Back in November, Bally announced it was going to be acquired by an affiliate of Standard General. While the Company's equity prices increased significantly to reflect the acquisition, it does not appear its bonds did (albeit, I do not have access to historical bond prices further than a week). The acquisition has been approved by the shareholders.
The Company currently has 2 publicly traded bonds which are trading significantly below par.
- PREENT 5.625 09/01/2029 FIX USD Corporate 144A - Priced at $72.5 per $100 of Par Value
- PREENT 5.875 09/01/2031 FIX USD Corporate 144A - Priced at $65.3 per $100 of Par Value
Based on my reading of the Note's Indenture, there is a change of control clause enabling the Bonds to be sold at $101 if the acquisition where to close.
While equity trades close to the acquisition price ($17.76 vs $18.25), why has the debt not moved up closer to par? I'm just wondering if there is something I am missing here or if the bondholder do not think the acquisition will close?...
Based on the most helpful WSO content, the situation you're describing highlights a few key considerations in the bond market when an acquisition is announced:
Change of Control Clause: The bonds you mentioned have a change of control clause that allows bondholders to sell at $101 if the acquisition closes. However, the current trading prices of $72.5 and $65.3 suggest that the market is pricing in uncertainty about the acquisition's completion. Bondholders may doubt the deal will close or anticipate delays or complications.
Credit Risk and Perceived Risk of Default: Even with the change of control clause, bond prices reflect the market's perception of the company's creditworthiness post-acquisition. If the market believes the acquisition could increase leverage or weaken the company's financial position, bond prices may remain depressed.
Liquidity and Market Sentiment: Bonds often trade in less liquid markets compared to equities. This can lead to slower price adjustments or a lack of significant movement, even when equity prices react quickly to acquisition news.
Arbitrage and Risk Premium: The equity market may be pricing in a higher probability of the acquisition closing, while the bond market may demand a risk premium due to uncertainties. This divergence can occur because equity investors and bondholders have different priorities—equity holders focus on upside potential, while bondholders prioritize downside protection.
Historical Context and Market Behavior: Without access to historical bond prices, it's challenging to determine how much the bonds have already reacted to the acquisition news. If they were trading even lower before the announcement, the current prices might already reflect some optimism about the deal.
In summary, the bond prices likely reflect a combination of skepticism about the acquisition's completion, concerns about the company's post-acquisition credit profile, and the inherent differences in how equity and bond markets react to such news. If the acquisition closes and the change of control clause is triggered, bond prices should theoretically move closer to $101, but until then, the market will price in the associated risks.
Sources: WSO Exclusive: Legerdemath - Anatomy of a Banking Trick, Help Me Understand Fixed Income Investing, Is value investing dead?, Winning at a Loser's Game? Control, Synergy and the ABInBev/SABMiller Merger, FOMC Texas Showdown | The Daily Peel | 6/2/2023
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