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Friday, 24 November 2017

US Structured Equity Issue: Dish Network's US$3bn 10-year convertible bond

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Spectrum of possibility

It’s not exactly obvious how a company can monetise something it doesn’t ever use. But Dish Network did just that with a US$3bn 10-year convertible bond underpinned by a part of its wireless broadcast spectrum.

It was the largest convertible bond in the awards period, and one of only three to feature a 10-year tenor.

The trade appeared to be the latest bit of wizardry from CEO Charlie Ergen, who defied expectations in the first place by touting satellite TV in the early 1990s. When others didn’t believe, Ergen did, using cashflows and assets to back the debt used to roll out his satellite-based TV network.

But with Dish’s wireless spectrum – a frequency range for phones, not broadcast, that the company currently does not use – unlocking value was rather a different proposition.

To provide flexibility, Dish sold the security directly as parent Dish Network, rather than the Dish DBS operating subsidiary that houses its traditional satellite business pledged as collateral for all of its loans and bonds.

“The satellite TV business had about US$14bn of debt against it,” said Faiz Khan, a managing director in equity-linked origination at Deutsche Bank, sole bookrunner on the bond.

“The view of our leveraged-finance counterparts was that it was going to become expensive to access the high-yield market,” he told IFR. “They did not want to encumber the wireless spectrum, because they wanted to maintain flexibility to sell, partner or roll out their own wireless network.”

On the afternoon that the CB was priced, S&P downgraded Dish’s credit rating by one notch to B+, citing elevated debt and declines in the pay-TV sector (the ratings agency rated the bond issue B–).

But by then, Deutsche was in a position to increase the size of the bond offering to US$2.5bn from US$2bn, thanks to demand from long-only CB and crossover high-yield buyers.

It placed two-thirds of the deal with those outright accounts at a 3.375% coupon and 32.5% conversion premium, the mid-point of price talk. Then it used its overallotment option to push the deal to US$3bn.

Dish sent a bullish message by using some proceeds on a call-spread overlay to offset dilution to share prices above US$86.0825, a 75% premium to the US$49.19 reference price.

The company still has plenty of value in its wireless spectrum holdings, estimated at some US$20bn or more.

Dish has the option to acquire more spectrum, sell what it has or partner with another company to build its own wireless network. And its US$3bn convertible bond is a financing vehicle that will give it the freedom to explore all of the above.

To see the digital version of this review, please click here.

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

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