The Long and Short

ICE pilots Black Knight through a turbulent market

Dan Bruzzo, CFA | May 13, 2022

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.

Although there was no rain, nor snow, nor heat nor gloom of night, Intercontinental Exchange launched a debt deal through turbulent markets in the last week to fund a recently announced acquisition of application software company Black Knight. ICE management clearly sees the current environment as preferable to the unknown of waiting. It is telling that ICE would issue within days after announcing the acquisition and so far from potential completion. Management likely sees the prospect for either higher rates or more market turbulence, or both.

Wasting little time after announcing the $15.6 billion acquisition of Black Knight (BKI: Ba2*+), ICE (ICE: A3/A-) on May 12 announced a 6-part $8 billion debt launch to fund the deal. The targeted completion date on the deal is not until June 30, 2023, which could likely serve as the expiration date on the $101 Special Mandatory Redemption (SMR) language on the debt tranches that include it. The initial price talk on the debt tranches included some extremely generous spread discounts to the existing ICE debt curve just prior to announcement. Though the eventual launch levels came significantly tighter, they still appeared generous and serve as an indicator of just how much the primary calendar can impact secondaries on the days it is actually functional. However, while the concessions on the new debt are substantial, it is important to consider that many of the secondary ICE bonds are trading at deep dollar discounts to par, lending support to their current valuations versus the new deals. The debt launch was roughly 3.5x oversubscribed.

Exhibit 1. New Debt IPT vs Existing ICE Secondary Curve

Source: Amherst Pierpont, Bloomberg TRACE/BVAL, Company Press Release
* Issue does not contain SMR language

ICE agreed to buy Black Knight on May 4, 2022, for $85 per share in a cash and stock transaction (80%/20%) that valued the market cap of BKI at $13.1 billion. Total cash consideration is expected to be $10.5 billion, which at the time of announcement ICE management stated would be paid with newly issued debt and cash on hand. The remaining $2.6 billion will be paid in stock. BKI offers software, data and analytics solutions and will prospectively give ICE a stronger foothold in the mortgage industry. The deal appears to be a solid strategic addition that lies close to ICE’s core competency. Only two years ago, ICE was rumored to be considering a bid for eBay – a deal that would have been well outside the company’s comfort zone and might have suggested that ICE management no longer prioritized its high-quality credit profile and single-A ratings.

According to Moody’s, the additional debt burden of the BKI deal will push ICE’s total debt balance to $24 billion and result in pro forma adjusted debt leverage of approximately 4.4x. ICE has temporarily halted debt repurchases and has indicated that it will not resume until it gets leverage under 3.25x. Moody’s affirmed the A3 rating with a Stable outlook and is affording management two years of flexibility to pay down debt and get to its target leverage into the 2.75-3.00x range.

S&P also affirmed the A- long-term rating and left the outlook at Stable. The rating agency projects that leverage will increase from its current level of 3.0x to 3.4-3.6x, when factoring in projected total synergies of $325 million starting in 2023. Likewise, S&P will be expecting ICE to reach its targeted leverage range of 2.75-3.00x.

Exhibit 2. $8 billion New Debt Launch Levels vs Existing ICE Secondary Curve

Source: Amherst Pierpont, Bloomberg TRACE/BVAL, Company Press Release
* Issue does not contain SMR language

As has become the standard among corporate issuers, most of the new tranches of debt will contain $101 Special Mandatory Redemption language, in the event that the proposed acquisition does not close on time. The 2025, 2027, 2029 and 2062 notes will all contain the SMR feature. Meanwhile, the 2033 and 2052 notes will not contain SMR language and would therefore not be redeemed in the event that the BKI deal does not close. The use of proceeds on the non-SMR bonds is the redemption of upcoming debt maturities, including the $500mm notes due in September of 2022, the $400 million notes due in September of 2023, the $1 billion notes due in June 2023 and the $800 million notes due in October of 2023. Which again speaks to management’s likely concerns regarding higher rates and/or additional market trepidation on the near-term horizon.

Bonds with $101 SMR language have recently come into focus with the extreme move in interest rates year-to-date, which has many of those issues trading at deep discounts to their prospective redemption prices. This was highlighted recently when Rogers Communications’ (RCICN: Baa1*-/BBB+*-/BBB+*+) proposed $20 billion acquisition of Shaw Communications was challenged by regulators, putting the deal in jeopardy. Though RCI management is seeking to appease regulators with potential asset sales, the deal remains in question, thus putting upward pressure on the dollar price of the SMR bonds that were issued to fund the deal. Management has until year-end 2022 to consummate the deal or risk triggering the SMR feature.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.