible rating by Moody's Investors Service. The other two were ranked in the weakest category not far off. The debtload hampered Refinitiv's capacity for growth.

"The initial transaction, the way it was put forth to investors, was definitely missing a story on the growth side," said Gregory Fraser, senior credit analyst at Moody's.

Growth would have had to come from investing in the business or merging, both of which would require more cash than could easily be come by with $13.5 billion debt to service.

"It is definitely a credit positive for Refinitiv," said Fraser. "They would be able to refinance the debt at LSE's more attractive rates and save that interest expense to reinvest in the business."

The deal, and subsequent jump in bond prices, has rewarded investors who made a high-risk bet in the hunt for yield. The biggest price gain has been a nearly 11% rise since July 25, when news of the deal was first reported by the Financial Times, in the 6.875% November 2026 note worth 365 million euro . The dollar-denominated 8.25% November 2026 junk bond worth $1.575 billion was last up 6% to trade at 110.75 cents on the dollar.

In the months after the Blackstone buyout, Refinitiv debt traded below par, bottoming out in January. Since then, prices have risen but, prior to the report of deal talks, have largely underperformed the comparable Merrill Lynch indexes, said Marty Fridson, chief investment officer at Lehmann, Livian, Fridson.

On an option-adjusted basis, the spread over government bonds - a measure of the premium investors are paid to hold the riskier securities - narrowed by 61.3 basis points for the 4.5% May 2026 eurobond versus 159 basis points for the Merrill Lynch European currency high yield BB-B rated index for the year through July 25.

The 6.25% May 2026 dollar-denominated issue underperformed the comparable Merrill Lynch index by 22.9 basis points and the November 2026 6.875% eurobond was 20.1 basis points lower than the comparable index for its B+ Standard & Poor's rating, and 4.1 basis points lower than the index for its Caa2 Moody's rating. Only the 8.25% November 2026 dollar-denominated bond outperformed.

"There's no real support for the thesis that Refinitiv was a darling of investors or outperformed the market prior to the big rise that occurred when word of the impending LSE purchase began to leak out," Fridson said. "The impact of the LSE announcement was so great that it swamped any lingering concern about the covenants." (Reporting by Kate Duguid Editing by Bill Trott)

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