Seeking Alpha
Debt, CFA, Portfolio manager, preferred stocks
Profile| Send Message| ()  

Given the news on Fortune Brands (FO), I figured it might be worth having another look at their debt, as it will be most affected (at least in a possibly negative sense) by the potential transaction.

First we will review the outstanding indentures and see which notes were issued under them (this will define the base covenants applicable to each series of notes), then we will look at other features contained within the notes to “safeguard” debt investors. Finally, we will determine the “pain priority”.

I. INDENTURES

Indenture dated as of April 15, 1999:

  • $400,000,000 aggregate principal amount of 3.000% notes due June 01, 2012. Issues 11/09; MW+40
  • $500,000,000 aggregate principal amount of 6.375% notes due June 15, 2014 - Issued 6/09; MW+50
  • $750,000,000 aggregate principal amount of 5.125% notes due Jan 15, 2011 - issued 1/06; MW+15
  • $950,000,000 aggregate principal amount of 5.375% notes due Jan 15, 2016 - issued 1/06; MW+20
  • $300,000,000 aggregate principal amount of 5.875% notes due Jan 15, 2036 - issued 1/06; MW+25
  • $300,000,000 aggregate principal amount of 4.875% notes due Dec 1, 2013 - issued 11/03; MW+12.5

Indenture dated as of July 15, 1988:

  • $200,000,000 aggregate principal amount of 6.625% notes due June 15, 2014 - Issued 6/98; MW+15

The covenants (base covenants) contained within the two indentures are identical, and will, therefore, be addressed as one.

Common (“base”) Covenants:

Limitations on Merger: The indenture provides that if we merge or consolidate with or into any other corporation or we transfer substantially all of our assets to any other corporation, and as a result any of our property or the property of a Restricted Subsidiary would become subject to any mortgage, we will simultaneously with or prior to such transaction secure the debt securities by a prior lien on such property. (Section 8.03). If we merge or consolidate with any other corporation or we transfer substantially all of our assets to any other corporation, the successor corporation shall be substituted as obligor under the indenture. (Sections 8.01 and 8.02).

Restrictions on Transfers of Property: Neither we nor any Restricted Subsidiary may transfer or lease any major facility to any Subsidiary not considered a “Restricted Subsidiary” for any of the reasons described in the first sentence of the Restricted Subsidiary definition in the “Definitions” paragraph above. (Section 10.08).

Not too much, is there? Unfortunately, these covenants aren’t going to help you. I have seen successor obligor used in creative ways in the past. Might be worth a look into, but don’t think it will really help. The basis for the argument was the Sharon Steel case.

II. OTHER FEATURES:

Change of Control.

  • $400,000,000 aggregate principal amount of 3.000% notes due June 1, 2012. Issues 11/09
  • $500,000,000 aggregate principal amount of 6.375% notes due June 15, 2014 - Issued 6/09

Definitions:

Change of Control Offer

If a change of control triggering event occurs with respect to the notes, unless we have exercised our option to redeem the notes as described above, we will be required to make an offer (a “change of control offer”) to each holder of the notes with respect to which a change of control triggering event has occurred to repurchase all or any part (equal to $2,000 or any multiple of $1,000 in excess thereof) of that holder’s notes on the terms set forth in the notes. In a change of control offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of notes repurchased, plus accrued and unpaid interest, if any, on the notes repurchased to the date of repurchase (a “change of control payment”).

“Change of control triggering event” with respect to the notes means the occurrence of both a change of control and a rating event with respect to the notes.

“Change of control” means the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more series of related transactions, of all or substantially all of our assets and the assets of our subsidiaries, taken as a whole, to any person, other than our company or one of our subsidiaries; (2) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding voting stock or other voting stock into which our voting stock is reclassified, consolidated, exchanged or changed measured by voting power rather than number of shares; (3) we consolidate with, or merge with or into, any person, or any person consolidates with, or merges with or into, us, in any such event pursuant to a transaction in which any of our outstanding voting stock or the voting stock of such other person is converted into or exchanged for cash, securities or other property, other than any such transaction where the shares of our voting stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the voting stock of the surviving person or any direct or indirect parent company of the surviving person, immediately after giving effect to such transaction; (4) the first day on which a majority of the members of our Board of Directors are not continuing directors; or (5) the adoption of a plan relating to our liquidation or dissolution.

Notwithstanding the foregoing, a transaction will not be deemed to involve a change of control under clause (2) above if (i) we become a direct or indirect wholly-owned subsidiary of a holding company and (ii)(A) the direct or indirect holders of the voting stock of such holding company immediately following that transaction are substantially the same as the holders of our voting stock immediately prior to that transaction or (B) immediately following that transaction no person (other than a holding company satisfying the requirements of this sentence) is the beneficial owner, directly or indirectly, of more than 50% of the voting stock of such holding company. The term “person,” as used in this definition, has the meaning given thereto in Section 13(d)(3) of the Exchange Act.

“Rating event” means the rating on the notes is lowered by each of the rating agencies then rating the notes and the notes are rated below an investment grade rating by each of the rating agencies then rating the notes on any day within the 60-day period...

Unfortunately, I don’t think this will help either. The key term is going to be “all or substantially all” which has never been defined (no “bright line”) and will be determined after litigation. As well, a quick look at the possible break up does not infer an “all or substantially all” scenario.

click to enlarge images

Coupon Steps (Interest Rate Adjustment).

$500,000,000 aggregate principal amount of 6.375% notes due June 15, 2014 - Issued 6/09.

Each adjustment required by any decrease or increase in a rating set forth above, whether occasioned by the action of Moody’s or S&P (or, in either case, a substitute rating agency), shall be made independent of (and in addition to) any and all other adjustments. In no event shall (1) the interest rate for the notes be reduced to below the interest rate payable on the notes on the date of their issuance or (2) the total increase in the interest rate on the notes exceed 2.00% above the interest rate payable on the notes on the date of their issuance.

Now we’re talking. As long as you are going to get hit, you might as well get a few more coins for your bruises. I think that unless there is some dividend back to FO to tender for debt, you are looking at high yield ratings.

III. PAIN PRIORITY

Least to worst pain:

  • 6.375% due 2014 - coupon steps and CoC (very little value in CoC IMHO)
  • 3.000% due 2012 - CoC (again, little value, but there could be creative legal arguments)
  • Everything Else
  • 5.875% due 2036 - nothing but yuck duration. Ouch.

LEVELS:

  • FO 3.000 12 /+115
  • FO 4.875 13 215 3yr
  • FO 6.375 14 235/231 5yr
  • FO 5.875 36 285-245

If you’re looking, 14s all the way. If you’re holding, hope you have the 14s or would consider shortening into them.

Links:

Get ready. If you're going to fight, its going to take time.

Source: Fortune Brands: The Debt Details