Working close to the wire

Goldman Sachs has consolidated its dominance of cable issuance in Europe with a €1.2bn unsecured high-yield issue for Ziggo Bond Company of the Netherlands. This was the largest-ever such bond for a cable issuer, and the largest first-time issue in Europe since 2006. It was also the first European high-yield bond to include a portability feature.

The deal shone a light onto what is going on in the world of private equity right now. In the years preceding the credit crunch, private equity groups were hyperactive, and very much in the driving seat of a debt-fuelled acquisitions market. Many of the companies that ended up in their portfolios are now looking like mature investments, ready for the next step in the process - usually a public offer. So their financial sponsors are taking a hard look at their capital structures.

"That raises two issues," says Stefan Green, who heads Goldman's financial sponsors group for Europe, the Middle East and Africa (EMEA). "Debt that was put in at the time of the buyout may be coming up for maturity and needs to be stretched out. There may also be a need to deleverage to access the public market. Ziggo has been a great example of how, with a large business, sponsors can use the high-yield market to position the company for the next phase of the buyout."

Key client

Ziggo is owned by private equity investors Cinven and Warburg Pincus, regarded by Mr Green and his Goldman colleagues as two of their most important clients. It was created in 2006 out of the merger of three smaller cable businesses. Goldman Sachs was involved in that transaction as adviser or financier to various parties and is well-acquainted with its capital structure.

Ziggo is the larger of only two Dutch cable operators - the other is UPC Netherlands - and provides its customers with cable TV, broadband internet and telephony. It has been growing rapidly since 2006, both in terms of revenue per user (RPS is a key cable metric) and improved operating margins. It has also all but completed a major capital expenditure programme to upgrade the speed and interactivity of its network, making it "futureproof", in the words of one banker.

Back in 2006, the company negotiated senior secured credit facilities totalling €3.35bn, with maturities ranging from seven to 9.5 years. It also raised €1bn in 10-year mezzanine finance, the largest mezzanine deal in Europe at the time. "Last year, Cinven and Warburg Pincus started to think about extending the maturities," says Eric Hamou, Goldman's head of cable and media for EMEA. "If they are going to exit, they want an appropriate capital structure to do it. With EBITDA [earnings before interest, taxes, depreciation, and amortisation] of about €700m, Ziggo is now one of the biggest cable operators in Europe apart from Liberty Global, so it's very valuable."

With its subscription-based business model, the cable business is very conducive to leverage, so it is no coincidence that private equity has been all over it. Today, the European sector is about 60% owned by private equity firms. With its positive earnings performance (including a 2009 EBITDA margin of some 54%) and greatly reduced capital expenditure needs, Ziggo is a highly attractive credit in an attractive sector. So last December, Goldman Sachs and Credit Suisse, which would be joint global co-ordinators and bookrunners, laid out a roadmap for a high-yield offering.

Littleton Glover, Goldman's head of EMEA technology, media and telecoms (TMT) finance, notes that, while Ziggo was about 7.5 times levered in 2006, the latest transaction lowers that to 5.5 times EBITDA. "This was not a releveraging or dividend exercise," Mr Glover points out. "Ziggo is looking to the future, where it is expected to continue to deleverage by 0.5 to 0.75 of a turn of EBITDA each year." So in the next year or two it should be in the zone where it can go public - say, four to 4.5 times.

Cost savings

The main object of the exercise was to strip out the mezzanine debt layer and replace it with a less costly form of borrowing that would be more acceptable to any potential equity investors. But that required the senior secured lenders to waive their right to be repaid first. "When we were asking for that permission, we believed there were other sensible areas of operational flexibility, that could be amended without much cost of consternation," explains Mr Glover. "You can't be too heavy-handed with the senior bank market - the ask needs to be balanced and fair."

Goldman and Credit Suisse detailed those elements of the credit facilities agreements where waivers and permissions might usefully be sought in the event of a high-yield issue. Refinancing the mezzanine, priced at Euribor plus 925 basis points (bps), would not only reduce interest costs but would also extend and stagger maturities. Permission was sought to issue further senior secured notes in future, if desired. The idea was to create a platform for further financing and to improve the liquidity of Ziggo's loan facilities through the completion of a public rating agency process.

Other 'flexibilities', with an eye to an eventual initial public offering, addressed areas such as capital expenditure covenants, ownership limits and reporting frequency.

The process of seeking these approvals began with a few feelers towards the end of March and was launched in earnest in the first week of April. "At that point the market felt good for high yield," says Michael Marsh, managing director, European capital markets at Goldman. "But we felt we didn't have a lot of time, and we still had to negotiate with the lending group, which could take some weeks."

The number of institutions in the lending group approached 100, and the changes required the approval of two-thirds of them. A little sweetening was necessary but, in the end, it was "one of the quickest amendment processes seen in Europe", in Mr Marsh's words. After only two and a half weeks, 98% of the lenders had agreed to the new dispensation, in return for a total consent fee of 75bps and a margin increase on senior and second lien facilities of 100bps.

Good timing

As soon as agreement had been secured, the bond issue was announced, on 21 April, and priced a week later, on 28 April. "The high-yield market, like many others, has windows of opportunity," says Mr Glover. "It's all about being ready with the right offering so that, when the time is right, you can hit the 'go' button. If we had gone two days later, we would have been looking at a very different market situation."

Indeed they would. The bond, rated B2/B, carried an 8% coupon and was looking to raise €1.2bn. It was the first high-yield bond in Europe to introduce a portability feature. Subject to an objective leverage test, this removed the investors' right to demand a refinancing given a 'change of control' event, so creating the potential for a fully portable financing.

For now, the market was reasonably short and tight, and the deal was priced at the tight end of price talk with a yield of 8.125%. The very day the bond was priced, Greece was downgraded to junk status and the bond market took fright, though a number of high-yield issues went ahead regardless. "It was time critical," Mr Marsh says. "But the message from the company was well received and the bonds traded well despite the Greek downgrade."

Goldman and Credit Suisse clearly worked well together, and the bankers paid tribute to the co-operative effort, describing it as "competitive but very civilised". They also pointed to the exercise as an example of Goldman's "truly integrated" advice and execution. "From our perspective, it demonstrated ongoing innovation in execution in the cable sector for our sponsor clients," concludes Mr Glover. "We have now done 10 out of 10 of the largest cable transactions in Europe since 2000."