When a company’s bond prices plummet to single-digit cents on the dollar in the secondary market, it tends to indicate a bankruptcy is imminent. In early 2009, residential real estate brokerage leader Realogy Corp.’s bond prices would have led many investors to that conclusion, a situation compounded by the fact that residential real estate—Realogy’s bread and butter—was falling off a cliff. Two years later, however, the company, which had $4.1 billion in 2010 revenue and owns such brands as Cold- well Banker, Century 21 and ERA, persuaded its lenders to participate in a massive restructuring that extended maturities on most of its debt and prepped the company—and its stakeholders—for a housing market recovery. Realogy’s bonds are now trading at or above par.
In the first quarter of 2009, the credit markets were frozen and companies much larger th,an Realogy had declared bankruptcy, so there was plenty of panic impacting bond prices. Nevertheless, Realogy’s owner, the deep-pocketed leveraged buyout firm Apollo Management, stated its full support for the company.
Realogy arguably has too much debt today, and its long-term health ultimately depends upon eliminating a significant portion of it, Katz says. The company can call the convertible unsecured subordinated notes due in 2018 at 90 cents on the dollar following a qualified equity issuance of $200 million or more. Since, in the event of an IPO, the notes probably would be trading well above that level—they are quoted at around 110 cents on the dollar now—this essentially gives Realogy the right to force a conversion.
Hull says that convertible feature will lower Realogy’s total debt-to-EBITDA ratio from 10 times to six times in one fell swoop.