Will the SMR be invoked for Waste Management bonds?
admin | June 26, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Earlier this week, Waste Management Inc (WM) announced amended terms for its definitive agreement to acquire Advanced Disposal, including an expectation that the deal will now close by the end of 3Q20, versus previous guidance of 2Q20. Given the updated transaction timing, WM noted that the bonds issued in May 2019 with Special Mandatory Redemption (SMR) language will be redeemed pursuant to their terms. With bonds recently trading well over the $101 SMR price, the company could be putting themselves in a precarious spot with their buying base by invoking the SMR and causing holders to take a loss.
Under the amended terms WM will now buy Advanced Disposal for $30.30/share, down from $33.15, bringing the total enterprise value of the purchase to $4.6 billion (from $4.9 billion). Additionally, WM announced that it has entered into a definitive agreement with GFL Environmental whom will be acquiring approximately $835 million of assets from the combining companies. The businesses being sold to GFL Environmental address substantially all of the divestitures required by the U.S. Department of Justice (DOJ) to satisfy conditions brought forward by the DOJ’s review process, thereby increasing the certainty of gaining regulatory clearance.
Exhibit 1. WM SMR Bonds – Baa1/A-/BBB+
Source: Company Reports; Bloomberg; Amherst Pierpont Securities
Under the SMR clause, if the deal is not consummated on or prior to 7/14/20, WM must redeem the bonds at 101% of the aggregate principal amount, plus accrued and unpaid interest up to (but excluding) the redemption date. However, WM did note that the press release did not constitute a notice of redemption under the indenture governing the senior notes with the SMR language. Additionally WM noted that they anticipate funding the transaction with a combination of its $3.5 billion credit facility (currently $3.0 billion of availability) coupled with commercial paper. Management is also apparently evaluating other longer-term financing options.
Why Not Seek Consent Solicitations?
We are a bit perplexed that WM did not look to seek consent solicitations from bondholders to extend the consummation deadline under the SMR clause. Our confusion rests in the fact that as late as 6/10/20, WM’s CFO (Devina Rankin), reiterated the company’s 2Q20 guidance for the deal to close. Holders of the SMR bonds relied on management’s guidance at that time to assess the possible risk of the bonds being called if there were to be any delays with consummation of the deal. Particularly given the fact that management noted that they are evaluating other longer-term financing options. The potential savings from calling the SMR bonds and refinancing may not be worth tarnishing their credibility with bondholders. Furthermore, they may be hard pressed finding buyers of new debt given that the holders list of the SMR bonds is quite extensive. Lastly, with the potential loss bondholders face with the call, WM likely wouldn’t need to pay a fee to receive the majority of consents required to amend the consummation date.
We think holders of WM’s SMR bonds could have some negotiating power if they were to band together and request that WM solicit consents to amend the consummation date. While SMR language could be argued to make sense for deals that are not consummated due to not receiving regulatory approval, the idea of not amending the SMR language with a deal closing roughly 90 days later than originally anticipated seems strange, particularly given the fact that financing is still necessary. Bondholders were successful when they united in the case of the Tyco split as they argued they were harmed by the spin-off as the majority of the assets supporting the debt that was transferred to new entities, triggering the “substantially all clause”. While that scenario is much different, there seemed to be power in numbers causing Tyco to pay a $250 million settlement.
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