Calhoun, Ga.-based Mohawk Industries had to insert protection features into its $1.4 billion bond offering last week as investors, leery of a potential takeover, clamored for a sweetener.
The offering, comprised of $500 million in five-year notes and $900 million in 10-year notes (Baa3), came with a step-up coupon in the event of a downgrade by Moody’s Investors Service and/or Standard and Poor’s. Investors stand to receive up to 200 additional basis points if the bonds are downgraded to a single B category. A drop to a Ba1/BB+ rating would result an increase of 0.25% on the stated interest rate.
“You don’t see it too frequently,” said Tom Houghton, a portfolio manager at one of Advantus Capital‘s Total Return funds. “You saw it a lot in the big European telecom deals four or five years ago.”
Investors also managed to squeeze a higher coupon out of the deal. Price talk came out at 125 and 150 basis points, over Treasuries for the five and 10-year notes. The spreads were printed at 138 and 170 points.
“Some investors have begun to cite LBO concerns,” said the head of an investment grade desk at a top Street firm. The concern is especially acute for companies whose capital structure and cashflow make them attractive takeover targets. Last month, Laboratory Corp. of America issued $250 million in 5 5/8% senior notes that came with a poison put--which refers to the company’s obligation to buy back the bonds at 101 in the event of a takeover or a downgrade to junk status.
Frank Boykin, cfo of Mohawk and William Hayes, cfo of Lab Corp., weren’t available to comment as CFW went to press. JPMorgan, Lehman Brothers and Wachovia led last week’s offering. Calls to bankers there weren’t returned.