Walmart defies investor push to rewrite bond rules

Bonds issued by Walmart to fund its acquisition of Indian ecommerce company Flipkart contain controversial provisions that could be used to withhold compensation to investors if the deal is delayed.

The big box retailer sold $8.5bn bonds on Wednesday whose documents contain legal language used recently by other issuers to avoid paying such compensation, in defiance of investor requests that companies stop using the language.

The bonds were part of a larger $16bn debt fundraising, the second-largest globally this year after strong demand led the retailer to increase the size of the offering.

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At issue are a pair of provisions that have been standard in bond documents for years but which have been used to save issuers cash in recent months and faced criticism as a result.

Walmart agreed to buy back five tranches of debt, worth $9.5bn, at 101 per cent of face value if it does not complete its purchase of a majority stake in the Indian ecommerce platform by June 7 2019, company filings show.

But $8.5bn of those bonds also contained a “make-whole call” which could allow Walmart to buy them back at the lower face value.

It is standard practice for corporate borrowers to pledge to pay compensation for deal delays, in covenants known as “special mandatory redemption” provisions or SMRs. Yet make-whole calls are also typical and have recently been used to redeem SMR bonds at face value when Treasury yields climbed and their value fell.

AT&T and Qualcomm have both recently tried to use make-whole calls to buy back bonds at the lower price when M&A was delayed by regulator scrutiny. In March, AT&T used the manoeuvre to redeem $1.75bn of bonds at par, saving $17.5m in the process. In June Qualcomm tried a similar move for $2.75bn of debt, though it received pushback from investors in response.

The two provisions — and the way they interact — have received more attention this year, as investors expect more debt-funded deals and continued Federal Reserve rate increases, while regulatory uncertainty has increased the possibility of deals being delayed.

The Credit Roundtable, an industry group of institutional investors, has called for better protections for bondholders in contracts, and has proposed revised language for bond indentures that would prohibit companies from using make-whole provisions to skip the 1 per cent SMR premium.

“Consistency and transparency are cornerstones of an efficient market,” the association said in a public letter. “The goal of our proposed SMR language is to utilise investment grade pricing conventions and reduce complexity in order to improve market efficiency and facilitate flexible M&A pre-funding in the unsecured markets.”

The lead underwriters on the Walmart deal — Barclays, Citigroup and JPMorgan — declined to comment. Walmart did not respond to a request for comment.

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