Striking a chord
Liberty Media is a company that takes as much as it can. Notorious for plying investment bankers for ideas, and paying little in return, the media conglomerate focused its funding efforts in 2013 on the convertible bond market with a series of financings. The capstone to those efforts was a US$1bn, 30-year senior unsecured CB that pushed the threshold on pricing, size, and structure.
“We’re hard. We’re not the easiest to work with,” admitted Liberty Media treasurer Neal Dermer. “But when you do your job we’ll reward you.”
The CB represented a unique investment opportunity. There are plenty of ways to play Liberty Media – investing directly into the parent, into its publicly traded holdings, or via a series of bonds exchangeable into underlying equities – but none provided a similar balance of downside protection and participation in its long-term potential.
Significant to that potential was XM Sirius Radio, the satellite-based radio company in which Liberty Media owned a 53% stake that represented roughly 68% of its market capitalisation at the time of the offering.
Given Liberty Media’s history of spinning off assets, the security was structured with a novel portability feature to true-up investors – in the event of a spin-off, investors would be entitled to roll into the spinco capital structure based on an averaging period.
“The debt moves, the equity moves,” said Suvir Thadani, co-head Americas equity-liked origination at Citigroup, of the potential spin-off. “That allowed us to get a premium valuation.”
XM Sirius also provided a benchmark credit given its established debt profile.
The effort culminated on October 10 in the pricing of the US$900m CB, structured with matching call protection and investor puts in 2023, at a 1.375% coupon and 22% conversion premium. That was through the 1.50%–2.00% and 17.5%–22.5% marketing range, while the deal was upsized from the original US$500m base deal. Exercise of the overallotment option pushed total sizing to US$1bn.
The company used a portion of the proceeds on a call-spread overlay to offset economic dilution to its shares above US$255, a 75% premium. The cost of repurchasing the embedded call option, the first step of the trade, is tax deductible while the sale of warrants at the higher strike is not, providing Liberty Media a tax benefit relative to the 1.375% coupon paid out to investors.
“Because of competition we got great pricing on call spread,” said Dermer. “We have a negative carry because of the tax benefit relative to the coupon. Essentially we get paid every year.”
Citigroup, Morgan Stanley and JP Morgan were the active leads on a syndicate of 12 bookrunners.
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