Crown Hybrids (CWNHB): Implications for Blackstone Takeover
Owners of Crown Hybrids (CWNHB) can rest easier, but uncertainty remains. Given the current price (approximately AUD100), the market has taken a strong view that they will indeed be redeemed very soon. In our view, the risk that they leave the Hybrids outstanding indefinitely is a very low probability event.
In May 2022, Crown held a scheme of arrangement (SOA) whereby the proposed acquisition by Blackstone was voted for in favour by majority of shareholders. Crown subsequently filed for approval from the Federal Court of Australia, which has now been approved. The scheme is now legally effective. Crown shareholders will be paid AUD13.10 per Crown share on the implementation of the scheme (expected to be 24 June 2022). Crown’s shares on the ASX will be suspended. However, Crown’s Hybrids (CWNHB) will not be suspended.
The Blackstone offer to buy all the shares of Crown would constitute a change of control. However, unlike standard debt instruments, Crown’s Hybrid does not contain a right for holders to be redeemed if a change of control occurs. Instead, there is a step up in margin from 4% to 9% above 3m BBSW if the board chooses not to redeem holders after a change of control. Crown Hybrid holders also have very little protections over interest. The board can defer interest payments indefinitely, almost like mezzanine debt with a payment in kind (PIK) mechanism.
There are two key questions to ask:
- Will Blackstone want to keep the Hybrids outstanding?
- Would the board fight to redeem the Hybrids if Blackstone wanted them left in place?
It is common for private equity firms in the US to buy casinos and increase leverage. However, Crown has regulatory limitations on how much debt it can incur. Furthermore, if Blackstone decided to keep Crown an investment-grade corporate, the Hybrids would be very expensive debt (3m BBSW + 9% if not redeemed), which makes redemption a near certainty.
Given the rates for high-yield debt have increased significantly recently, it is less likely that Blackstone would increase leverage in the current environment and reduce their equity portion. However, we believe Blackstone will be able to source debt a lot cheaper than what the Hybrids cost (3m BBSW + 9% if not redeemed) and so it won’t be an optimal capital decision to keep the Hybrids outstanding.
In our view, this leaves the risk that the Hybrids are outstanding indefinitely a very low probability event. The interest is still being deferred but cumulative and compounding with interest accruing on a daily basis. We expect it’s just a matter of time before these securities are cleaned up and lost to history.
Chart 1. Crown Pricing