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Sep 11, 2020
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Investors in LVMH's Tiffany bonds left second-guessing on redemption payout

Reuters API
Sep 11, 2020

The holders of 9 billion euros (8.36 billion pounds) worth of bonds issued by LVMH to fund its now imperilled acquisition of Tiffany & Co have been left second-guessing as to when they might get their money back.

The Louis Vuitton owner told Tiffany this week that it could not complete the $16 billion acquisition of the U.S. jeweller because of a French government request to delay closing the deal - as part of leverage in trade talks with the United States - and due to the impact of the coronavirus outbreak. Tiffany said it would sue LVMH to try and enforce the deal.

Most of the LVMH deal bonds initially rose on news the deal was off as holders bet they would be swiftly repaid at "par" or slightly higher along with accrued interest, having been previously trading below that level.

There are seven different tranches of the bonds of varying maturities, five denominated in euros and two in sterling. They were issued in February at a time when corporate funding costs were close to record lows.

But as corporate bonds were hit hard by the COVID-19 crisis and the outlook for luxury goods clouded in a recessionary environment, the LVMH bonds traded down as low as 90 cents on the euro. That is typically seen as a significant fall in value and means the yield on the bonds doubled in some cases from where they were priced.

So a failed acquisition and swift repayment could make the bonds one of the best trades of the post-covid market in the European investment grade space.

"A number of the bonds are a pretty good value proposition if the acquisition falls through, as there are calls at par or slightly above," said Gordon Shannon, a portfolio manager at Twenty Four Asset Management.

Moves by the two companies to file lawsuits against each other, however, have complicated the outlook for bondholders. Most of the bonds have retraced some of their gains in the past few days on the increasing likelihood that there will be months of legal wrangling until the deal's fate is finally confirmed.

"I suspect we will see some trading around the 100 mark as this situation unfolds," said a banker who managed the original sale of the LVMH debt, speaking on condition of anonymity.

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