The headache U.S. bond investors get from financing failed takeovers is getting worse, and they are demanding change.
Since 2015, at least eight proposed M&A transactions that were funded in the bond market, including the Aetna-Humana deal, had to be called off, according to the Credit Roundtable, a New York-based organization advocating on behalf of bondholders. All eight allowed the borrower to repay the notes at 101 cents, even if the securities were trading at levels far higher than that.
Now, and despite years of complaints from bondholders about inadequate compensation, some borrowers are repaying the notes at 100 via a make-whole call rather than a so-called special mandatory redemption, which typically sees repayments at 101.
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AT&T Inc. and Qualcomm Inc. used a make-whole provision when poised to miss deadlines related to the acquisitions of Time Warner Inc. and NXP Semiconductors NV after raising a total of about $40 billion. Walmart Inc.’s $16 billion bond offering in June to fund its acquisition of Flipkart Group also includes a make-whole call provision.
It “was bad to get called at 101 but what we’ve seen more recently is folks getting called at less than 101,” said Alex Diaz-Matos, an analyst at Covenant Review, a firm specializing in debt document analysis. “People never thought the make-whole call would really be cheaper than the special mandatory redemption provision and now it is,” Diaz-Matos said.
Make-whole calls are typical in bond indentures and allow the issuer to redeem the debt at specific spread above a U.S. government bond or at par, whichever is greater. Rising rates can make the make-whole call cheaper, and give a lower-cost alternative to the special mandatory redemption clause.