Danske's $7.4 Billion Bond Unit Dumps TDC as Buyout Brings Junk

(Bloomberg) -- Danske Bank A/S was quick to act when it became clear that phone company TDC A/S was about to become Denmark’s biggest buyout in a decade.

The credit team at Danske’s wealth division, which manages about 6 billion euros ($7.4 billion) in corporate bonds, got rid of its 3.75 percent notes due 2022 immediately after TDC said last month it agreed to a 41 billion-krone ($6.8 billion) takeover deal from a Macquarie-led consortium.

“We analyzed this takeover to see how the buyers would be able to make a return and came to the conclusion that they would probably need to add to TDC’s debt leverage,” Rikke Zink Secher, a senior portfolio manager at Danske Bank Asset Management, said by phone. “As a bondholder, you have to try to guess what the structure will look like.”

TDC’s board told shareholders on Feb. 12 it was recommending the takeover offer at 50.25 kroner a share. But TDC then took another 18 days to tell bondholders it was probably going to be downgraded to junk because the buyers plan to add a “significant” amount of debt in a new holding company.

TDC Says ‘Significant’ M&A Debt Means Company to Be Rated Junk

The Danske wealth unit still holds 1.75 percent bonds due 2027, because they’re subject to a change-of-control clause that lets investors sell the debt back to TDC at par (the bond was already trading close to 100 before the takeover was announced).

“It isn’t possible to completely avoid situations like this because you can’t know in advance if a company will be bought,” Secher said. “But for a company like TDC -- which has the high cash-flow characteristics that takeover funds tend to like -- you can make sure that there is some protection for bondholders. For example a change-of-control clause or a step-up trigger for the coupon.”

TDC Bonds Have Limited Negative Pledge, Takeover Protection

The transaction, which is still pending shareholder approval, is set to be the fourth-biggest in Denmark’s history and the biggest debt-financed buyout since TDC was acquired by a group comprising Blackstone and KKR back in 2005.

“We knew that TDC was a potential takeover target so we wouldn’t have bought the bonds without protection,” said Secher. “Even with the protection on TDC’s bonds, this is a negative outcome for bondholders. But the protection means that it’s not nearly as bad as it could have been.”

TDC Treading in Teva’s Footsteps May Swell High Yield Supply

The market expects TDC will buy back its hybrid bonds, because their coupon will have to go up if and when the company gets cut to junk. TDC’s ratings are already on review for downgrades at S&P Global Ratings and Moody’s Investors Service. Both rating companies have TDC at the lowest investment grade.

“For bondholders, there has been a lot of uncertainty on how TDC’s debt structure will end up and there are still some unknowns,” Secher said. “We think it’s clear that TDC will lose its investment grade, but it’s unclear how low the rating will go.”

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net.

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Jonas Bergman

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