A bloc of Electronic Arts (EA) bondholders stalled a debt-buyback maneuver orchestrated by the PIF-led consortium taking EA private, Bloomberg reports, citing people it says are in the know. Bondholders representing 75% of the 2031 notes and about 90% of the 2051 securities reportedly inked a cooperation agreement to reject a tender offer for USD 1.5 bn of senior unsecured notes, which they claim is designed to cheat them out of a mandatory payout.

What now? The consortium must now decide whether to sweeten the offer closer to the 101% par value or risk a protracted judicial battle that could delay the close of their landmark USD 55 bn acquisition, which is expected between April and June this year.

The defeasance trap

Typically, when a company is bought out in a leveraged buyout, a change of control clause is triggered, forcing the new owners to buy back existing debt at 101% of par (the full value).

The loophole: To avoid this multi-bn-USD bill, the PIF-led group — which includes Silver Lake and Affinity Partners — attempted a workaround maneuver called defeasance. They offered to buy a portfolio of US Treasuries to back the EA bonds, arguing that because the debt was now no-risk, it should be rated investment-grade.

This would have allowed them to retire the debt at a steep markdown, offering just USD 0.92 per USD 1 for the USD 750 mn 1.85% notes due 2031, and USD 0.74 for the USD 750 mn 2.95% notes due 2051. The tender is priced flat to the yield of on-the-run US Treasuries.

The S&P ratings roadblock

S&P upends the strategy: The plan relied on getting a top-tier credit rating for the Treasury-backed bonds to bypass the downgrade trigger. However, the gambit hit a wall last Friday when S&P Global said it would not grant the higher rating, stripping the group of its primary shield.

Bondholders are just digging in for better terms. While the 5% early premium (equivalent to 5 points of par) expired on Tuesday, the offer still stands. “We believe there is a high likelihood that bondholders will receive a better outcome by holding out,” CreditSights analysts wrote.

ADVISORS- JPMorgan is quarterbacking the tender offer as lead manager and consent agent, with Houlihan Lokey and Akin Gump Strauss Hauer & Feld providing financial advice and counsel to the bondholders.

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