EA Takes Steps to Calm Bondholders
The record-breaking $55bn leveraged buyout of Electronic Arts is expected to close this year, but the company’s decision to tender for its bonds well below par has sparked controversy among bondholders.
Electronic Arts had two bonds outstanding when the LBO was announced last year, with coupons of 1.85% and 2.95%, which were issued in the low-rate environment of 2021.
Many bonds include a Change of Control clause that requires the issuer to offer to repurchase at 101 in the event of a takeover, protecting bondholders from a deterioration in credit quality if a weaker owner takes charge.
Before the announcement, the bonds were Investment grade rated and traded around 100bps over Treasuries, but in the higher-rate environment of 2025, a 100 bps spread translated to a price near 65 for the bonds.
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On hopes of a 101 payout, those bonds jumped almost 50% to around 90, but Electronic Arts is now offering to buy the bonds at a flat spread to Treasuries, which currently equates to c. 74.
They will use defeasance, an archaic but legitimate mechanism, to place the remaining bonds in trust, backing the bonds with Treasuries, and relieving itself of ongoing covenant obligations, including the Change of Control.
Holders who refuse the tender will be left with an instrument that has the payment certainty of US Treasuries but dreadful liquidity, making it practically impossible for them to refuse the offer.
The savings for Electronic Arts are material in absolute terms: over $250m versus the higher 101 payout, which may seem small in relative terms of a $55bn transaction, but could still have an impact on the company’s financials.
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Current secondary pricing above the tender level suggests there is a chance Electronic Arts relents, but the recent fall in software valuations may encourage the sponsors to squeeze every part of the structure to make the deal work.
Bondholders will likely argue that $250m is small in relative terms, and perhaps that Electronic Arts will find it harder to place the $20bn of LBO debt should it alienate the market, but for now, they have little choice but to accept the offer.
It is a wait and see situation.
As the deal is expected to close this year, bondholders will have to wait and see how the situation unfolds, and whether Electronic Arts will reconsider its offer, or if they will be left with a less desirable investment.
