Global market meltdown blamed for lack of interest
KEY POINTS:
Yellow Pages Group backers have ditched plans to sell up to $150 million worth of bonds to New Zealand investors, blaming deteriorating market conditions for a lack of interest.
The bond issue - to fund the highly-leveraged private equity purchase of the directories business - had been scaled back from $300 million last week as investors became more risk-averse in the wake of the global market meltdown over the past month.
Before it was cancelled yesterday, the bond offer was for $100 million with capacity for $50 million over-subscriptions.
Yellow Pages chief executive Dudley Enoka refused to say how far short the offer was of the minimum $100 million target.
"We didn't get what we think was adequate to carry on with the deal. We got a good level of interest but it didn't do justice for the offer."
The sticking point is believed to have been the rate of return on the offer.
Yellow Pages had been hoping to sell the six-year secured, subordinated debt securities with a rate of return of between 11 and 11.25 per cent.
The final pricing was to have been set by an institutional book build. But market sources say there was no serious interest from institutions at a level below 12.25 per cent return.
That represents a 2 per cent premium above the 10.25 per cent at which the banks have provided funded for secured senior debt of $1.175 billion.
Yellow Pages debt levels meant the bonds would not have been given an investment-grade rating and bond holders would have ranked below the banks in the event of the business failing.
Telecom sold Yellow Pages Group to a private equity consortium for $2.24 billion in March. At 13.2 times Yellow Pages' forward earnings, the deal was described at the time as the most expensive private equity transaction in Australasia and one of the most heavily leveraged.
"This reflects what's happening overseas where funding banks are struggling to sell down their exposure to the secondary market," said one senior market source. "In the US corporates are typically paying 2 to 5 per cent more than bank debt for junk bonds."
Enoka would not discuss the pricing of the offer.
"It was more that the market has deteriorated, even in the last 10 days. We've just taken a decision and said the timing from a market perspective is not right."
Investment banks ABN Amro, Deutsche Bank and Barclays have underwritten $300 million of the debt - of which up to $150 million was to be covered by the bond issue.
ABN Amro director of global markets David McCallum said his bank was comfortable holding the debt - long-term if necessary.
"We were comfortable selling and we had to be very comfortable in terms of providing for it," he said.
"We knew that when you provide facilities like that, when something does go wrong in the markets or whatever, that you will be holding that position for potentially six-and-a-half years."
One of the key objectives Yellow Pages had was to get a widespread investor base that could offer a springboard to a future NZX float of the whole company.
"I guess you were getting down to a size of issue that wouldn't achieve that," McCallum said.
Enoka said another debt issue was possible at a later date.
"Who knows where this market is going to land and what the conditions are like in a year's time," he said.
All market feedback about the operational side of the business had been positive and it was disappointing for investors, Enoka said.
"Some people just kept coming back saying it is high debt. We just had confidence - and so did all the banks - in our ability to service that."
There had been thorough due diligence done on the business by the 24 financial institutions that were already providing funding, he said.
From an operational point of view it would change nothing for Yellow Pages Group, Enoka said.
"We're fully committed to our business plan. Nothing at all changes for the direction of the business."
DEBT OR NO DEBT
*Telecom sold Yellow Pages to a private equity partnership of CCMP Capital Asia and Teachers' Private Capital for $2.24 billion.
*Investment banks ABN Amro, Deutsche Bank and Barclays have underwritten $300 million of the debt. They had hoped to on-sell all of that to the public by issuing bonds.
*Initial lack of interest saw the offer downgraded to $100-$150 million before being deferred indefinitely yesterday.