By Davide Scigliuzzo
NEW YORK, Nov 25 (IFR) - Vodafone fell victim to the pickycorporate bond market this week, opting to pull its deal ratherthan relent to investor demands for chunkier spreads and greaterrisk protection.
The investment-grade deal, expected to be up to US$2bn insize, was the second multi-billion dollar issue yanked from themarket in a week - and largely for the same reasons.
The sticking point appeared to be the absence of achange-of-control (CoC) provision - a covenant that forcesissuers to redeem bonds, usually at 101, in the event of atakeover or merger, and which helps limit bondholder losses.
Bookrunners Citigroup, Goldman Sachs, JP Morgan, Mizuho andMorgan Stanley began marketing the 30-year issue at Treasuriesplus 250bp area - but it struggled to gain traction.
Investors decided the event risk was too big to ignore -especially as Vodafone's talks with junk-rated Liberty Globalfell apart less than two months ago - and asked for a CoC clauseas well, a senior banker on the deal told IFR.
But Vodafone declined, the banker said, instead trying tosweeten the terms by offering coupon step-ups in the event of adowngrade to junk from Moody's or S&P.
One investor said the coupon would have increased by 25bpper notch of downgrade per agency, with a 200bp cap.
In the end, the two sides could not agree and afterinvestors began asking for more spread - roughly up to 100bpmore - Vodafone decided enough was enough.
"The issuer played their hand and the investors playedtheirs," the banker said.
"(Vodafone) probably did not want to set a precedent byagreeing to a CoC or compensate investors with a much widerspread," said the banker.
None of the issuer's outstanding dollar bonds have suchclauses, according to Covenant Review, an independent researchcompany.
"When they eventually come back to the market, they will bepushed to spell out a clear strategy," the banker said.
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Investor push-back has been fierce of late.
In the junk market, a US$5.6bn debt offering backing CarlyleGroup's leveraged buyout of Veritas collapsed in spectacularfashion last week, leaving the eight underwriting banks hurtingfrom a deal gone horribly wrong.
The high-grade market - where pulled deals are more of ararity - has also had its fair share of bumps in the road.
Earlier this month, Chile's Tanner Servicios Financierospostponed a US$300m deal, and insurance company Allied Worlddropped a 30-year tranche.
While issuers such as oilfield services provider Halliburtonhave included CoC clauses on bonds to finance M&A, suchprotections actually work in the issuer's favor by giving themthe option to pay the debt back if the M&A doesn't happen.
Including a CoC is more unusual in the high-grade space whenit comes to protecting investors against an unknown creditevent, though some in the market believe it will soon becomemore commonplace.
"After the LBO wave of 2006/07, investors started to payclose attention to CoC," said Alex Diaz-Matos, an analyst atCovenant Review.
"We expect more IG bonds to include them as marketconditions change."
From an investment-grade bondholder perspective, anacquisition by a high-yield company is one of their worstnightmares.
Without CoC protection, the acquirer has the option ofleaving cheap investment-grade debt outstanding, and piling evenmore debt on top of it - and such scenarios have played out thisyear.
Holders of Cablevision's bonds, for example, were leftlicking their wounds earlier this year when junk-rated Europeantelecoms company Altice bought the company.
Time Warner Cable bondholders were also exposed to volatiletrading in the debt when high-yield credit CharterCommunications said it was buying the business.
Charter eventually structured the financing without layeringthe high-grade bonds - but that decision was highly unusual.
Yet with event risk on the rise, the buyside has cause to beleery, and more issuers may have to relent to their demands.
"This issue of having CoC in structures may become morepervasive in an environment where investment grade clients havebecome a strategic choice for acquisitions," said the banker.
"IG issuers are not used to agreeing to such demands frominvestors, so it will be interesting to see how this pans out." (Reporting by Davide Scigliuzzo; Additional reporting byShankar Ramakrishnan; Editing by Natalie Harrison and MarcCarnegie)