Hedge funds, including DE Shaw, are looking to use an overlooked corporate bond clause to extract profits from European companies undergoing asset sales or break-ups, forcing issuers to repurchase debt at above-market prices, according to a report by the Financial Times.
As well as DE Shaw, Sona Asset Management, and Attestor are among the hedge funds that have targeted several companies including Annington, Just Eat Takeaway, and Dutch grid operator Tennet, arguing that their restructurings have triggered a “cessation of business” clause — potentially compelling borrowers to redeem bonds at par value.
The cessation of business clause, common in investment-grade European bonds, is designed to protect creditors by mandating full repayment if a company ceases a significant part of its operations. Hedge funds are now exploiting this provision, acquiring bonds at a discount and then pushing for redemption at face value.
“This strategy is gaining traction as investors actively monitor corporate break-ups and disposals,” said a restructuring lawyer involved in several disputes. Some advisory firms have reportedly compiled “shopping lists” of bonds with such clauses, allowing funds to identify potential targets in advance.
One of the most high-profile cases involves Annington, the property firm owned by Guy Hands, which sold 36,000 military housing units to the UK government for £6bn. The firm used the proceeds to repay loans and buy back £3.35bn of outstanding bonds at above-market prices but below their face value.
While more then 70% of long-term bondholders took up the tender offer, several hedge funds led by DE Shaw, Sona Asset Management, and Attestor and advised by law firm Milbank, who had acquired bonds more recently, rejected the offer, insisting Annington’s asset sale constituted an event of default. If the funds successfully enforce the clause, they could secure a 30% gain on bonds purchased as low as 76 pence on the pound.
A pioneering case last year saw investors challenge Belgian chemicals group Solvay over its split into two entities. The creditors, working with Houlihan Lokey, successfully argued that the restructuring triggered the cessation of business clause — forcing Solvay to redeem bonds at par and delivering a windfall to investors who had purchased the debt below 90 cents on the euro.
Annington CEO Ian Rylatt has dismissed the hedge funds’ claims, saying: “Annington has taken legal advice and is firmly of the view that the [housing] sale does not constitute an event of default.” The company currenly has over £400m of real estate assets and over £1.4bn of cash – sufficient to meet the principal and interest on the bonds in full.
Hedge funds have also pursued similar plays elsewhere. Swedish manufacturer SKF recently sought bondholder approval to confirm that spinning off its automotive division wouldn’t trigger default claims.
Tennet, the Dutch state-owned grid operator, also faced pressure from creditors after announcing plans to sell its German operations to the Berlin government. That dispute is currently paused after Germany backed out of the deal.
Just Eat Takeaway has become a fresh target after its sale of Grubhub, while investors have also set their sights on WHSmith, which recently confirmed talks to sell its UK high street stores.
