NXP offers super priority debt for current notes, bonds little moved on news - and holders may sit offer out

By Paul Deckelman

New York, March 3 -- NXP BV officially announced offers Monday to give holders of its existing unsecured and second-lien secured bonds new "Super Priority" secured bonds, in a widely expected effort to take out as much as around $2 billion of its nearly $6 billion of bond debt at a fraction of that paper's face value - but so far, bondholders from both classes seem to be wary of the offer, with no great surge of trades to lift prices to around the respective takeout levels as frequently happens in such an exchange situation.

One observer familiar with the credit meantime sees a real possibility that many of the unsecured holders - the chief target of the offer - may choose to not tender their bonds for the new paper at all so that they can keep enjoying higher yields.

Terms of the offers

NXP - the financially challenged Eindhoven, Netherlands-based semiconductor company formed in 2006 when Dutch electronics giant Royal Philips Electronics Inc. sold 80% of its semiconductor operations to a private-equity syndicate led by Kohlberg Kravis Roberts & Co. - said Tuesday that it would issue up to €250 million equivalent ($315.375 million at current exchange rates of about $1.26 per euro) of new dollar- and euro-denominated 10% "Super Priority" secured notes due 2010, in exchange for the existing bonds that the holders would tender under the exchange offers.

It set up two separate exchanges, with top priority going to the offer for its $1.25 billion of dollar-denominated 9 ½% and €525 million ($662.29 million) of 8 5/8% senior unsecured notes, both due in October 2015. Holders who tender their notes by the March 16 early tender deadline would get total consideration in new notes of 17 cents on the dollar or €0.17 per euro; those tendering after that deadline but before the March 30 tender offer deadline would receive 15 cents on the dollar or €0.15 per euro of consideration.

Second priority would go to the company's existing second-lien senior secured bonds - its €1 billion ($1.26 billion) of euro-denominated floating-rate notes due 2013, and its dollar-denominated $1.535 billion of 2013 floaters, and its $1.026 billion of 7 7/8% notes due 2014. Holders tendering the 2013 floaters by the early deadline would get total consideration in new notes of 27 cents on the dollar, or €0.27 per euro, reduced to 25 cents on the dollar or €0.25 per euro after that, up to the expiration, while holders of the 7 7/8% 2014s would get 32 cents on the dollar in new notes for bonds tendered by the early deadline and 30 cents on the dollar after that.

Any tendering holder from either category whose bonds are accepted in the exchange would also receive accrued and unpaid interest in cash on their tendered bonds, up to, but excluding settlement date. The company further said that the minimum denomination for the new notes would be $75,000 or €50,000, with multiples after that of $1,000 or €1,000 -- effectively barring small holders who do not meet the threshold from participating in the offer.

The deal is structured to take out the maximum amount of the unsecured notes as possible, with those tendered notes meeting the minimum threshold being accepted for exchange first, then followed by the secured notes - if any of the €250 million of new notes remain for allocation - which presumably would be accepted for exchange on a pro-rata basis.

Holders might shun offer?

Adam B. Cohen, the founder of Covenant Review LLC, a New York-based investment research service that specializes in detailed legal analysis of bond indentures and credit facility covenants of companies involved in restructurings, mergers or other special situations, noted Tuesday that the new "Super Priority" notes will be secured on an equal basis with the company's senior revolving credit facility, and thus would rank ahead of the existing secured notes in the capital structure.

He pointed out that under the terms of the indentures on the existing bonds and the credit facility, the company has the legal ability to secure another €250 million of new debt in addition to its existing €500 million committed revolver and on an equal priority with that revolver - which works out to the exact same amount of new notes it anticipates issuing under the exchange offer.

By offering new notes to the unsecured bondholders at 17% of par, and "assuming for the sake of argument that all of the unsecured bondholders tendered into the exchange at the offered price, NXP could eliminate nearly all" of the approximately $1.91 billion equivalent of the two tranches of unsecured bonds, thus cutting the company's debt load by around one-third, and doing so at a cost that is but a small fraction of the principal amount of the debt being taken out.

One-year breakeven

However, Cohen raised the possibility that "some holders who recently bought these bonds at less than 10 cents on the dollar may consider their 8 5/8% or 9½% coupon - which cannot be changed without their consent - and if the holder believes that the exchange offer will help NXP survive, then paradoxically, that investor might decide not to exchange," and would instead just continue to collect the coupon on the existing bonds, presumably figuring that enough other bondholders will exchange their notes and let the company sharply reduce its debt.

However, he cautioned, if enough bondholders were to pursue that strategy, it could "thereby undermine the relative success of the exchange offer."

Cohen explained that "if you bought those bonds last week at 7 or 8 cents on the dollar" - the 91/2s jumped to around 9 at that time from prior levels at 6, on media reports that NXP was likely to offer such an exchange of new secured debt for them - "and if you can collect interest for just one year, you've already broken even. So if you think [the company] has bought themselves running room [with the debt exchange], you might like the idea of just taking interest for another year, rather than exchanging into something that's going to have less current yield - because if you hold on for a year, basically, your yield is 100%."

He told Prospect News that "if you exchange into the new paper, yes, that piece of paper will have a higher market value - but the yield is not the same."

He likened NXP's situation to that seen late last year when Harrah's Entertainment Inc. mounted an exchange offer for a portion of its outstanding bonds; while the offer was oversubscribed and the Las Vegas-based gaming operator was able to reduce its overall debt, it got tenders of only a relatively small portion of the bonds which it had put at or near the top of its priority list. "Some Harrah's holders thought, 'well, let someone else tender and improve the company's liquidity - we'll take a chance that we'll have unsecured bonds that will do pretty poorly in bankruptcy, but at least we'll get coupon for a year or a year and a half, based on a very high yield.'"

Bonds go nowhere

Although bonds being tendered for or exchanged for frequently trade up to around the proposed takeout levels, particularly if that's well above where the bonds have previously been trading, a junk trader said Tuesday that the 9½% notes were still in the same 9-10 context they were in before the offer was announced, "so it didn't help at all, it did not help."

A second opined that "everyone is skeptical about anything," seeing the 91/2s unchanged at 10 on $14 million traded, mostly in round lots of $1 million or more, and the 7 7/8% notes actually falling to 16.25 from prior levels at 21.5, though on only $4 million traded.

Another trader agreed that the 9½% bonds were "active - but right around where they were [ Monday] at 9.5-10, a lot of them traded there," while the floating-rate notes due 2013 ended at 14 bid, 16 offered, versus 16 bid previously.

At another desk, a trader pegged the 7 7/8s down 6 points on the day at 16 bid, 18 offered.

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