Electronic Arts (EA) Bondholders Push Back on $1.5 Billion Buyback as Take-Private Deal Faces Pressure

Electronic Arts EA +0.04% ▲ is facing pushback from its own bondholders after launching a $1.5 billion debt buyback tied to its planned take-private deal. The video game firm agreed to be acquired by a group led by Silver Lake, Affinity Partners, and Saudi Arabia’s Public Investment Fund. As part of that deal, the buyers are seeking ways to reduce financing costs.

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Earlier this month, Electronic Arts offered to buy back two sets of bonds at a discount. Holders of its 2031 notes were offered about 92% of par, while holders of its 2051 bonds were offered about 74%. That pricing came as a surprise to many investors, and bond prices dropped soon after.

Now, holders of more than 75% of the 2031 notes and about 90% of the 2051 bonds have signed a cooperation pact, according to people familiar with the matter. By acting as a group, they aim to gain leverage and seek better terms.

The Defeasance Strategy Under Scrutiny

At the heart of the dispute is a tactic known as defeasance. Under this plan, Electronic Arts would buy U.S. Treasury securities and use them to cover future interest and principal payments on the bonds. In theory, that would make the bonds safer because they would be backed by Treasuries rather than the company itself.

The key issue, however, is whether this move would avoid triggering a change of control clause. Normally, when a company is acquired in a debt-funded deal, bondholders can demand repayment at a premium if the company’s credit rating falls. The current bonds are rated BBB+ by S&P and Baa1 by Moody’s, both of which are solid investment-grade levels.

However, S&P recently said it expects to rate the defeased bonds “based on our issuer credit rating on EA once the announced take-private transaction closes and not in line with the default risk of the collateral.” In short, that means the rating may still reflect the risk of the new, more leveraged company, not just the Treasuries backing the bonds.

CreditSights said the update “changes the game” and urged bondholders not to consent to the offer. The firm added that meeting S&P’s criteria could make the defeasance “economically irrational,” as buyers might need to post much more Treasury collateral than originally planned.

For now, the bondholder group is rejecting the offer, which runs through March 11 and depends on the deal closing. If enough investors hold out, the buyer group may need to revise the terms or consider a different path.

Is EA a Good Stock to Buy Now?

On the Street, Electronic Arts has a Hold consensus view, based on the four analysts’ ratings. The average EA stock price target is $208, implying a 3.75% upside from the current price.

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