Mondelez Debt Buyback Presents `Prisoner's Dilemma' to Holders

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(Bloomberg) -- The snack giant behind Cadbury chocolates and Oreo cookies is leaving bond investors with a bitter taste in their mouths.

Mondelez International Inc. is trying to buy back as much as $1 billion of notes it sold last decade that pay high interest rates. To convince investors to part with the bonds, the company is dangling premiums, but is also using other methods that strike some money managers as more coercive.

Should a majority of holders agree to the offer, the non-consenting minority would lose critical covenants that currently restrict how much secured debt the company can take on and protect bondholders in the event of its being sold, according to a company statement. In essence, Mondelez is telling investors: either agree to sell your bonds at a price above market value, or risk losing your protections.

It’s a prisoner’s dilemma, where investors that keep their bonds are betting that a large group of noteholders will also be willing to risk losing some safeguards, said Bill Parry, a managing director of capital markets at Seaport Global Securities who advises bondholders.

"It puts bondholders in a very uncomfortable position,” he said. “There is no other offer given to bondholders other than to participate, because the downside is so dire.”

The offer expires at 5 p.m. in New York on Friday.

Mondelez has tried to buy back, or tender for, these bonds multiple times since 2013. The notes do not feature call options, which would have allowed Mondelez to repurchase the debt at a predetermined price. Without such provisions, the company likely had to resort to other measures to get the last remaining holders on board, Parry said.

‘No...solution’

The company is paying money managers attractive premiums to sell their bonds, as much as 30 basis points, or 0.30 percentage point, more than where some of the securities were last quoted.

“Covenants and lack-of-covenants work both ways,” Parry said. “There’s no fair, easy solution.”

Mondelez only started including make-whole calls on its bonds in 2013, and the bonds being tendered were issued between 2001 and 2010, spokesman Michael Mitchell said in emailed comments.

“We were advised that including a consent solicitation with the offer could help participation as it has in precedent tender offers for numerous other companies,” Mitchell said. “We believe the offer is fair and offers an appropriate premium for investors.”

Representatives for Barclays Plc and Citigroup Inc., which are serving as deal managers, declined to comment.

Mondelez is looking to buy back up to $1 billion of bonds. There are about $2.5 billion of the notes outstanding, total. The offer is contingent upon the company lining up financing to purchase the securities, which it plans to do by issuing new debt, according to a statement earlier this month.

The company has the option to go beyond $1 billion if it has the funds and consents to do so, but Mitchell said it expects to repurchase all notes tendered up to the cap.

Illiquid Notes

Investors, mostly insurance companies, have held onto the securities to reap the high coupons over long periods, which matches their long-term liabilities. If they accept the current offer, the gain would be considered a one-time gain, which equity analysts tend to frown upon, according to insurance funds that hold the debt.

But with the consequences of not participating so extreme, it’s likely Mondelez will be successful, according to three of the biggest bondholders, who asked not to be identified discussing private deliberations. Without those covenants, the yields on the bonds could rise as much as 150 basis points, Parry said.

The bonds -- due 2018, 2020, 2031, 2037, 2038, 2039 and 2040 -- are also highly illiquid, so trying to sell them in the secondary market, especially at such an attractive premium, could prove difficult, he said.

If the offer is successful, the remaining outstanding bonds will provide no protection against the company taking on more secured debt, or selling itself in a transaction that results in its getting cut to junk, or transferring assets. While removing those restrictions would make it easier for Mondelez to engage in mergers or acquisitions, that may not be the motivation behind the offer, said Alexander Diaz-Matos, an analyst at Covenant Review. Even if successful, Mondelez would still have several other bonds outstanding that contain similar restrictive covenants, he said.

Economic Incentive?

Losing those protections is serious, and the premium over market price isn’t enough to be material to at least some investors, Diaz-Matos said.

“There isn’t really a carrot in this deal in terms of economic incentive, but there’s a big stick if you’re left with illiquid paper that has its covenants stripped,” he said. The remaining protections would essentially only guarantee the payment of principal and interest, he said. “There are still words on the page, but they don’t have a lot of teeth.”

Mondelez seems to be going through a lot of work just to save a few million dollars of annual interest, according to Bloomberg Intelligence analyst Paul Simenauer. The company would have to pay about $1.3 billion to buy back all of the 2031 and 2040 notes as well as some of the 2038 bonds to reach the $1 billion outstanding threshold. Assuming it issues $1.3 billion of bonds at a 4.5 percent coupon, the annual interest savings would only come to $7.2 million, he said.

Mondelez, whose name was designed to evoke the word delicious and the Latin word for "world," traces its roots to the late 18th century. In 2012, it split from what was then Kraft Foods Inc., and has frequently been cited as a possible acquisition candidates. Kraft has since combined with Heinz, and investors speculated last year that the merged company would be interested in buying Mondelez, but Warren Buffett -- chief executive officer of Berkshire Hathaway Inc., Kraft Heinz Co.’s largest shareholder -- squashed that idea.

The shakeup for the U.S. food industry has continued, with more than $40 billion in deals announced last year, and the consolidation wave may continue in 2018 as food giants struggle to generate growth in a changing marketplace.

©2018 Bloomberg L.P.

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