Globo debacle gives junk bond syndication a black-eye

* Globo (LSE: GBO.L - news) exposes risks in opaque high-yield market

* Investors slam bookrunners, ratings agencies

* Warning signs ignored

By Robert Smith

LONDON, Oct (HKSE: 3366-OL.HK - news) 30 (IFR) - The growing scandal at Globo has laid bare the dangerously opaque nature of the international high-yield bond market, with ratings agencies, investment bankers and auditors all failing to spot the warning signs of suspected fraud.

But while Globo's bond made it to syndication, the market provided the ultimate check, with insufficient investors willing to buy the deal even at double-digit yields.

The UK tech company's CEO and CFO both resigned last week after informing their board of directors about misrepresentation of the AIM-listed company's financial situation on October 25. CEO Konstantinos Papadimitrakopoulos sold the majority of his shares on October 22, the same day short seller Quintessential Capital Management published a damning report about Globo.

Globo had announced only one day prior - on October 21 - that it had postponed a months-long effort to sell a senior secured bond issue due to what it said were unfavourable market conditions.

The company originally tried to sell a US$180m five-year non-call two senior secured deal in June, but after investor push back tried again in August, this time with a US$130m five-year non-call three with stricter covenants.

Book-running manager Imperial Capital and international co-manager ISM Capital failed to sell the deal, even after offering investors a 10.375% area coupon with a steep 94 original issue discount.

Imperial Capital's chief operating officer Mark Martis told IFR that he was "shocked by the revelations that came forth on Monday".

"As with all of our deals, we engaged in a robust due diligence process for the Globo transaction," he said, providing a long list of safeguards including diligence with the potential borrower's independent accountants and reviews by the two largest ratings agencies.

Standard & Poor's and Moody's both rated Globo in June. Moody's pegged the company at B2 while S&P put it two-notches higher at BB-. The latter rating put it in the top tier of sub-investment grade companies, on a par with international carmaker Fiat Chrysler, for example.

One investor who attended the deal's roadshow said he could not believe the deal received a Double B rating.

"It (Other OTC: ITGL - news) was just such a hairy credit. I remember thinking it felt like a Triple-C at best," he said.

Representatives from both ratings agencies declined to comment.

FAMILY BUSINESS

The investor said that while he did not necessarily suspect fraud, his meeting with the CEO was "full of red flags" and felt like a "practical joke".

"You'd expect the founder to have a background in Silicon Valley or programming," the investor said. "He told me he'd worked in his family's orange business. I thought maybe it was jargon, but he explained he meant the fruit."

The bond's offering memorandum states that Papadimitrakopoulos was operations and exports manager for his family's fruit processing business from 1989 to 1995.

A second investor questioned how closely bookrunners had examined the business.

"Imperial Capital probably got a lot of feedback from bond investors expressing concerns," he said. "They were pushing the deal hard and it's definitely a black-eye for them."

The investor said he told the bookrunners in June of his concerns about the large number of intercompany transactions and had asked why the vast majority of cash was deposited in junk-rated banks.

He added that there was no indication where its considerable stated cash balance of 83m sat in Globo's complex web of subsidiaries.

When asked if Imperial Capital's reputation had been damaged, Martis responded: "we certainly hope that it has not been tarnished as we take our diligence process very seriously given our role in the middle market high-yield space."

LUCKY ESCAPE

While Globo's bond deal ultimately failed to get off the ground, some investors may have had a very narrow escape.

"Amazingly, I heard some big high-yield accounts had bitten," said the first investor.

The episode underlines the faith bond investors place in the financials provided to them, which in this case Grant Thornton had audited.

Christopher Smith at Grant Thornton signed off on Globo's 2014 numbers. Grant Thornton's public relations manager John Heredea responded to IFR on behalf of Smith, declining to comment due to "obligations to client confidentiality".

Globo's previous auditor was PKF Littlejohn, with Mark Ling signing off on its 2012 financial statements.

Ling confirmed to IFR that he had audited the company but said he could not remember when.

"Which years, without checking the records, I can't remember," he said.

When asked why the company changed auditor in 2013, he declined to comment.

"When auditors have signed off, it's really difficult for bond investors to suspect fraud," said a third investor.

"There's so much high-yield issuance right now, so there will be more of these cases. When you have to look at four new deals a week, you don't have the time to do proper diligence." (Reporting by Robert Smith. Editing by Alex Chambers and Matthew Davies.)