TDC Faces Junk Rating as Bidders Reveal New Debt Structure

(Bloomberg) -- TDC A/S is in danger of losing its investment grade rating after a consortium led by Macquarie revealed its planned ownership structure for Denmark's biggest phone company.

The expected downgrade suggests creditors are the losers in a $6.7 billion takeover bid for TDC announced earlier this year.

“The new structure is far from ideal for bondholders,” Mads Rosendal, a senior credit analyst at Danske Bank A/S, told Bloomberg. “It's highly doubtful that TDC can keep its investment grade with this structure.”

S&P Global Ratings told Bloomberg it will include the holding company's debt plans in its review of TDC's ratings. S&P, like Moody's Investors Service, already ranks the Danish company at the lowest investment grade.

“Our understanding is that the offer document indicates issuance of incremental debt,” Lukas Paul, an S&P analyst, said in a written response to questions on Thursday. S&P has had TDC on credit watch negative for a possible downgrade since Feb. 13.

According to the offer document published on Wednesday, Macquarie and the three Danish pension funds that make up the consortium won't add debt to TDC, which has fought hard through the years to avoid a junk rating. But the holding company they will use to own TDC will take on about 3 billion euros ($3.7 billion) of debt in bridge term loan facilities and a revolving credit facility, which will then be replaced by high-yield notes, according to the document

TDC Is Said to Line up Bonds, Loans for $6.7 Billion Buyout

“The debt at the holding company level will, as such, affect TDC's debt structure, because it will be served by TDC's cash flow,” Rosendal said. He expects S&P to cut TDC to BB or BB- from BBB-. TDC's bonds are trading at a level that suggests investors are already bracing for the downgrade.

Meanwhile, shares in TDC have soared about 31 percent this year. But its 3.75 percent bond due 2022 has delivered a negative return of 1.5 percent over the period.

TDC bondholders may have another reason to feel somewhat aggrieved, seeing as they were originally expecting the company to go through with a takeover of its own that would have provided the kind of diversification that rating companies tend to like. It would also have given TDC's management more scope to live up to its goal of staying investment grade.

The proposed takeover by the Macquarie-led consortium, which is being advised by Nordea and Barclays, was pushed through after it was leaked to Danish media, scuppering TDC's plan to buy the TV assets of Modern Times Group AB of Sweden.

The Danish Financial Supervisory Authority declined to specifically comment on the TDC leak. But the regulator said it tends to initiate “intensified surveillance” in such cases.

A leak “could potentially be looked at as an attempt to manipulate the market,” Anne Bruun, the head of the FSA's Capital Market Regulation Division, said in a written response to Bloomberg. “Individuals that violate the market abuse regime may potentially face a jail sentence.”

With MTG out of the picture, bondholders may now essentially be looking at a leveraged buyout.

The financing “implies a leveraged takeover, with acquisition debt in holding companies above TDC,” Aidan Cheslin, a senior credit analyst at Bloomberg Intelligence, said in report. The offer document points to “a high yield financing structure that could add as much as 6.7 billion euros of new debt financing above the TDC group.”

TDC Offer Document Points to Consolidated Leverage Hitting 5.8x

Rosendal says the owners of TDC's 1.75 percent bond due 2027 will probably choose to use an option to sell it back to TDC. And TDC will probably redeem its 3.5 percent hybrid bonds due 3015 because a junk rating would trigger a higher coupon. Some of the other bonds may also be bought back in a tender, but it's too soon to speculate how TDC will refinance them, he says.

“A sale of TDC's Norwegian activities could help reduce the debt but probably not to the extent that it saves the current rating,” the analyst said.

--With assistance from Frances Schwartzkopff

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net.

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net.

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