ISS bondholders unhappy with new ow

According to press reports, the bondholders of ISS, the Danish cleaning services group, have written to EQT, the new owners of the group, threatening legal action for devaluing their investment. Bondholders are unhappy that whereas ISS issued E1.35bn of bonds last November, in March the firm agreed to a highly-geared E2.94bn bid from Goldman Sachs Capital Partners and EQT, which has placed E2.89bn of debt on the company. Following the revelation, Standard & Poors dropped the bonds' rating from BBB to junk level B, with a negative credit watch that could mean a further cut. As a result, the bonds' price has dropped from E101 to E70.The bondholders are taking legal advice as to whether there has been a breach of the Danish Companies Act, and are citing specifically that the buyout was not mentioned when ISS issued E500m of 10-year bonds last year. An E850m issue of seven-year bonds in September 2003 is also affected by the buyout. Shareholders are also concerned about the links between ISS and EQT, since a chief ISS adviser is also a senior adviser to an EQT-managed fund involved in the bid.Irrespective of whether a lawsuit follows, the deal could have repercussions for the European bond market. Most corporate borrowers have enjoyed few restrictions, compared with their US counterparts, but conversely have seldom sought standard legal protections on their bonds, hence leaving them vulnerable to private equity bids. In a leveraged buyout scenario, the private equity house increases the company's debt-equity ratio, and without covenants guarding a bond's rank in the capital structure or conditions on what happens when the company changes hands, bondholders are faced with devalued bonds. In the current climate, where private equity houses are buying large companies, bondholders could stand to lose out, and are becoming increasingly aware of the need for some form of bondholder protection.

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