Qantas lenders regroup with ôcovenant-liteö package

The bidding consortium Airline Partners Australia drops its minimum acceptance level to 70% and announces a new $7.5 billion debt package.
The private equity consortium hoping to buy Australian airline Qantas has restructured its bid in an attempt to get the A$11.1 billion ($9 billion) deal off the ground. Airline Partners Australia has dropped the minimum acceptance level from 90% to 70% which means the company will stay listed on the stock exchange with minority investors still holding an interest in the business.

The move comes after at least two institutional investors who own significant shares in Qantas û Balanced Equity Management, which owns a 4% share, and UBS Global Asset Management with a 6% plus share û indicated that they may not support the deal, making it impossible for the consortium to reach its old minimum level of 90% acceptances.

The new terms outlined in a seventh supplementary bidderÆs statement yesterday also include a new debt package put together by the consortiumÆs lending banks. The package includes $6.1 billion in debt to fund the acquisition. It also includes a $1.5 billion loan facility and a $200 million revolving credit facility to allow Qantas to refinance some of its existing debt and to fund part of the dividends and capital reductions contemplated under the capital management policy.

The consortiumÆs main lenders are Calyon, Citigroup, Deutsche Bank, Goldman Sachs, Morgan Stanley and Royal Bank of Scotland.

The wording of the supplementary statement gives the clear indication that both the lenders and the equity providers in the deal expect that Airline Partners Australia will end up achieving its original goal of receiving 90% acceptances from shareholders. If the buyers do reach this 90% level and gain control of the business, then the terms of the old debt package kick in.

Meantime, the new package has an initial term of three years, extendable to five years if 35% of the principal under the facility has been repaid.

The foreign currency hedging transactions that Airline Partners Australia entered into to establish an agreed Australian currency equivalent in respect of its US dollar denominated borrowings will also be rolled over to the new facility.

ôThese transactions ensure that Airline Partners Australia will have a minimum amount in Australian currency of A$7.5 billion under the new facilities which, together with the investor group funding of approximately A$3.5 billion, will be sufficient to pay the offer consideration regardless of exchange rate movements,ö the statement states.

The statement describes the new facility as ôcovenant-liteö. ôThis means that it does not have any financial covenants such as maximum leverage ratios or minimum interest coverage ratios, that are tested on an ongoing basis. There are no financial covenant events of default which can be triggered solely by a deterioration of the financial condition or performance of Qantas or Airline Partners Australia.ö

The new deal structure isnÆt ideal because Airline Partners Australia wonÆt end up owning Qantas outright, but it has saved them from raising the offer price of A$5.45 a share û at least for now. The consortium indicated yesterday that it now holds a relevant interest in 11.8% of Qantas securities, with shareholders holding another 18.11% of shares having tendered their acceptances.

ôThe problem with lowering acceptances is that private equity firms can end up holding a private interest in public equity û we call this a Pipes situation,ö says a source at a boutique advisory firm, outlining the difficulties resulting from the new deal structure. ôWhile you may run the company and control the board, you arenÆt able to de-list it, so the company remains quoted on the stock exchange. That means you have to comply with continuous disclosure rules and it is harder to restructure a business when it is in the public eye. Your exit strategy is also more complex.ö

Qantas shares closed up eight cents to A$5.39 after the news yesterday. The shares were trading at around A$4.60 prior to the consortiumÆs bid being made.
¬ Haymarket Media Limited. All rights reserved.
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