Stada high yield exchange offer creates blueprint as market capacity shrinks

The offer by German generic pharmaceutical group Stada to exchange a portion of its existing 2024 secured bonds with longer-dated, higher-coupon notes could be the first in a series of liability management exercises to come as issuers look to address near-term bond maturities outside the primary market, bankers and investors say.

Stada on Oct. 12 launched a par-for-par offer to holders of €1.885 billion of its 3.5% secured bonds due 2024 to exchange the notes for new 2026 bonds with a 7.5% coupon. The offer is conditional on at least €500 million being exchanged, and will expire after five working days on Oct. 19.

The offer comes as issuers and private equity firms increasingly look to address their 2024 maturities amid a higher-for-longer interest-rate environment.

In a September report, Spread Research said most of the €9.5 billion of paper rated in the single-B and triple-C bracket due 2024 should be refinanced via conventional means, but added that Stada could face difficulties because it has a large capital structure that's due to mature in the next three years.

Stada’s debt was in the spotlight earlier this year due to the company’s exposure to Russia, where it generates roughly 14% of revenue following its 2020 acquisition of assets from Japanese rival Takeda. But the company has so far this year shown resilient financial performance, and investors say the move to extend its debt maturities is indicative of a market with the capacity to host large refinancings, and that the exercise could prompt a series of similar deals.

However, the proposal from Stada has drawn some differing views among both ratings agencies and investors, and follows a few years during which non-distressed exchanges were a rarity due to wide open primary bond markets.

Under terms of the deal, Stada will pay holders eight points upfront to replace bonds that were trading around 91/92 prior to the offer, which initially drew some queries from observers who questioned the large upfront premium paid by the company.

Fitch meanwhile in an Oct. 13 report — which observers say was critical of the proposal — said the deal represents a “reduction of terms” for 2024 bondholders, and that it saw no evidence the company is trying to avoid insolvency proceedings or a default, in an assessment which has been questioned by some market sources.

No worse off
“It is a par-for-par exchange, so it doesn’t reflect a reduction in terms for investors,” said a source close to the transaction, referring to the Fitch assessment. “Investors can participate at their discretion and will be no worse off if they do — but it is a function of the market now that if you give investors the opportunity to take cash back, they will, given pressure from outflows.”

In response to a request to comment from LCD, Fitch said maturity extensions are considered a reduction in terms under its rating criteria. The agency does not however view the transaction as a distressed debt exchange, Fitch added.

Sources added that Stada's proposal is the product of a comprehensive pre-marketing procedure which engaged most of the largest 2024 bondholders, with several accounts having committed to the exchange offer prior to the public announcement on Oct. 12.

The new 7.5% coupon plus eight cents of cash compensation equates to a yield close to 10%, sources said, which is only slightly below the average new-issue yield of 10.25% for European single-B rated bonds for the three months ended Oct. 14, according to LCD data.

Moody’s, in a report published the same day as Fitch's, put the deal in a more positive light for creditors, saying that it expects the proposal to cause “no loss in value to current bondholders”. S&P said the transaction is “opportunistic,” but that it also expects it to be “largely leverage neutral since total debt will be unchanged after closing.”

Several holders of Stada’s 2024 bonds have concurred with this view, and told LCD that the proposal represents an attractive proposition to stay invested in a solid credit which is facing headwinds and a complex capital structure to refinance.

“Sponsors need to be pro-active with shorter maturities and this is a good way to do it,” said one 2024 bondholder involved in the exchange offer. “New issues in past few months have also come between 9% and 11% and this is pricing in that range — ostensibly our read is that the exchange represents a very normal course of business given the current market backdrop.

Chipping away
Stada’s offer to bondholders comes as lower-rate European high-yield companies are only just starting to address bonds which mature in 2024 and beyond, with Spanish retailer Tendam Brands earlier this month completing a €300 million 5.5-year E+750 floating-rate bond at 93 in a deal which represents the first benchmark-sized offering to fully replace a bond maturing later than 2023 since January, according to LCD data.

Unlike Tendam, Stada has a complex capital structure which is too large to refinance via conventional means given current market conditions. As well as its secured bonds, the company has roughly €3 billion in term loans due 2025, €590 million of unsecured paper due 2025 and a €400 million RCF currently set to expire in August 2023 (although Stada is said to be in discussions with lenders to extend its revolver).

“From an investor perspective it is good that they are being proactive in addressing their maturities,” said a bondholder. “They have lots of wood to chip so can’t just wait and hope — you have to be pre-emptive.”

While issuers such as Tendam with only a single large bond or loan and a smaller RCF should be able to refinance via conventional means, companies with more complex structures might have to adopt a similar approach to Stada. “Stada is a pretty straightforward transaction, and we will see a lot more transactions like this,” the same bondholder said.

BC Partners-backed United Group for example recently announced asset sales to help reassure investors ahead of a maturity wall which includes €525 million of bonds due 2024 and €550 million of FRNs due the following year.

Among other large borrowers, Blackburn-based petrol station forecourt operator EG Group faces a €300 million 3.625% secured bonds maturity in 2024 and then four separate bonds set to mature in 2025, for a total of €1.37 billion in euros and $1.385 billion in dollars. In addition, EG has euro and dollar term loans due 2025.

Addressing its 2024 maturities has naturally led to speculation that Stada will look to address its junior-ranked bonds, namely its 7.25% unsecured bonds which mature in 2025 and are rated CCC+/ Caa2/CCC+. Spread Research had previously said that refinancing the 2024 notes alone would be difficult because it would put secured holders behind junior creditors, but the firm’s analysts in an Oct. 14 note said they expect Stada to “launch a similar debt exchange” for the 2025 notes.

Sources familiar with the company’s thinking said this remains a possibility, but that an offer to junior bondholders will likely come after all its 2024 secured bonds have been refinanced. Even if Stada attracts a great deal more interest than the €500 million minimum required for the exchange, sources say investors holding the secured notes in short-duration funds may not be able to participate in the exchange — meaning a substantial amount of the €1.885 billion bond will be either repaid at maturity or refinanced before it becomes current in September 2023.

“The likelihood is that the exchange will leave behind a material balance of 2024s to be refinanced,” said a source. “Given the 2024s mature 12 months ahead of the unsecured bonds, it would be unusual to refinance unsecured paper before addressing secured debt, because you don’t want to give unsecured holders priority over senior creditors.”

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This article originally appeared on PitchBook News