Bonds backing distilled-spirits company Beam Inc. were volatile on the secondary market today after Japan’s Suntory Holdings yesterday announced plans to acquire the company for roughly $16 billion, trade data show.
Investors are not only grappling with the leverage and ratings implications of the deal – which could result in junk-level ratings for Beam debt – but also with disparities in covenant protections across the distiller’s array of debt instruments.
For now, shifting bond prices appear to be primarily linked to concerns that credit-quality-constrained portfolios would be forced to dump the issues on a move to junk, rather than worries about Beam’s ability to service its debt.
Indeed, the cost to protect against the risk of default on Beam debt for five years on the CDS market fell 17.3% yesterday, reaching a long-term low of 44 bps yesterday, from levels near 70 bps in the first quarter last year, according to data provider Markit.
Higher leverage appears to be the only certainty regarding the proposed merger, leaving bondholders and ratings agencies to wait out clarification of the ultimate capital structure of the merged entity. Fitch today made a placeholder cut of one notch to Beam ratings – citing the “lack of information and transparency regarding this transaction,” which it views as a “significant credit risk” – and left the lower rating under review for further downgrade. Moody’s and S&P are reviewing ratings under a range of potential outcomes, as the current BBB-/Baa2/BBB- ratings profile teeters just above the high-grade/high-yield demarcation.
“Further details about the financing have not been disclosed, including the amount of debt financing (which might be substantial), which entity will issue some or all of the incremental debt, and whether Suntory will provide any guarantees to Beam,” S&P noted today.
Eyeing adjusted debt/EBITDA leverage in the six-times range pro forma for the merger, Moody’s this week placed Beam’s Baa2 and Suntory’s A3 issuer ratings under review for downgrade, assuming Suntory would incur the incremental debt as a result of the proposed transaction. The agency is estimating incremental debt of more than $10 billion, even if Suntory draws on its historically high levels of cash on hand to help finance the deal.
However, Moody’s notes that, while pro form leverage would be “inconsistent” with an investment-grade rating, there could be a potentially “key” offsetting factor. “Leverage reduction could come from the increased earnings opportunities presented by the acquisition, and the current cash flow available from Beam and Suntory to reduce debt,” the agency said today.
The uncertainty leaves bondholders gaming scenarios across Beam’s range of nine long-term debt maturities, dated 2016-2036. Only four of those issues – the $300 million of 1.875% notes due 2017, $250 million of 1.75% notes due 2018, $300 million of 3.25% notes due 2022, and $250 million of 3.25% notes due 2023 – carry change-of-control put provisions, at 101% of par, in the event a takeover leads to ratings downgrades.
However, the put is only triggered if all three ratings agencies cut their grades on Beam to levels below the BBB-/Baa3/BBB- investment-grade threshold, regulatory filings show. Equivocal commentary from the ratings agencies this week leaves the ultimate ratings profile an open question for the marketplace, given the operational strengths of the companies.
All four of Beam’s covenant-protected debt issues were inked in 2012 or 2013, after the company changed its name from Fortune Brands in 2011. Those deals include $500 million of notes placed last June to back a tender offer for existing debt, including the early repayment of a June 2014 maturity and the reduction in outstanding amounts of 2023, 2028, and 2036 issues. Any issues placed earlier than that lack the change-of-control feature, “potentially placing these noteholders at a disadvantage,” Fitch analysts noted today.
Even so, whipsaw trading conditions are not limited to deals lacking the covenant protections. The dollar price for the put-protected 3.25% 2023 issue eroded roughly 2.5 percentage points today, to the 96.5% of par area, after rallying closer to the put level yesterday as one of the most actively traded issues on the bond market, trade data show. But Beam’s shorter-dated 1.875% 2017 was steadier this week, holding in the 100-101% range witnessed over the last month, or just shy of the put price.
Meantime, Suntory announced yesterday that it has obtained committed financing from The Bank of Tokyo-Mitsubishi UFG in connection with the acquisition, which is expected to close in the second quarter.
Under the terms of the deal, Suntory will acquire all outstanding shares of Beam for $83.50 per share in cash. The transaction represents a 25% premium to Beam’s closing price of $66.97 on Jan. 10; a 24% premium to the volume-weighted average share price over the last three months; and a multiple of more than 20x Beam’s EBITDA for the 12 months ended Sept. 30, 2013.
Deerfield, Ill.-based Beam’s brand portfolio of distilled spirits includes Jim Beam Bourbon, Maker’s Mark Bourbon, Sauza Tequila, Courvoisier Cognac, Canadian Club Whisky, Teacher’s Scotch, Pinnacle Vodka, Laphroaig Scotch, Knob Creek Bourbon, Basil Hayden’s Bourbon, Kilbeggan Irish Whiskey, Cruzan Rum, Hornitos Tequila, Skinnygirl Cocktails, and Sourz Liqueurs.
Osaka-based Suntory provides a range of beverages and foods, including a portfolio of beers, distilled spirits and liqueurs, and wines. Analysts noted this week that the merger would address Suntory’s geographic concentration of its alcohol business in Japan, as Beam primarily operates in the U.S. – John Atkins