US CORP BONDS-Liberty Interactive cashes in HSN stake

By Stephen Lacey

NEW YORK, Sept 5 (IFR) - As a conglomerate that owns a mishmash of media assets - Time Warner Cable (NYSE: TWC - news) , Time Warner (NYSE: TWX - news) Inc, AOL (NYSE: AOL - news) , HSN (NasdaqGS: HSNI - news) , etc. - Liberty Interactive is akin to a publicly traded hedge fund in some regards, and its funding strategies are similarly sophisticated.

Convertible bonds (CBs) exchangeable into shares in the underlying assets form a significant part of Liberty's funding strategy. In total, Liberty Interactive had US$2.15 billion principal outstanding through four exchangeable debentures outstanding as of June 30, including an innovative US$500 million, 30-year CB issued in April that is exchangeable into a basket of Time Warner Inc. and Time Warner Cable shares.

Make that five securities and US$2.5 billion.

Liberty Interactive this week raised US$350 million on an overnight basis on the sale of 30-year, put-three security exchangeable into HSN, operator of the Home Shopping Network. A short-dated tenor - put three - proved instrumental in achieving attractive pricing terms for Liberty.

BNP Paribas (Milan: BNP.MI - news) , Barclays (LSE: BARC.L - news) and Deutsche Bank (LSE: 0H7D.L - news) , the active bookrunners on the trade, finalised pricing at a 1% coupon and 37.5% conversion premium, the wide end of 1% (fixed) and 37.5%-40% price talk. Arguably the banks may have overshot their mark in pursuit of the most aggressive terms.

Liberty Interactive, rated BB, three-year CDS trades at roughly L+130bp and five-year - a proxy for where it would issue a high-yield bond - closer to L+300bp, steep for a typical BB-rated issuer.

The three-year put provided confidence in a marketed credit spread of L+140bp. The combination with the relatively high 37.5% conversion premium created a debt-like security - with a bond floor of 95 and a delta (equity sensitivity) of 30%, according to sources.

The exchangeable is convertible into 4.7m HSN shares, an 8.8% stake and roughly one-quarter of the 18.5m shares held by Liberty Interactive.

The point of the funding exercise is not necessarily to sell the position on conversion, but to realize value on a portion of its 34.8% stake - in conjunction with a US$500 million exchangeable issued in April, the company called an existing US$1.25 billion exchangeable for cash at premium prices to retain the underlying.

To avoid the need to register the underlying shares, Liberty Interactive included a feature that prohibits conversion within the first six months.

Another, more significant, enhancement was tweaking the bond's change of control provisions. Typically the provision is triggered once 50% of an issuer's stock is acquired, allowing bondholders to put at par with additional compensation at premium share prices based on a grid.

In this case, however, the threshold was increased to 65% to provide Liberty Interactive more flexibility to add to its position. NetSuite (NYSE: N - news) , 43.1%-owned by Larry Ellison, and Workday (NYSE: WDAY - news) , 57.9%-owned by co-founders David Duffield and Aneel Bhusri, issued CBs earlier this year that were structured with similarly high thresholds, noted CB bankers.

To investors the provision were merely cosmetic. The new Liberty Interactive exchangeable closed yesterday at 101.125-101.875, versus a 0.9% decline in the underlying to US$53.57. (Reporting By Stephen Lacey; Editing by Varghese Joseph)