Bloomberg News

Graham Packaging Bondholder Group Plans to Reject Tender

July 13, 2011

(Updates with terms of tender offer in fifth paragraph.)

July 13 (Bloomberg) -- Graham Packaging Co. bondholders plan to reject the company’s offer to buy back or change terms of outstanding debt before its $4.5 billion takeover by Reynolds Group Holdings Ltd.

“The offer is fundamentally flawed for all parties involved,” according to a letter to Credit Suisse Group AG, the manager of the tender offer, from lawyers at Willkie Farr & Gallagher LLP. “The holders do not intend to tender or consent pursuant to the terms proposed,” according to the letter, obtained by Bloomberg News from an investor.

The law firm represents holders of 81 percent of York, Pennsylvania-based Graham Packaging’s $253.3 million of 8.25 percent notes due January 2017 and 78 percent of its $250 million of 8.25 percent debt maturing in October 2018, according to the letter, which was dated yesterday.

Resistance to the tender offer and an associated consent solicitation may complicate Auckland-based Reynolds Group’s takeover. The solicitation seeks to alter terms that allow bondholders to sell the debt back to Graham Packaging at 101 cents on the dollar in the event of an acquisition, The pushback shows investors are trying to taking advantage of slowing junk- bond issuance and widening relative yields to gain the upper hand from borrowers.

Graham Offer

Graham Packaging is offering 102 cents on the dollar for the notes as well as for its $375 million of 9.875 percent notes due October 2014, it said in a July 7 statement distributed by PR Newswire. Investors may also consent to change the terms without selling their bonds back to Graham Packaging, according to the statement. The 2017 and 2018 notes can first be called at 104.125 cents on the dollar in October 2014 while Graham Packaging can retire the 2014 notes in October of this year at 101.646 cents, according to data compiled by Bloomberg.

“It is very rare for an issuer to offer such a paltry tender premium,” wrote Rob Matz, a New York-based analyst at Covenant Review LLC, a research firm that analyzes bondholder safeguards, in a July 8 note to clients. “Holders of the 2017s and 2018s should uniformly reject this offer.”

The debt maturing in 2018 fell 0.5 cents to 106.5 cents on the dollar, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Loans, Notes

Reynolds Group will finance the takeover with $4 billion split evenly between new bonds and term loans, that company said in a July 7 statement distributed by Business Wire. Reynolds Group also plans to make a $2 billion loan to Graham Packaging, according to Brian Bogart, an analyst at KDP Investment Advisors, wrote in a July 12 note to clients.

The terms of the intercompany loan require Graham Packaging to pay back $200 million in principal annually and give Reynolds a secured claim on the company’s assets, wrote Bogart, who’s based in Montpelier, Vermont.

Bondholders “reserve the right to challenge the acquisition, particularly the terms of the $2.0 billion intercompany note,” according to the letter.

Reynolds Group may choose to keep Graham Packaging’s bonds in place and pay higher interest rates to raise debt to finance the acquisition that isn’t guaranteed by the target company, according to Eric Swanson, an analyst at Thrivent Financial, which has $73 billion in assets including Graham Packaging bonds.

‘A Little Unusual’

“Reynolds will try to see what the debt will cost them, but we hope it flat-out doesn’t get done because the structure is a little unusual and that could lead them to come back to us,” said Swanson, who’s based in Minneapolis.

High-yield, high-risk bond sales of $350 million this week are poised to fall short of the 2011 average of $6.77 billion for the seventh straight period, Bloomberg data show. The extra yield investors demand to own the debt instead of Treasuries has widened 23 basis points since touching 534 basis points on July 1, according to Bank of America Merrill Lynch index data.

Cristopher Greer and Joseph Minias, the New York lawyers who signed the letter, didn’t return calls seeking comment. Steven Vames, a spokesman for Credit Suisse, and Joseph Doyle, legal counsel for Reynolds Group, declined to comment. David Bullock, Graham Packaging’s chief financial officer didn’t return a call seeking comment.

Willkie Farr represents Bloomberg LP, the parent company of Bloomberg News, in regulatory and legislative matters.

--Editors: Mitchell Martin, Pierre Paulden

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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