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* Botched deal costs Equiniti around GBP7.75m extra ininterest costs
* Banks in rush to bring deals overlooked problems
* Fiasco sets unwelcome precedent
By Robert Smith
LONDON, June 7 (IFR) - Business services company Equinitiwill end up paying around GBP7.75m in extra interest costs overthe life of a bond it was forced to relaunch this week after theUK's Financial Conduct Authority refused to approve thetransaction.
The GBP440m dual-tranche 5.5-year high-yield deal printed onTuesday, two weeks after the original bond had priced but hadfailed to settle.
The debacle - unprecedented in the European high-yieldmarket - drew heavy criticism from irritated investors andmarket observers, and left high yield stalwart, and mainbookrunner, JP Morgan red-faced.
"It is probably symptomatic of banks falling over themselvesto get deals done in hot markets," said Steve Logan, head ofEuropean high yield at Scottish Widows Investment Partnership.
"It's embarrassing both for the leads, and the company, butI do think it is an isolated case."
The timing was particularly unfortunate for the issuer,which had to offer investors an extra 0.375% coupon on the fixedrate tranche and 25bp more on the floating rate note following a40bp widening in the Crossover index.
The GBP250m fixed-rate tranche priced at 7.125% andthe GBP190m FRN priced at 575bp over Libor. The originaltranches had the same size and structure, but were priced at a6.75% yield and Libor plus 550bp respectively.
Investors that bought the bonds with the intention ofselling them straight away have fared worse, as they have beenunable to book a profit. But buy-and-hold investors haveactually benefited as they get the same deal at a higher yield.
REPERCUSSIONS
The fiasco arose as Equiniti is moving a subsidiary calledPaymaster, which is subject to regulation by the FCA, into itscorporate structure.
According to sources close to the deal, Equiniti believedthat the FCA would rubber stamp the move, but, as Equinitiexplained in a statement, the company was "subsequently requiredto apply for formal consent to the transfer."
Even at this stage, the FCA intimated that formal approvalwould be forthcoming quickly, according to these sources, andthe legal advice from all parties was that approval would comebefore the settlement date on June 4.
"However, after the close of markets on Friday, May 31, 2013we learned that [the FCA] will not be in a position to granttheir consent prior to settlement," Equiniti's statement said.
Some investors are still disgruntled, however.
"Investors don't think, 'oh, it's just one of thosethings,'" said Martin Reeves, head of global high-yield at Legal& General.
"The mistakes probably reflect the pressure underwriters andcompanies are under to get deals done when 'windows' for issuingcan be short-lived," he said, but nonetheless had set anunwelcome precedent.
Reeves worries that the events could undermine theefficiency of the high-yield bond market.
"At the least, if investors and traders believe a deal mightnot exist it will impair liquidity," he said.
"In the future there will be queries as to thresholdsrequired to cancel a deal and who can make that determination."
Reeves suggests that shorter settlement periods could be theanswer. The 10-day settlement period in high-yield isanachronistic, reflecting a pre-digital age of intensive backoffice processes.
The worst option would be to ignore the issue, as some saythe US market has done.
"It probably behoves buyside and sellside to come togetherto discuss this issue," said Reeves.
COMPLICATED
For syndicate bankers, reconstructing the book andreallocating the deal was complicated by the fact that someinvestors, unhappy with their original allocation, added totheir positions after pricing.
Market sources placed the blame variously at the FCA andthose managing the deal - which also included bookrunners Lloydsand Citigroup. Critics said that if the bond proceeds had beenplaced in escrow initially, the whole problem would have beenavoided, and saved the company a lot of money.
Precedents in the US, where high-yield deals have failed tosettle, include ServiceMaster's USD1bn bond in August 2012. JPMorgan and Citigroup were both bookrunners on that deal too.
A source close to the matter said that the FCA now has up to130 days after issuance to approve the repriced bond.
"It's pretty incredible the FCA has done this, given thatthey knew exactly what the implications were. The company's beenput in a rough spot," the source said. (Reporting by Robert Smith, IFR Markets; editing by MatthewDavies and Natalie Harrison)
