NEW YORK, May 21 (IFR) - Bond markets were showing support on Thursday for Mexican conglomerate Alfa and Harbour Energy's definitive decision to acquire embattled oil company Pacific Rubiales.
The announcement late Wednesday of a firm deal, which still requires 66% shareholder approval, lifted Pacific Rubiales's 5.625% 2025 bonds to 86.00, up from 83.50 on May 14.
The relief rally comes after considerable price swings this month. The bonds first rose on May 6 on news of a possible Alfa purchase only to sink later on poor results and attempts by a group of holdout investors to accumulate a larger position in the company.
"Given the bond market's reaction (today), risks for Pacific Rubiales have declined," said Alexis Panton, head of Latin America corporate strategy at Jefferies.
"While they are not being guaranteed by Alfa, bondholders can take comfort from its solid sponsorship."
A shareholders' meeting to vote on the acquisition is expected to be held in early July and the deal could close by the third quarter of 2015, Pacific Rubiales said Thursday.
It is by no means a done deal and that may be the reason why the bonds are still slightly south of the 86.00-88.00 levels reached on May 6.
The company faces possible challenges from a group of Venezuelan investors headed by the O'Hara Administration, which has upped its stake in Pacific Rubiales and just this week expressed their opposition to the merger.
"In opposing the proposed acquisition, O'Hara may take any and all actions it considers advisable, including acquiring additional common shares of Pacific Rubiales," O'Hara Administration said in a statement late Tuesday.
O'Hara now owns an approximately 19.02% position in Pacific Rubiales, giving it a larger stake in the company than Alfa's 18.95% position.
"They have almost 20% and they could gather enough shares to block (the acquisition), but I don't think it is in their interest to do so," said Klaus Spielkamp, head of fixed-income sales at Bulltick.
"They have no intention of buying the company. They want to increase the price, but if Alfa decides not to go ahead, they have a lot to lose. You can only pressure up to a certain point. It is now a poker game."
O'Hara said Tuesday it currently has no intention of making its own bid for the company, but "may consider doing so if circumstances change."
Besides shareholders' approval, the transaction is also subject to its creditors agreeing to amend existing senior facilities to allow for a change of control and a modification of covenant ratios.
Pacific Rubiales is also approaching bondholders with a consent solicitation on over US$4bn in bonds.
The company said on Thursday it is seeking to amend the indentures on the 5.375% 2019s, the 7.25% 2021s, the 5.125% 2023s and the 5.625% 2025s so that acquisition agreement does not constitute a change of control.
Under the current indenture, a triggering of the change of control clause would force the company to repurchase all or any part of each holder's notes at a price of 101.00.
While the company doesn't expect Wednesday's agreement to trigger change of control clauses, it is moving forward with the consent solicitation to provide more certainty, it said.
"The change of control could only be triggered if the company is downgraded, which is not the case as Alfa is better rated than Pacific Rubiales," said Spielkamp.
At the same time, Pacific Rubiales is seeking to amend the definition of bankruptcy law in each indenture to avoid a possible event of default.
Noteholders who submit consents by June 4 will receive a cash payment of US$5.00 for every US$1,000 principal amount. However, that payment may not be enough to satisfy some bondholders.
"If I were a bondholder, I would want more than half a point on the consent solicitation," said Jefferies' Panton. "The level of the consent payment is small relative to the overall size of the deal."
Pacific Rubiales is also asking holders of the 5.375% 2019s to exchange those notes for a new series of 7.25% bonds due September 12 2021s, which will carry terms similar to the outstanding December 12 2021s.
That exchange offer will begin after the expiration of the consent solicitation, which is being led by Bank of America Merrill Lynch, Citigroup, JP Morgan and Credit Suisse. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)