Bondholders Skeptical of Best Buy Offer

Trading in securities with poison put suggests investors don’t put much stock in Schulze purchase.

Best Buy Co. founder Richard Schulze says his takeover offer gives the world’s largest electronics retailer its best shot at competing with Amazon.com Inc. and Wal-Mart Stores Inc. Bondholders aren’t convinced.

Best Buy has $1.5 billion of securities that have a so-called poison put, which requires the company to purchase the notes at 101 cents on the dollar in the event of an acquisition combined with a ratings downgrade. A total of $1 billion of that debt is trading as much as 11 cents below that repurchase price, indicating bondholders believe a buyout isn’t imminent.

Bond Coupons

Best Buy’s $500 million of 6.75 percent bonds due in July 2013 compensate investors for downgrades, with the interest rate increasing 25 basis points for every level below junk the rating falls until it reaches B, according to a Dec. 15, 2008, prospectus. Those bonds are trading at 103.1 cents, from as high as 107.3 cents on Oct. 11, Trace data show. Investors in that debt are less concerned with buyout speculation as the maturity date ticks closer, according to Diaz-Matos.

Like Junk

Traders already are treating some Best Buy debt like junk. At 7.08 percent, the yield on the 5.5 percent notes due March 2021 were higher than the average yield on BB rated bonds at 5.64 percent on Aug. 27, according to Bank of America Merrill Lynch index data.

Credit Swaps

Credit swaps protecting against the company’s default for five years have climbed to 14.3 percent upfront yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $1.43 million initially and $500,000 annually to protect $10 million of Best Buy’s debt.

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