TheChek News Flow

EA’s owners have invoked a ‘defeasance’ clause in the bond documentation

Private equity companies are known for keeping a keen eye on costs, even when times are good. Collapsing software and gaming valuations, though, must be providing an extra frisson for the buyers of Electronic Arts.

Silver Lake, Saudi Arabia’s Public Investment Fund and Affinity Partners agreed to buy the video game maker for $55bn in September. Since then, gaming shares have taken a tumble: rival Take-Two Interactive, for example, is down by a fifth. That may help explain why the incoming owners of EA, known for its football and NFL games, are taking a robust approach to dealing with its bondholders.

Typically in a leveraged buyout, holders of the target’s outstanding public debt receive a payout equivalent to 101 cents for every dollar of face value, under the so-called “change of control” provision. But EA’s owners have invoked a “defeasance” clause in the bond documentation. Instead of buying back the bonds, they will buy a pile of US treasuries, place them in a trust, and use the income they generate and the securities themselves to cover all future interest and principal payments. EA’s notes, due in 2031 and 2051, in effect become treasury-backed instruments. 

For EA, that’s good capital management. Its 2051 bond, issued in a low-rate environment, yields 2.9 per cent while 30-year US treasuries yield about 4.6 per cent. That means the company can spend less on treasuries to make up the same interest payments. Instead of the roughly $1.5bn they would have spent paying everyone back at 101 cents, they only spend about $1.1bn buying treasuries, Lex calculates. Sure, that’s a tiny sliver of the private equity companies’ total equity investment, but every little helps.

Some bondholders, however, are displeased. From a net present value perspective, they are no worse off. They receive identical cash flows to those their bonds promised, now backed by the US government. But these quasi treasuries will be hard to trade, and anyone who tries to sell may have to accept less than their face value.

In recognition of this, EA has offered to buy them back at a treasury-equivalent price of roughly 73 cents on the dollar for the 2051 notes. That might be attractive to long-term holders. But event-driven funds that piled in after the M&A announcement and drove up the price from about 60 to 95 cents on the dollar will be left nursing losses, and are pushing back at the company’s offer.

Defeasance clauses — the name literally means “to make null” — are widespread in corporate bond contracts. But incoming investors might have underestimated the likelihood that they are invoked. With treasury yields now much higher than yields on debt issued in 2020 and 2021, and many private equity buyouts facing lower valuations, EA may not be the last LBO to seek to take advantage of this contractual quirk.

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Kem One’s bonds have cratered as some funds short them and others ply it with more debt

The debt of one of Europe’s largest chemicals companies has become a battleground for some of the world’s most aggressive credit hedge funds, as fears for the viability of the continent’s chemicals industry have almost wiped out the value of its bonds.

The financial decline of Kem One — a heavily indebted French chemicals producer owned by US private capital group Apollo — has pit credit funds in Europe and the US against each other, with some placing large bets against and some in favour of the company.

Credit funds betting on a recovery have scooped up the company’s bonds at deep discounts to their face value, while others have plied Kem One with even more debt in recent months. Some investors could be on the hook for steep losses as the company’s fortunes have worsened. Others who shorted Kem One’s debt have reaped large windfalls.

Among the company’s largest backers are London-based Arini Capital, one of the most active distressed credit investors in Europe, and New York-based Monarch Alternative Capital. The two funds teamed up to provide Kem One with an extra €200mn of financing early last year.

At the time, Kem One’s other €450mn of publicly traded bonds were changing hands at about 70 cents on the euro. They have since sunk to trade at 2 cents on the euro, with investors anticipating near 100 per cent losses for lenders to what is one of the worst affected constituents of Europe’s ailing chemicals industry.

Arini and Monarch’s debt facility ranks senior to those bonds, meaning they would be repaid first in the event of a default. The two funds doubled down last month, lending the company an additional €30mn that has the same collateral as, and ranks alongside, their previous $200mn loan.

On the other side of the trade, hedge funds including London-based Sona Asset Management and Polus Capital Management have shorted the company’s debt, booking profits as its bonds cratered in value, according to people familiar with the matter.

Diameter Capital Partners — a New York-based credit hedge fund in which Kem One-owner Apollo holds a stake — also built a small short position against Kem One’s bonds as part of a wider bet against the global chemicals industry, according to people familiar with the matter.

“We had success in the fourth quarter in shorts of global chemicals companies bedevilled not so much by sudden drops in demand (RECESSION!) than by the evolution of supply,” Diameter, which oversees $25bn in assets, said in its most recent investor letter. “The problem is China, which seems determined to add capacity up and down the chemicals chain.”

It added: “We have shorts in the most impacted names and believe that 2026 will be a watershed inflection for chemicals.”

One high yield credit investor who used to own Kem One bonds said they expected investors to get a “First Brands-esque recovery — soon to be zero”, a reference to the collapse of the Ohio-based car-parts supplier that sent shockwaves through Wall Street last year, wiping out creditors owed billions of dollars.

Kem One’s difficulties are part of a broader slowdown that has plagued Europe’s chemicals sector in the past 12 months, as it has battled a combination of high production costs, driven by rising energy prices and carbon tariffs, and a huge influx of cheap supply from China.

Industry peer Ineos has also taken a hit in credit markets in recent months, as investors have sold out of its more than $20bn debt pile.

Jim Ratcliffe’s group previously warned that time was “running out” to rescue Europe’s chemicals industry and last year filed anti-dumping cases against imports of cheap chemicals products to the EU.

Apollo, Arini, Monarch, Sona, Diameter and Polus declined to comment.

The plane maker expects to make between 70 and 75 of the aircraft a month by the end of next year, compared with a prior target of 75

Airbus AIR 2.11%increase; green up pointing triangle said a persistent Pratt & Whitney engine shortage had forced it to slow down production of its best-selling A320, the latest setback for the company as it struggles to leave supply-chain snags behind.

The European plane maker expects to make between 70 and 75 A320 aircraft a month by the end of next year, compared with a prior target of 75.

“Pratt & Whitney’s failure to commit to the number of engines ordered by Airbus is negatively impacting this year’s guidance and the ramp-up trajectory,” Airbus said. Pratt & Whitney parent RTX didn’t immediately respond to a request for comment.

Airbus said revenue for the three months to the end of December grew 5% on year to 25.98 billion euros, equivalent to $30.61 billion.

Net profit increased 6% to 2.58 billion euros, while adjusted earnings before interest and taxes—Airbus’s preferred measure of profitability—climbed 17% to 2.98 billion euros.

Analysts had expected revenue of 26.51 billion euros, a net profit of 2.36 billion euros and adjusted EBIT of nearly 2.87 billion euros, according to market consensus provided by the company based on estimates from 20 analysts.

Airbus said it would propose a 2025 dividend of 3.20 euros a share at its shareholders’ meeting on Apr. 14, compared with a dividend of 2 euros a share and a special dividend of 1 euro a share for the previous year.

The company is forecasting roughly 870 commercial aircraft deliveries this year, more than the 793 planes it dispatched in 2025. Airbus has dispatched 19 aircraft so far this year.

For 2026, Airbus expects adjusted EBIT of around 7.5 billion euros. Free cash flow before customer financing—a closely watched metric by analysts and investors—is projected at around 4.5 billion euros.