The Long and Short

Two mergers in financial sector are put on ice

| March 3, 2023

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.

New doubts have emerged around Toronto Dominion’s acquisition of First Horizon and Intercontinental Exchange’s acquisition of Black Knight. Both situations require bondholders to focus on the most appropriate course of action. These cases also present a possible window onto the prospects for further M&A in each of their respective industries.

Toronto Dominion (TD: A1/AA-/AA-) recently announced that their long-proposed $13.4 billion acquisition of US regional bank First Horizon (FHN: Baa3+/BBB-*+/BBB*+) would not be able to close by the recently revised date of May 27 and could not at this time provide an accurate timeline for a new closing date. Additional commentary was provided during TD’s fiscal first-quarter earnings call later in the week. Most notably, TD management stated that the company remains committed to deal in the face of increased opposition from regulators.

Intercontinental Exchange’s (ICE: A3/A-) $15.6 billion proposed acquisition of Black Knight (BKI: Ba2*+/BB*+) also has reportedly been challenged by the Federal Trade Commission (FTC), putting its regulatory approval in significant jeopardy. Few additional details are known at this time. However, the completion deadline of June 30 now appears far less likely, raising significant questions for holders of ICE’s bonds with special mandatory redemption language, with a fast-approaching initial trigger date for the mandatory put at an execution price of $101.

Exhibit 1. TD bond curve versus FHN issues outstanding

Source: SanCap, Bloomberg/TRACE BVAL Indications Only

It has now been over a year since FHN agreed to be acquired by TD in a deal that was originally projected to close by the end of the current month. That timeline has once again been pushed back to an unknown date. While regulatory approvals can prove exceptionally difficult in bank mergers of this nature, the deal initially appeared a likely candidate for success on the heels of several notable regional bank mergers over the past several years. With a total asset base of approximately $79 billion as of the end of 2022 and total deposits of roughly $64 billion, FHN appeared large enough to warrant scrutiny but still a deal size that should be imminently do-able from the perspective of regulators. While TD represents one of the pillar banks of Canada with an extraordinarily conservative credit profile, concerns were raised early regarding recent consumer fraud settlements, with Sen. Elizabeth Warren even calling for the transaction to be blocked. Those concerns, along with the complications of a cross-border transaction and future oversight of TD’s increased presence in the US, are likely weighing heavily on the process.

FHN bondholders that are hopeful for debt assumption by TD are best served to maintain their positions, or even consider adding on weakness of the most recent regulatory delay. The more likely outcome still appears a successful completion of the transaction. At worst, if the regulators choose to block the deal, it seems highly probable that FHN could seek another buyer, potentially a larger regional bank within the US, which would still provide considerable upside to bondholders, albeit on what could be a significantly longer-term basis. On a broader scale, a failure to complete this deal as proposed could muddy the landscape for bank M&A, at least for any potential deals that may already be in the works. At a minimum it could certainly spook potential buyers outside the US who might be looking to similarly establish a foothold in the US regional markets.

Exhibit 2. ICE bond curve versus BKI issues outstanding

Source: SanCap, Bloomberg/TRACE BVAL indications only

The ICE acquisition of BKI was announced on May 4 of last year. The proposed financing was set up to be 80% cash and 20% equity.  ICE wasted very little time in pre-funding the bulk of the cash financing for the transaction with a public USD debt launch for $8 billion in five tranches, four of which contained $101 Special Mandatory Redemption (SMR) language through May 4, 2023. The indenture language includes two automatic extensions, the first to August 4 and the second to November 4, in the event that “…U.S. antitrust clearance or a related law, injunction, order or other judgment, in each case whether temporary, preliminary or permanent, that restrains, enjoins or otherwise prohibits the consummation of the Merger remains outstanding and all other conditions to closing are satisfied…” Though few details about the FTC challenge have been provided, it would appear likely that the challenge would trigger the automatic extensions, giving ICE the flexibility to gain the necessary approvals until November 4 at the latest. If the process were to drag beyond that date, the issuer also always has the ability to solicit consents of bondholders (typically with a small nominal fee) to postpone the SMR even later.

The SMR bonds have all tightened relative to ICE bonds outstanding without the language as the dollar prices have migrated closer to the $101 put price. Bondholders of those issues are better served to continue holding and await more clarity around the potential challenge from the FTC. Meanwhile, the non-SMR ICE bonds, which would remain outstanding in the event that the BKI transaction were cancelled, do appear to offer good relative value to the SMR counterparts for investors that want to maintain or add exposure to ICE with or without the addition of BKI.

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

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