Wesfarmers upsets the locals

By far the most difficult story I've had to write. When Wesfarmers alerted its local bondholders it was unlikely to redeem its bonds following the Coles buyout, they were furious (as you will notice). Consensus was that they would redeem, and the bonds had traded on that assumption. A large fund manager suggested I cover the furore, and make the ABN AMRO the advisor and Wesfarmers pay. I did some further digging and it appeared that even though the whole process was mishandled by the ABN AMRO, and the investors had been treated poorly, there was another side to the story- Wesfarmers had not explicitly said they would do what the market has assumed they would do.  

I left no stone unturned and in keeping with balancing the story, I delayed printing the story to get comment from Wesfarmers Treasury. They came across well and from their offices in Perth, I was convinced that they had no idea of the stink they'd caused and believed they had acted fairly. However, In balancing out the story, fund managers felt that I'd let Wesfarmers get away with murder, but I am adamant the story was a fair account. 

In 2008, in a remarkable twist of fate, I found myself working for ANZ, who arranged a reconciliatory roadshow for Wesfarmers. While many fund managers 'let them have it', most had moved on and would not let the incident prevent them from buying Wesarmers paper.... their high gearing, multi-billion dollar refinancing mountain, and the complexity and risks of the Coles integration would! 

 Insto Bond Diary 

*** Wesfarmers decision splits lenders (8 November 2007)***

As Coles shareholders voted to approve the acquisition of the supermarket chain by Wesfarmers, local bond investors have once again felt locked out.

The bond market had widely assumed that Wesfarmers would refinance Coles existing debt and Friday’s announcement that it will not be doing so, came as a surprise to some.

The Perth based conglomerate was thought to have provided comfort to Coles bondholders through statements suggesting it would be refinancing the debt facilities of the Coles Group.  So Friday’s stock exchange announcement that Wesfarmers would not be refinancing the Coles debt caught bondholders off guard. 

On 1 October, Wesfarmers stated that it would draw down on a committed debt facility, which would in part be to refinance existing facilities of the Coles Group. And in July Wesfarmers indicated in an open statement by the finance director that the bonds were expected to be paid out.

Wesfarmers however has said it has never explicitly stated its intention to redeem the Coles notes and that it had released a press statement in August stating that it had not made a decision regarding the bonds.

On the back of the assumptions that the notes would be redeemed, the outstanding bonds traded relatively strongly but have subsequently widened on Friday’s news.

Buy and hold investors have been caught out, as have hedge funds and propriety traders that were positioned on the assumption the bonds would be redeemed.

“They (hedge funds and prop traders) are more sympathetic to Wesfarmers. For them it’s a ‘win some lose some’ situation,” said an observer.

Wesfarmers has acted within the constraints of the terms outlined in existing Coles’ debt terms, but investors feel Wesfarmers has something to answer for.

“We organised for an independent legal opinion to be made available to bondholders so that they would be satisfied that we weren’t doing anything that wasn’t provided for in the bond documents and acting within the terms of the bond documents,” said Luigi Mottolini, General Manager Finance and Tax, Wesfarmers.

Wesfarmers said that the motivation for not leaving the Coles bonds outstanding is to cover the amount of a portion of its acquisition finance debt package that will need to be refinanced.

“Without time to consider our rights fully, we are limited to accepting the proposal, but do so under duress and reserve our rights in this action. Even though it appears Wesfarmers have acted within its legal boundaries under bond documentation, management have not won any friends from its change of heart given its statement to the ASX,” said Rob Camilleri, senior income manager of investment house, Portfolio Partners.

In a letter to registered bondholders, Wesfarmers proposed to ‘enhance’ the credit with the same recourse provided to the Wesfarmers Group and to include a guarantee from Wesfarmers and subsidiaries. The proposal also includes a number of covenants and clauses, according to ANZ credit research. 

The offer also included a fee to bondholders.

“We offered a one off payment of 10 basis points to recompense bondholders for their time and effort in reviewing the documents and agreeing to the proposal,” said Mottolini.

Earlier today following discussions with advisors and bondholders, the offered fee was increased to 25 basis points.

Bondholders were dissatisfied with the short time frame they were given to assess Wesfarmers proposal.

“There is a wave of legal documents we need to get our heads around and we have the added pressure of only having three and a half days to do it. Under normal circumstances this is unreasonable but given we also have to analyse a complex merger scenario, it’s extremely unreasonable,” said an investor.  

“We certainly regret the time frame but we were in no way trying to put them into a position to make a quick decision.  It was a fallout of the extremely complicated and detailed process that we had gone through with this bid offer and the amount of work that had to be done, and unfortunately some things were compressed into a short amount of time,” said Mottolini.

The new terms appear to be weakened, especially in relation to those given to Wesfarmer’s bank lenders.

“We’re the holders of the longest term debt yet we don’t benefit from the same terms,” said an investor.

“Given the terms offered to Coles Finance Parties are not as attractive as the Wesfarmers bank facilities currently in syndication, bondholders may ask why any Finance Party would agree to these terms,” said Sarah Percy-Dove, head of credit research at ANZ.

“The proposed gearing levels are higher than the initial terms and are not consistent with a highly rated company,” said an investor.

The syndicated bank loans also benefit from a rating matrix which offers step ups for rating downgrades - a term not granted to Coles bondholders. 

The Coles 2012 bonds have had a colourful past.

In August 2006, Coles was targeted by a KKR led private equity consortium. Spreads on the bonds initially widened on the news, but once investors examined the change of control clauses in place to protect investors, spreads tightened again.

The change of control condition is actually a ‘Change of Control Review Event’ and all Coles creditors are now being asked to examine their options. A two thirds majority is required for a plan of action to be implemented and applies to all finance parties, not only bondholders.

According to credit analysts, this condition is highly unusual, with few in the market having seen a similar set of terms.

If bondholders made up the majority, they would most likely elect for the bonds to be repaid but it appears that many of Coles’ major lenders are funding the Wesfarmers takeover, and would vote not to have Coles debt refinanced.   

“Two thirds majority of Finance Parties binds all Finance Parties. Bondholders represent less than one third of commitments, so Banks/US PP holders would have most influence,” said Percy-Dove.

Their actions may have alienated bondholders to some degree.

“With the A$4 billion Tranche A bridging facility needing to be refinanced in 12 months, access to the capital markets could be made a little tricky at that time given the likely disenfranchisement of bondholders in the current proposal,” said Percy-Dove.

“We still want to issue in the Australian market as part of our continuing refinancing requirements so the last thing we want to do is upset the noteholders,” said Cliff Allison, Group Treasury Manager, Wesfarmers.

“We have a 12 month portion of the debt, so we will be accessing a variety of markets for that refinancing task and certainly the Australian market is one of our key sources of financing as well as offshore markets. Our primary focus has always been the domestic market,” said Mottolini.

For the moment, it appears investors will be forced to accept the new terms.

“What really amazes me is that Wesfarmers has caused so much grief for only $400 million of bonds in light of the A$10 billion total funding. Now Wesfarmers has to face the global bond market to fund this with precedent of cutting a raw deal for bond holders. Wesfarmers and the banks may have won this round, but have made it even harder for all issuers, including themselves going forward,” said Camilleri.

“This will only further strengthen the resolve of all domestic bond holders to have water tight change of control covenants for new bond issues,” he added.