Competitive fiber and data provider TW Telecom (NASDAQ:TWTC, news, filings) announced today that it intends to raise $430M in senior notes due 2018 . They intend to use the money to refinance their current 9.25% bonds due 2014, of which there is $400M currently outstanding. What’s interesting here is that the debt just became callable at just above 103% of face value on February 15, but they aren’t calling it. They are tendering for it at 100.4% with another 3% consent payment, and are seeking to have covenants eliminated and other terms adjusted. This debt isn’t due for 4 years and has been trading above 103 consistently. While the credit markets have improved, I doubt they will save a huge amount on interest just yet so what is TW Telecom up to?
I think this is less about a refi and all about those covenants. This debt was issued back in 2005 when the company wasn’t in as powerful a position as they are now. In the recently released 10K the covenants are described as follows:
The 2014 Notes are governed by an indenture that contains certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.
Hmmm, it sounds to me like they’re preparing for M&A this year, and the covenants on the 2014 debt are in the way. Perhaps the ideal scenario for them is to raise the $430M, but have only part of the 2014 debt tendered – just enough that those restrictive covenants are erased. Combined with the $470M or so in cash and short term investments on their balance sheet, they would emerge from this maneuver with both greater flexibility and substantial financial firepower for M&A.
And of course, there are many potential targets for TW Telecom and their stock price is high enough to use as currency as well. I have always been partial to XO as a fit for them though, and perhaps Icahn is ready now to part with it.
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