Millicom and Atlas – the takeover
Many investors were busy with the events of last week, navigating the equity market volatility, which in the end really didn’t provide too much opportunity in credit markets. On one level this was disappointing – as stock pickers, volatility can be our friend. On another level, it was further evidence of the resilience of the high yield market. The Liontrust GF High Yield Bond Fund is well positioned and waiting for a larger sell-off (widening of credit spreads) before adding to exposure and executing on valuation opportunities.
With a more focused high yield lens, our attention last week was brought to a company in our portfolio that was in the headlines for a potential takeover, and which presented a situation where bondholders were left scratching their heads.
Millicom International Cellular SA (“Millicom”) is a leading provider of telecommunications services in Latin America. Atlas Investissement SASU (“Atlas”) is the largest shareholder of Millicom, with a 29% stake in the company. In recent months, Atlas has made a bid to buy out other shareholders of Millicom; its initial bid was rejected and, based on the Millicom Board’s recommendation, the subsequent bid is likely to follow suit. The Board’s position is that the bids by Atlas undervalue the company.
If Atlas is successful with its takeover attempt, resulting in its stake exceeding 50%, then this would trigger the bonds Change of Control (“CoC”) covenant. The CoC covenant is standard for most high yield bonds, and is a key protection for bondholders from a change in ownership. If triggered, Millicom would have to make an offer to purchase all outstanding bonds at a predetermined price which is a small premium to par value. The covenant is particularly valuable if your bond’s current price is much lower than par value. Millicom has a further covenant to be satisfied alongside the change in ownership – in order to trigger the CoC covenant, a bond rating downgrade must occur within 90 days of the change in ownership.
Amid last week’s volatility, Millicom announced that it wants bondholders’ consent to remove the CoC covenants. If consent is given, then should a change in ownership occur coupled with a subsequent ratings downgrade, Millicom would not be forced to buy back its bonds at the covenant price. The announcement surprised bondholders, as the removal of a standard safety net for high yield investors is a big ask.
Typically, material bond documentation amendments come with a reasonable consent fee. In this case, bondholders were offered a 2.5% premium. Some bondholders would consider this unreasonable, as it would only be paid once the company takeover has concluded, and most importantly would not compensate the bondholder for the risk that the new owner has a more aggressive financial policy. Furthermore, it also removes the upside of the bonds being potentially bought back at a premium to par value. For context, if the CoC covenant was triggered now, we would realise an upside of approximately 15%.
On the one hand, Millicom’s Board is not willing to accept a takeover bid on the grounds that it undervalues the company, however, on the other hand, Millicom want bondholders to accept a small fee in order to remove a standard high yield covenant, which offers a great deal of protection and potentially provides a large upside.
Putting this double standard to one side for a moment, investors are left in a tricky spot. There are various permutations, but what is on the table here represents a classic prisoner’s dilemma, an economic scenario made famous in the Hollywood movie, ‘A Beautiful Mind’. There is some likelihood that bondholders vote in a manner that is worse for both the collective and the individual.
On an academic level, it will be interesting to see if this consent solicitation will set a precedent for the importance of covenant protection in high yield bonds, and whether that importance has a price.
Sharmin Rahman, Global Fixed Income team
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