The debt of TIM and other large listed companies, such as Telefónica, is not protected against a change of control
The acquisition fever gripping Europe’s telecoms sector may have a clear loser: bond investors. Telecom Italia’s creditors suffered after purchasing fund KKR said it was considering an 11 billion euro offer for the former monopoly. This is because the Italian group’s bonds may lack protection after an acquisition. It’s a reminder that the merger boom is targeting companies that were previously considered out of the reach of the venture capitalists.
Telecom Italia had a net debt of 22 billion euros at the end of September, which makes it a great mouthful for a purchase. However, while companies often give bondholders the right to demand repayment if their ownership changes, most of the Italian group’s debt securities do not contain such a change of control clause, according to analysts at CreditSights. That means a new owner could simply inherit up to 20 billion of Telecom Italia’s debt.
What’s good for private equity buyers could be bad for bond investors. KKR has not yet explained its plans, but a purchase could involve the group taking on more leverage, adding risk to existing bonds, or spinning off its fixed line network and leaving the remaining company with weaker assets. Investors are understandably nervous: Telecom Italia’s 2027 bond was trading around par before KKR declared its interest; yesterday it was worth about 97% of its face value. Investors are now demanding a 350 basis point spread on risk-free rates to hold the securities, according to Refinitiv, compared to 300 basis points previously.
Bondholders could get rid of the worst: the Italian newspaper Il Messaggero reported Tuesday that KKR is preparing to buy back Telecom Italia’s debt. But the episode will encourage creditors of even the largest listed companies to take a closer look at the bond documents. Telefónica, for example, also has debt without change of control clauses.
Even the best-protected bonds can remain vulnerable to mergers and acquisitions. For example, BT, another candidate for a purchase. Although most of the British operator’s debt has change-of-control clauses, falling interest rates mean that securities with relatively high coupons now have a premium over their redemption price.
BT’s bonds due 2042, for example, trade at 115% of their face value, which could cause some investors to suffer losses in the event of a change in control.
As the private equity frenzy intensifies, bondholders will have to do more to avoid the pitfalls.