The Long and Short
FDX exchange-and-consent causing turbulence
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Federal Express (FDX: Baa2/BBB) last week launched an exchange and consent solicitation for existing US dollar and euro-denominated unsecured debt. The issuer plans to amend the bond indentures and remove FedEx Freight as a guarantor considering its plans to spin-off the unit. Bondholders have the option to exchange into notes with identical coupon and maturity while getting a cash premium for consenting to the amendments. The actions have resulted in some selling and volatility in FDX bonds as holders weigh their options. The decision to participate looks like a difficult one.
FDX launched the exchange offer and consent solicitation on January 7. The issuer can amend the bond indentures with a majority consent from bondholders of each series of notes—there are 22 debt tranches included on the announcement—and does not intend to do so beyond the removal of FDX Freight as co-guarantor. Holders who choose to participate will get a cash distribution of $2.50 per $1,000 par outstanding and receive par for par bonds with otherwise identical characteristics such as coupon, maturity, make-whole and so on. Investors can elect early participation before January 22 at 5:00 pm in New York, and the exchange offer and consent expires on February 6 at 5:00 pm in New York. Holders who consent to the exchange after the early date but before the expiration will lose $30 per $1,000 par value of their bonds. While this is presented as an early participation premium, it is more or less a penalty for not consenting by the earlier date. Therefore, bondholders should not participate after that earlier deadline has passed.
FDX longer-dated bond spreads have widened by about 10 bp to 12 bp since earlier this week as the situation continues to gain attention among bondholders. Shortly after the announcement was made, there had already begun some debate as to whether FDX’s $2.50 cash premium is sufficient compensation for the loss of FDX Freight as guarantor, with some calling for bondholders to band together to effectively negotiate more attractive terms from the issuer. While this is great in theory, bondholders need to contemplate the risks of holding out, even where it may be in their best interest (as a group) to do. Investors that hold out risk not only missing out on the cash consideration of the consent solicitation, but also potentially being orphaned into a smaller, less liquid and potentially non-index eligible CUSIP if a large enough contingent of the other holders do choose to participate. And with spreads moving wider with an abundance of potential sellers in the market, selling right now might not be the most ideal economic option for bondholders either.
FDX Freight represents just over 10% of FDX’s annual revenues based on the most recent year, which is why management needs to alter the indentures in the first place. And while the unit is coming off a disappointing quarter for earnings, it is considered one of the more valuable segments of their overall operations. FDX has stated that the company does not intend to increase leverage in connection with the separation of FDX Freight. This would imply intention to bring down leverage as the company recapitalizes in order to maintain their current ratings profile, which means the debt in question could eventually be tendered for or called outright. The rating agencies have not downgraded FDX or placed the company on review following the announcement of the restructuring.
Exhibit 1. FDX vs IG transportation – credit curves
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
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