There is no such thing as a successful debt-for-equity swap. It is, after all, a last-ditch effort to keep the company from collapsing under the weight of its debt. Those who loaned the money are told they will not be paid back fully and offered shares in the company that has already once let them down. The original shareholders are pushed aside and left with at most a tiny stake in the newly issued equity. The debt restructuring often takes place in the bankruptcy court, a place synonymous with failure.
But how can a company make the most of a bad situation and salvage some positive feeling in the investor community when going through a debt-for-equity swap? How can it regain the trust of investors as it seeks to rebuild itself?
There are no easy answers and plenty of ways to make a bad situation worse, but everyone agrees open and honest communication with shareholders, bondholders, customers, employees and the media during the debt swap is absolutely essential if the company ever hopes to recover the confidence of the investor community.
Look them in the eyes
‘The hardest part was explaining to people we weren’t going to be able to pay them all the money we borrowed. When you speak to some of the small retail investors, who are not as sophisticated and have a hard time understanding why they are not going to get 100 percent on the dollar, that is particularly tough,’ says Brock Robertson, senior VP of treasury and IR at AT&T Canada, which completed a C$4.5 bn debt-for-equity swap in March.
Like many telecoms companies, AT&T ran up huge debts during the 1990s building a network to compete with Canada’s incumbent telcos, Bell Canada and Telus. When it became obvious that the long-awaited boom in telecoms demand wasn’t going to materialize anytime soon, the company began devising a way to pay back bondholders who had bet on fast growth.
Between the announcement in June 2002 and throughout the negotiations with bondholders running up to the conclusion of the debt swap in March, Robertson provided a constant contact for the investor community.
‘We were very busy taking phone calls. Although most of the value of our bonds was held by institutions, we had 8,000 retail investors who were not getting much information from their brokers, so they relied on us,’ Robertson recounts. Analysts and investors also needed clarification of details already disclosed by the company and Robertson, along with his small staff of two, dealt with them, too.
Investment pros say it’s critical for IROs who have earned their trust to return their calls; otherwise the company has no hope of restoring confidence even after the swap is completed. Unfortunately, this is the exception. ‘The IR guy who used to call you back right away stops calling you. In a time when investors need information the most, they get it the least. Investors often sell the bonds, not because they no longer believe in the company, but because they cannot get information,’ says one London-based debt analyst at a big UK bank.
In AT&T Canada’s case, Robertson worked closely with the company’s public relations team on a consistent message. ‘We worked arm in arm, hand in hand. We agreed on a message and made sure it was shared by everyone,’ he says. That message was communicated through a variety of channels, including press releases, disclosure documents filed with regulators and posted on the company’s web site, and telephone conversations with shareholders and analysts.
Use the media
Robertson says the press coverage of AT&T’s woes wasn’t too negative, despite the company’s bankruptcy, because by the time the debt swap was announced other telcos had been hit by industry overcapacity. The PR and IR teams worked long hours during the eight-month process, even pulling a few all-nighters putting the last touches on releases.
Active PR was also key in the case of Dutch telecoms firm Versatel, which many observers say did a good job of executing its debt-for-equity swap. Although the company had an active IR department, it took a back seat to PR which drove the debt-restructuring communications so shareholders, bondholders, analysts, suppliers and clients got a consistent message. IR officer AJ Sauer worked with corporate communications director Anoeska van Leeuwen, who wrote all the documents needed to explain the complex situation.
‘We’ve always tried to be open about the good stuff and the bad stuff,’ says Van Leeuwen, adding: ‘The restructuring was the most extreme example and in the end taking a proactive approach paid off.’
Versatel, which sells data and internet services, was one of the first European telcos to come to grips with the huge debt burden it acquired in the sector’s heady boom of the late 1990s. It began planning for a debt swap in late 2001 and announced plans to restructure in March 2002. In September 2002, it completed a swap of E343 mn in cash and 365 mn newly issued shares to bondholders who held the E1.7 bn in debt.
The straight story
Sauer continued to take calls from shareholders, analysts and bondholders as usual, but the first line of communications with investors was the web site with documents prepared by Van Leeuwen. Sauer was wary of selective disclosure and stuck to discussing publicly available information.
‘My investor relations function during the restructuring was actually quite limited. Once we went public [with the offer], there was only so much I could say because the only information I could provide was already publicly disclosed on our web site,’ Sauer says. He also had the company’s CFO, Mark Lazar, who was leading complex negotiations with a committee of bondholders, back him up with some of the heavy lifting when it came to analyst queries. Analysts, who were used to having close contact with Lazar, appreciated the high-level handholding.
‘Versatel did a very smart restructuring. They were very forthcoming. As soon as they did something, they had a press release out. Whenever you called Mark Lazar, you got a call back, even at 8 pm,’ says the London debt analyst.
Van Leeuwen and Sauer made sure all the information Versatel could give about the restructuring and its ongoing business was released into the public domain. Again, consistency was important. ‘You want to avoid bondholders trying to squeeze out information. But we were very consistent in our messaging. We sounded like a broken record,’ Sauer says.
Bondholders are typically very sophisticated investors, especially those who invest in distressed debt bought at a fraction of face value, hoping the company will offer equity at something close to the bonds’ face value. Normally, different classes of bondholders, some with a higher priority for repayment, are pitted against each other and against the company as they try to agree on how much equity everyone gets.
Investors lose trust when they fear others have more information than they do. When public documents tell one story and company officers another, the first assumption is dishonesty. ‘It’s obvious investors like consistency,’ says Frans Faas, a shareholder and bondholder representative from the Netherlands who was involved in the Versatel swap as well as a few others that weren’t so well executed. ‘Versatel sold the process well. They were smart people,’ he adds.
Faas contrasts the Versatel swap with that of another Dutch company, IT services group Getronics, which in March scrapped its proposed debt swap after bondholders, led by Faas, revolted, demanding better information and terms. The board fired the management team after the offer had to be sweetened twice. New management was brought in and Getronics yanked its swap offer. ‘With Getronics, everything that could go wrong, did. The main problem was they did not speak with one voice. The CFO and the CEO told different stories, which were also different from what the IR department was saying and which varied from the written documents. With all of this inconsistency, the company lost credibility,’ Faas says.
Hired guns
Versatel had originally hoped to restructure without turning to the protection of the bankruptcy courts. But because of delays, the company decided in June 2002 to put itself into a restructuring bankruptcy in the US and the Netherlands. That move meant only holders of 75 percent of the bonds would have to agree on the terms in order to complete the restructuring, since the bankruptcy court had the authority to impose the deal on holdouts.
While it sped up the process, going into bankruptcy could have scared away clients and demoralized staff. It was certain to get negative press in a country where several high-profile companies had gone bankrupt and never recovered, including peer KPNQwest which was liquidated in 2002. Versatel had to get journalists to understand its bankruptcy was different from KPNQwest’s. This was a difficult job given how often the two were twinned in the media.
‘The minute we decided to file the bankruptcy petition, the focus of all of our communications turned to employees, customers and suppliers,’ Sauer says. In the end, Versatel emerged from bankruptcy and restructuring and is now a healthier company free of debt. It did not lose any customers and it had some of its best quarters, in terms of operational profit, during the restructuring.
At both Versatel and AT&T Canada, outside public relations and investor relations firms were hired to help with strategy, but the companies themselves always remained the point of contact with investors and the media. Some companies going through debt swaps hide behind outside PR agencies rather than face up to difficult queries from the media themselves. Europe’s largest cable company, United Pan-Europe Communications, took precisely this approach. UPC’s parent company, US-based Liberty Media, hired a London-based PR agency to field calls from journalists while UPC refused to take their calls. Unsurprisingly, the media response was furious and universally negative. Journalists ridiculed the company and accused it of hiding the truth.
Still, because of geography, time zone differences and potential language barriers, some companies going through a debt swap can effectively use an IR agency as a point of contact for foreign investors. Netia, Poland’s largest alternative telecoms provider, completed its $850 mn debt-for-equity swap last year with the help of New York-headquartered IR agency Taylor Rafferty.
‘Given that Netia was then listed on two markets, the Warsaw Stock Exchange and Nasdaq, the time difference between these markets’ opening hours often forced us to issue press releases late at night. So it was very helpful to have the assistance of Taylor Rafferty, which has offices in both New York and London,’ says Anna Kuchnio, investor relations manager at Netia.
The keys to a well-executed and successful swap appear to be consistency of communications and a willingness to face investors head on. Although these are also the basics for good investor relations in almost every other situation, the challenge is exaggerated during a restructuring, when nerves are frayed and friends turn to foe. Those IR professionals who rise to the challenge can look back at the long hours and the trying times and see that they helped to save a company.
As AT&T’s Robertson concludes, ‘The restructuring was difficult. But at the end of the day, we are proud that we now have a viable company and thousands of jobs have been saved.’
It can be easy
While debt-for-equity swaps are primarily a European and North American phenomenon, particularly among telecoms companies, South Korean chip maker Hynix Semiconductor swapped $1.6 bn of debt for 67 percent of its new equity late last year. But the debt swap was relatively painless for the IR pros working in Seoul, mainly because the company had only 114 creditors, most of them banks and other financial institutions, who were also significant shareholders.
The swap was proposed by the company’s largest creditor, Korea Exchange Bank, based on recommendations from Hynix’s financial adviser, Deutsche Bank. With so few creditors, all negotiations and communications took place at board level and the IR staff were not involved in selling the deal to either creditors or shareholders, the company says. ‘We never had to speak to creditors or participate in roadshows,’ says a spokesman in Hynix’s IR department.
