The Treasurer April 2006

Losing control

It appears that change of control clauses are becoming the norm in response to complaints by investors that the current climate in the world of mergers and acquisitions (M&As) works to their disadvantage.

It is not a trend that is universally welcomed by treasurers, but it seems that trying to stop change of control clauses may be the corporate equivalent of trying to turn back the tide. Other treasurers appear to be more willing to concede defeat, judging that it is not worth fighting over.

The last issue of The Treasurer reported on the change of control clause issue which featured so prominently in BAA’s highly successful multi-tranche bond issue.

While the last few weeks have seen a sudden focus on change of control, the argument has been simmering away in the bond markets for some time, mainly because of the perception that some private equity takeovers have left bond owners with the raw end of the deal.

A year ago investment grade borrowers had little need to offer covenants against the weakening of credit after a change of control, but the increasing M&A activity has placed bond covenants firmly in the forefront of investors’ minds. Particularly as we are now in an era where no quoted company of whatever size appears immune to the possibility of being placed on the radar of private equity. According to Bloomberg, by the end of February companies in Europe had announced takeovers amounting to $191bn – more than double the amount in the first two months of 2005 causing debt securities to drop as much as 11%.

In private there is a degree of cynicism on this issue. Some bankers think that treasurers should take the easy option and grant the change of control clause on the grounds that you can’t come to market without offering protection. Some even argue that there is very little for treasurers and their colleagues to worry about as, if the worst does come to pass, they may not be the ones who have to pick up the pieces. But let’s not forget that change of control clauses can run counter to the interest of shareholders and at first glance should be resisted. It may be better for the market to build into its assessment and pricing the possibility of change of control, which, in theory at least, could result in an improved rating if the acquirer had a better-rated credit. But such calls are unlikely to hold sway. Instead, the best that treasurers can hope for is careful wording so that the clause is only triggered by takeovers that lower the credit rating.

There is a wider point. Treasurers are uneasy about change of control clauses partly because of the signal that it sends to the market. Some treasurers feel that if they allow themselves to be pushed back on this issue it will only be a matter of time before they are being asked to give ground elsewhere.

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