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Goldman Sachs has drawn the ire of investors in Europe’s high-yield market after a fund controlled by the US investment bank looks set to benefit more than many other bondholders from a corporate deal that it is advising on.
Some bondholders in Verisure, a Swedish home alarms company owned by US private equity house Hellman & Friedman, complain that they have been offered far smaller fees to permit H&F to raise new debt to pay itself a €1bn dividend.
H&F, which secured control of the Swedish company in 2015, is having to pay fees because the terms of Verisure’s existing bonds forbid such a large dividend payment. While the payments promised to holders of Verisure’s senior secured bond under a process of “consent solicitation” amount to just €9.45m, owners of the company’s “private senior” bonds, which include the Goldman fund, will receive €28m, according to the terms published for the pending deal.
An investor who owns Verisure’s secured bonds said that the different treatment of the two securities was striking. “Is Goldman saying: we would never do this on bonds we own, but we’re asking you to do it?”
Verisure’s debt sale is the latest flashpoint in a European junk bond market in which the European Central Bank’s quantitative easing programme has helped drive yields to record lows, leaving investors on the back foot as companies raise fresh debt or refinance existing borrowings.
The difference between the two sets of fees stems from the “consent solicitation” process, which would allow H&F to give a financial sweetener to owners of the €630m of senior secured bonds instead of handing over a much larger “pre-payment” that would be more typical. While several banks are advising on the deal, Goldman Sachs is the sole “solicitation agent”.
By contrast, the consent solicitation does not extend to the €692m of “private senior” bonds, which will receive the much larger pre-payment fees. A mezzanine fund controlled by Goldman Sachs is one of the investors in these riskier unsecured bonds, which were issued in late 2015. Reports at the time said that the Goldman fund bought €500m of bonds. Goldman Sachs declined to comment. H&F could not be reached for comment.
“The sponsor will receive its €1bn dividend and holders of the private senior notes will receive €28m in pre-payment premium,” said Scott Josefsberg an analyst from Covenant Review. “For allowing these transactions, investors in the secured notes should demand their fair share because they are entitled to their make-whole premium too.”
Funds controlled by Goldman Sachs commonly invest in the riskier “junior” debt of leveraged buyouts, a technique that has given the US bank more firepower in the competitive world of debt underwriting. Yet it can cause tensions. Debt investors, for example, in Avantor’s recent LBO forced changes to terms governing preferred stock, which an affiliate of Goldman was investing in it.
“It creates a lot of noise on something like Avantor, but to be fair to them [Goldman Sachs] it means that they are taking on risk as well,” said one debt investor, however.
In the case of Verisure, H&F also has a greater incentive to repay the private bonds earlier, as the premium equates to 4 percentage points, lower than public notes’ 9 per cent make-whole premium.
The Verisure bondholder added that he did not expect the majority of investors to oppose the consent solicitation, which expires at 4pm on Thursday, as the security company then plans to issue over €1.1bn of new unsecured bonds.
“A lot of people really want to participate in the new unsecured deal and will be worried that they won’t get a good allocation if they don’t consent,” he said. “But if it passes it’s a ridiculously lopsided outcome.”