December 4, 2020

Breakingviews: Blackstone upends bond history with Ancestry.com

by Breakingviews.

Ancestry.com is making history. The genealogy provider’s $1.2 billion debt offering, part of fundraising for its sale to buyout firm Blackstone, comes with an investor-unfriendly feature that would limit the influence of big bondholders, and violate the credit-market equivalent of the one-share-one-vote principle. Bondholders could push back on future deals, and have good reason to, but chances are they won’t.

What Ancestry has done is lousy for creditors. It caps voting for any one holder of the bonds at 20% while setting the threshold for important provisions, like accelerating payment or giving notice of default, at 30% – so no single creditor can invoke them. The issuer may claim this is to protect other bondholders from a large ill-intentioned investor. But Ancestry also reserves the right to lift this cap. It could do that, say, if a big creditor supported a company measure that hurt other holders.

Weak protections for bondholders have a long and undignified lineage. Contracts with only weak restrictions on measures like what kind of financial metrics the borrower must maintain, or how much debt it can amass, were prevalent before the pandemic and have remained so. The covenant quality of North American bonds has been in the weakest level, as measured by Moody’s Investors Service, for 22 consecutive months.

Yet bondholders are continuing to buy. Sometimes, there has been resistance, as in Precision Medicine, another Blackstone-backed firm that tried and failed to include a voting cap in an October debt deal. But Ancestry’s offering was over eight times oversubscribed, according to the Financial Times.

The main reason is too much money chasing too little yield. Central banks have pumped trillions into the financial system and provided backstops to the credit market. Consequently, the amount that U.S. high yield debt offers over Treasuries has shrunk by over 60% since late March, according to a Bank of America Ice index. Investors who avoid weak offerings risk missing out in the short term, even if caution might be long-term rational.

It’s possible investors in future bond issues may consider voting caps too extreme, especially if cheeky issuers try to lower the threshold even further. Some recent debt blowups have left creditors with low rates of recovery on their investments, which may make them more circumspect. But Ancestry’s offering suggests that, as long as markets are awash in liquidity, the balance of power in credit markets will remain with borrowers.

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