US CORP BOND WRAP-Vodafone pulls deal as investors crack down

By Davide Scigliuzzo

NEW YORK, Nov 23 (IFR) - Telco Vodafone became the second issuer to pull a multi-billion dollar deal from the US corporate bond market in less than a week on Monday, after investors protested a lack of covenant protection.

Vodafone pulled an up to US$2bn 30-year US dollar offering, just hours after announcing initial price thoughts, one of the lead managers told IFR. He declined to give more detail.

Investors said the bond sale, led by Citigroup (NYSE: C - news) , Goldman Sachs, JP Morgan, Mizuho and Morgan Stanley (Xetra: 885836 - news) , had struggled to gain traction mostly because of a lack of sufficient protection against a possible takeover or a downgrade.

The company, rated Baa1/BBB+/BBB+, was expected to raise US$1.5bn to US$2bn though the transaction, which was being marketed at a spread of 250bp area over US Treasuries.

A key concern for investors was the absence of a change of control option, which would have forced the company to redeem the notes in the event of a takeover or a merger.

"Some of this was credit specific, but it also tells us a lot about the market as the deal did not get done because of investor demands. They wanted that added protection of a change of control," said one portfolio manager.

"It (Other OTC: ITGL - news) 's also not the best kind of deal to bring in a holiday-shortened week."

Vodafone and Double B rated Liberty Global (NasdaqGS: LBTYA - news) abandoned talks to swap business assets in September, but bankers haven't ruled out the possibility of a merger between the two companies.

The company had offered to add step-ups to its coupon structure in the event of a downgrade below high-grade from Moody's or Standard & Poor's, according to another investor.

The coupon on the deal would have increased by 25bp per notch of downgrade per agency, with a 200bp cap.

Step-up coupons have been a rare feature in the investment-grade bond market this year - even for companies that have leveraged up to finance M&A and share buybacks. One company that did include them was Southwestern Energy on a US$2.2bn three, five and 10-year bond deal in January.

Vodafone's woes follow a pulled high-yield issue for Veritas last week, backing its LBO from Carlyle.

Earlier this month, Chilean financial company Tanner Servicios Financieros, rated BBB-/BBB-, postponed a US$300m bond sale due to adverse market conditions, while insurance company Allied World, rated Baa1/BBB+/BBB+, dropped a 30-year tranche before that.

As Vodafone pulled its deal, four other issuers - Lloyds Banking Group Plc, Metlife Global Funding I, HCP (NYSE: HCP - news) and Stifel Financial Corp - raised a combined US$2.65bn. Two were upsized.

In high-yield, just one small drive-by issue priced: a US$300m five-year non-call two unsecured bond for M/I Homes. The deal, which will refinance outstanding 8.625% bonds maturing 2018, priced in line with talk of 6.75%. (Reporting by Davide Scigliuzzo; Writing by Natalie Harrison; editing by Paul Kilby and Shankar Ramakrishnan)