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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Bond markets have always been a pedantic person’s playground.
Before the recent rise in interest rates, this mostly involved gawking at the erosion of lender protections in bond contracts and having fun with credit default swaps. Yield was hard to find and cash was abundant, so borrowers’ lawyers were able to take the offensive, as a general rule.
But, believe it or not, the bond-covenant game seems to have worked in favour of the investors this week.
Avid Bioservices, a small-cap company that helps develop and manufacture drugs for pharmaceutical companies, filed this with the SEC yesterday:
On February 29, 2024, Avid Bioservices, Inc. (the “Company”) received an acceleration notice (the “Acceleration Notice”) from a holder of its 1.250% Exchangeable Senior Notes due 2026 (the “2026 Notes”). The Acceleration Notice stipulates, among other things, that (i) the Company did not remove the restrictive legend on the 2026 Notes by March 17, 2022 as required under the indenture governing the 2026 Notes (the “2026 Notes Indenture”), (ii) due to such failure, additional interest has accrued thereafter at a rate of 0.50% per annum (the “Additional Interest”), (iii) such Additional Interest has not been paid by the Company as of the date of the Acceleration Notice, which constitutes an event of default under the 2026 Notes Indenture (the “Event of Default”), and (iv) such holder is the beneficial owner of at least 25% in aggregate principal amount of the outstanding 2026 Notes and therefore has the right to accelerate all of the 2026 Notes.
The company is a CDMO, which stands for “contract development and manufacturing organisation”. It’s a funny phrase because it makes perfect sense in the pharmaceutical context — they’re contractors who manufacture drugs and help with some of the development process — but also sounds a bit like they are developing and manufacturing actual contracts.
But it’s investors who owned Avid’s 2026 convertible bonds were the ones doing the real contract work, however. [Christ — Ed]
Convert bondholders — or one of their lawyers, or some analyst reading bond contracts or feeding them into an AI — discovered that Avid had promised in its contract to free the security from “restricted status” in March 2022 (a process called “delegending”) but had not actually followed through.
Instead of notifying the company, investors chose to accelerate the bonds and demand immediate full repayment of $146mn; that’s including interest, and the extra 0.5 per cent the contract said they were due if the company didn’t delegend. (The bonds were trading at 89c on the dollar at the end of February, according to Finra data.)
Whoops! Anyway the company just announced it had completed a private placement of $160mn in convertible senior notes to raise cash for the bondholders’ acceleration demand. It now has to pay a 7 per cent in coupon instead of 1.25 per cent, though. Shares are down 27 per cent today.
After all these years, it’s finally paying off to read the small print.
Further reading
— On Teflon bonds
