The Raw Deal

Buyers' verdict

The misfortunes of ISS bondholders are under the spotlight. But while many investors have little sympathy for peers they believe deserve all they get for buying bonds with no protection, aggressive moves from other creditors have got them more worked up.

Chief among the issuers currently raising their ire is Vodafone, which bought Czech mobile phone business Oskar Mobil and Romania's MobiFon from Telesystems International Wireless in March.

Vodafone structured the Oskar deal specifically to exercise the equity call, they say, causing the bonds to drop three points on the news in early June. The UK-based company also offered a very aggressive tender price on MobiFon several points lower than where the bond had been trading for the past year.

Investors have reacted badly to the moves, which they say represent a 'stretching' of the covenants; the market awaits Vodafone's response.

Another deal currently upsetting the buyers is Baxi, owned by private equity firm BC Partners. In early December the heating products group paid shareholders a £70 million dividend – the proceeds of the sale of its showers business. Bondholders were upset about that, says one analyst – but not nearly as upset as they were five months later when the firm announced the acquisition of Spain's Roca Heating for €200 million. BC Partners intended to finance the entire acquisition with debt, while the memory of the massive dividend payout was still fresh in bondholders' minds, with compensation of just two basis points for them.

In this instance investors won a small concession, with a revision of the proposed senior leveraged debt of 4.0x to 3.75x.

Still, bondholders are left thinking tighter covenants are required to stave off more creditor power. "Essentially even in cases where bondholders have covenants, we still seem to be coming up short," says one London-based high-yield investor.