ONO’s multi-stage refinancing programme has established a new refinancing model for European companies.
Spanish cable company ONO issued $310 million high-yield notes due 2018, in conjunction with a complete refinancing of its existing senior bank facility.
The deal completed in mid-June and led to the subsequent upgrade of ONO, despite a deteriorating market caused by Spanish sovereign debt concerns. Lawyers on the deal expect to see a lot more deals using the ONO template in the future.
Clifford Chance’s high yield partner, John Connolly said companies facing a wall of refinancing could use ONO’s technique to attack their financing needs in smaller bites rather than waiting and refinance a large amount of debt in one go.
“ONO was strategic, issuing bonds in instalments at opportune times in the market,” he said. “Unless markets improve dramatically, refinancing in one go is going to be very difficult.”
The ONO template
In order to implement the refinancing, ONO first had to amend its existing senior bank facility to allow new special purpose vehicle (SPV) tranches, which would be funded with the proceeds of a high yield bond issued by an SPV so long as the proceeds were used to repay existing bank debt.
Once this amendment was approved, ONO was free to issue senior secured high yield bonds that ranked pari passu with its senior bank debt and shared security equally with its bank lenders.
Over the course of 20 months, ONO completed five high yield bond offerings, refinancing almost two-thirds of its existing bank debt as well as all of its existing subordinated high yield bonds. ONO’s revenue was entirely euro-denominated. But the bonds tapped the deep liquidity of the US dollar market.
Upon completion of the last bond offering, ONO was able to enter into a new senior bank facility which refinanced all remaining bank debt.
The new senior bank facility included €1,076 million in bank tranches, a €100 million undrawn revolving credit facility and approximately €1,981 million in SPV tranches relating to bond offerings executed by ONO since October 2010.
What to watch out for
However, deal counsel warned firms looking to replicate this technique need think through in advance all that they are required to ask for in order to get the bond done the right way.
Michael Dakin, another high yield partner with Clifford Chance said that once the mechanics were in place through the amendments, it was not possible to ask for other amendments to provisions if something in the structure wasn’t acceptable to the bond market.
One particularly controversial part of the structuring concerned how much voting rights the SPV tranches would have as compared to the existing bank tranches in terms of enforcement of security.
Initially, the bank lenders were opposed to allowing dollar-for-dollar voting and imposed a ceiling on voting rights for any SPV tranches at 30% of the total votes. Although the provisions created no marketing issues for the early bond deals, as the total value of the SPV tranches approached 30%, ONO had to seek a further amendment to increase the voting limit to 40%.
When the new senior credit facility was negotiated, ONO was able to remove the voting limit entirely, creating one of the first dollar-for-dollar voting mechanisms in the market.
Euro exit safeguards
Another complication in the refinancing arose when the documentation for the bank facility had to be converted from Spanish law into English law because of escalating Euro-crisis concerns.
This meant ensuring that the English law provisions in the facility and inter-creditor agreement were functionally equivalent to the existing Spanish documentation. Connolly explained the structure was replicated so all the existing bonds would transfer into the new facility. “But we had to make sure that could all be done without a problem under the indentures,” he said.
Who can use this template?
In refinancing, ONO aimed to position itself to be able to act fast and take advantage of windows of opportunity when the market was open. The fact that the company was already a well-known high yield issuer and had quarterly reporting helped in this respect.
Quarterly reports enabled ONO to issue at any moment, since its financial information was always current and its disclosure was updated. “In two weeks we could have had an offering memorandum ready and they could be on the road so they could really time it to their advantage,” said Connolly.
Clifford Chance acted as Spanish, US and UK counsel for ONO. Cravath, Uría Menéndez and Linklaters acted for the managers and bank lenders. White & Case acted for the banks.