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ISS bonds jump on acquisition news

Both of the company’s high-yield bonds, which have change of control (CoC) covenants, jumped higher towards their call prices. The most liquid 8.875% EUR582m 2016 subordinated bond was bid at 104 and offered at 105, about 12 points higher compared to a bid-offer spread of 92-93 on Friday, a trader said.The deal, worth GBP5.2bn including debt, would create the world’s biggest security and facilities services group.G4S said it would pay GBP1.53bn to ISS, half in cash and half in shares, and would raise GBP1.88bn, net of expenses, to fund the deal through a rights issue. That sent G4S shares 18.5% lower. G4S will also assume ISS’s debt of GBP3.67bn.”G4S has committed debt funding, and the statement implies that it can fund at much cheaper levels than ISS,” said one credit analyst. ISS is rated BB-, while G4S is at BBB, both by Standard & Poor’s.The 2016 ISS bond is currently callable at 104.4, but that falls to 102.96 in May next year, the analyst said. Alternatively, bondholders have the option to sell the bonds back to the company at 101 under the CoC covenant.The company also has a EUR525m 11% bond that matures in 2014, which is callable in December at 105.5 and also has a 101 CoC price, the analyst said.HIGH-GRADE CONUNDRUMIt is less clear whether the company’s 4.5% bond — which has investment-grade covenants and matures in 2014 — will be left outstanding, the analyst said, because of the relative cheap cost of funding. That bond, which has EUR110m outstanding according to Tradeweb, is also bid higher at 106.5 and offered at 107.5, the trader said.”If G4S wants to clear up the whole capital structure, it may decide to take that bond out as well,” the analyst said.Five-year credit default swaps on ISS Global tightened sharply — by 240bp to 175bp — according to Markit, although the contract is fairly illiquid.ISS, owned by Swedish private equity investor EQT and Goldman Sachs Capital Partners since 2007, pulled the plug on a planned USD2.8bn IPO in March due to market turmoil. The proceeds of that IPO were intended to pay down debt.Earlier this year, ISS agreed DKK12.5bn of new loans from banks, including 7.8bn crowns of five-year senior term loans and a 4.5bn crown, five-year revolving credit facility.