I suppose it's a jolly good thing if ratings agencies suggest you're going to default on your debt, because that depresses the market value of your debt, and you can then buy it back at a very low price.
So how do you think the big-wigs at Freescale are feeling at the news that the ratings agency Moody's have put the company on the 'Bottom Rung' of companies that may default on their debt.
Freescale is given a 'Ca' rating by Moody's which is the same rating as General Motors. Normally speaking, to have your company rated for creditworthiness on the same level as General Motors would be seen as a positive.
Not any more with the car company looking to be saved by the
Asked if any of the various governments' bail-out schemes would help the semiconductor industry, Rich Beyer, Freescale's CEO, replied: "My impression is that all these bail-outs are to save the most desperately ill industries rather than fund those that are going to be successful."
Beyer has successfully managed to get rid of about $2 billion off the $10 billion of debt which private equity owner Blackstone loaded onto Freescale after buying it in 2006.
Beyer did this by going to his bondholders and offering them new bonds which rank higher in the order of priority in the event of bankruptcy, but which have a lower par value than the bonds they were holding.
Presumably Beyer was able to get the bondholders to agree to this, and so to reduce his annual interest payment from $700 million to $600 million, because the bondholders were scared of Freescale going bust.
So, the more scared the bondholders are that a company is going bust, the less it costs to buy back the debt they hold.
So Moody's 'Bottom Run' listing might have sounded quite agreeable to Freescale's finance chiefs.
I asked Beyer recently why he didn't talk the company down, say how tough the market is, put out bad trading figures and so depress the market price of the debt to the point where it can all be bought back for a few measly cents on the dollar?
"If I did that," replies Beyer, "both I and my CFO would go to jail."
Dulce et decorum est pro Freescale in carcere?
David,
I spoke with an informed source regarding this whole NXP, FSL debt debacle. As I have said before, it just makes no sense. Anyway, the reply was quite enlightening.
Basically the problem is that the debt is structured into various priorities (tranches), at the bottom of the heap are the unsecured creditors at the top of the heap the senior secured creditors, there are various grades of both secured and unsecured debt. Now let's assume, for simplicity that FSL's total debt is $10B, of which lets say $4B is senior secured debt. Now lets assume that the "term-sheet" liquidation valuation for FSL is $3B (or less). This values ALL the unsecured debt at ZERO (in liquidation today), regardless of its relative seniority. So what FSL did was to rearrange the seniority of the worthless paper,(hence no one complained), in the process they reduced their total debt. Smart move.
Now if the semi stocks market recovers than "term sheet" valuation will increase but the debt is permanently erased. So the real winners are the PE's. No doubt, they extracted some fees for this maneuver, but the real change in in the "option" valuation of their right to float FSL at some future date (too complex to go into at the moment)
Of course that unsecured debt tranche in the next LBO will be much harder to push, I think they'll need a new name for unsecured debt plus some "insurance CDS's" backed by another AAA rated (soon to be bankrupt) counterparty. WOW I think that how we got here....
BTW the recent default rating of their debt actually increases the relative valuation of the senior debt because it typically triggers a clause in the bond, which increases interest rates and adds penalties. So if the market recovers to value FSL at say $6B than the unsecured note holders still get nothing.
regards
Robert
Robert thanks very much indeed, that's very enlightening. Can't say I really understand it all yet, but I believe I'm getting there, much obliged, David