What’s in the EA endgame?

Electronic Arts’ proposed $55bn leveraged buyout has upended expectations for its 2031 and 2051 bonds.

Instead of pricing in a straightforward 101% change-of-control payout, investors are weighing a tender offer and potential defeasance strategy that could strip covenants and lower the takeout cost. With a potential downgrade looming, bondholders must decide whether they can resist the maneuver or accept a discounted exit.

Tune into our latest episode of Cloud 9fin, where senior legal analysts Chris Osborne and Anthony Park unpack this situation with senior credit analyst Steven Price.

Follow our reporting of the Electronic Arts takeover at 9fin.com.

Have any feedback on this episode? Send us a note at [e-mail]. Thanks for listening!

Creators and Guests

Producer

Chase Collum

Head of Podcasts for 9fin Limited

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Episode transcript:

This transcript was generated with AI assistance. Report any material inconsistencies or inaccuracies by emailing [e-mail].

Chris Osborne:
Hello everybody and welcome to Cloud 9fin. Today we're going to be talking about Electronic Arts and their possible takeover and what's going on with their bonds in light of the recent tender offer announced last week, as well as how it fits in with the takeover. So with me, I've got a couple of esteemed colleagues here with me. My name is Chris Osborne. I'm a senior legal consultant here at 9fin. Been here for nearly three years and was in private practice for 14 or 15 years before that. But Anthony and Steven. Anthony, can you go ahead and introduce yourself?

Anthony Park:
Yeah, absolutely. My name is Anthony and I do legal analysis for 9fin. I just recently joined.

Chris Osborne:
Awesome. Thank you much. We're very lucky to have you joining us, Anthony. And Steven, can you go ahead and introduce yourself as well, please?

Steven Price:
Yeah, my name is Steven Price. I've been with 9fin for about three years now. And I'm a senior credit analyst in the U.S.

Chris Osborne:
Amazing. And we've got these great people lined up as you'll start to discover as we work through some of these potential issues.

I think to set the scene, I’m going to go ahead and kick us off. And basically, so Electronic Arts have issued some notes back in 2021, $750 million notes due 2031 and $750 million worth of notes due 2051.

And then there was an acquisition announced in September 2025 by PIF, Silver Lake and Affinity Partners as part of a planned LBO to buy all of Electronic Arts.

And I guess, Steven, maybe just to set the groundwork here a little bit, how were these notes trading before the announcement? Why were they trading so far below par? And what's kind of happened to them after that announcement back in September?

Steven Price:
Yeah, of course. So both tranches of the notes actually were trading at pretty large discounts.

So the 2051s were trading in the 60s, the 2031s were trading in the 80s. And the reason for this was not any sort of fundamental credit risk, but rather just a duration story. So these are longer dated, low coupon, zero interest rate policy-era bonds that naturally will drop in price when rates increase. And so that's sort of the story of what happened with why they were trading at such a large discount. Not anything fundamentally wrong with the business.

And then right after the announcement, the longer dated 2051s popped up about 20 points into the mid 80s. The 2031s jumped about 10 points to the high 90s.

And so, the interesting part here is that when a take private like this gets announced, you'd normally expect the bonds to trade up towards par, or 101. And that's because investors are anticipating a change of control takeout. But that didn't happen here.

And so, the bonds basically hung around at a discount for a while because existing bondholders weren't exactly sure how their adoption mechanics would play out, which sort of kept the lid on the price.

Chris Osborne:
Okay. And I think that segues perfectly into kind of, in a way what we would have as a base case scenario in this type of announcement.

So, as you highlighted typically, and these notes did have it, is a change of control put right normally at 101. And that's, as you highlighted normally in that type of scenario, if you assume that's going to happen, you'd expect to see it trading up there.

And before we get into maybe the reasons why it didn't trade all the way up there, it's probably worth at least just setting out the scene for this base case.

So, Anthony, the EA notes did have this change of control offer requirement. But what were the conditions for them to be triggered?

Anthony Park:
The change of control put has two required components.

One is a qualifying change of control. And two is a ratings downgrade below investment grade for the applicable series of notes.

Chris Osborne:
Okay. And, we know that those notes did not then trade up to 101, even though the expectation is that there was going to be a qualifying change of control. And I guess the question is, Steven, would we expect that we'll kind of get to maybe why what's happening with the ratings downgrade, but are there any other reasons that it wouldn't trade all the way up to 101 before we kind of fully explore the change of control?

Steven Price:
Yeah. So generally there's a few key reasons. The first is there's always the risk of a deal not closing. So in the same sense as merger arb, the notes will typically trade just shy of the takeout price with that gap reflecting closing risks.

And then second, there might be some other options which offer a cheaper repayment. And so, for example, we highlighted this in our November article. We talked about how the make-whole redemption price meant they could actually redeem the notes at par and save 1% on the change of control.

And then third, there was also talk about potential defeasance, which can save a substantial amount of money compared to the other change of control or make-whole takeouts.

Chris Osborne:
And I think that's where we've got a lot of questions that are starting to go.

And so I'm going to ask you to hold that thought before we dive too much into it, because what then did happen last week is the company announced that, or I guess just to clarify, Oak-Eagle AcquireCo, Inc. announced that they were going to be doing a tender offer for these notes. And any notes that weren't actually accepted for tender could be defeased.

And so I guess the question here, Steven, is what's kind of happened to the notes since this announcement last week?

And then, Anthony and I can maybe talk through a little bit about how a defeasance might work, but to set the scene on what's happened with the pricing of these notes.

Steven Price:
Yeah, so right after the tender offer announcement, the bonds plummeted back to around 79 for the 2051s and 92 for the 2031s.

And this came after people realized that the company was going to pursue a tender or defeasance route as opposed to the change of control at 101 that everyone kind of thought they were going to get.

Chris Osborne:
And how does that actually compare then to the tender price that's on offer?

Has it traded all the way down to the tender price or is there still some sort of ambiguity that there's sitting above it that maybe people think there might be an option on the table other than the tender?

Steven Price:
Yeah, so I would say prior to the actual announcement of the tender offer, the notes traded between the tender price and 101 as a reflection of that uncertainty.

And then after the announcement, they've traded pretty much in line with the tender offer price after people realized that this is something that the company and the sponsor was actually going to pursue.

Chris Osborne:
Okay. And so, you've mentioned the defeasance and that's what's been mentioned in the actual tender offer announcement.

So I guess as we move into the kind of opaque world of bond defeasance, Anthony, maybe you can help us out again here a little bit and maybe can you just explain what a defeasance is simply and then maybe we can walk through some of the terms and conditions that apply here to the Electronic Arts bonds.

Anthony Park:
Yeah. Think of defeasance as a legal buyout of a contract without actually retiring the debt.

So instead of paying back the bondholders directly, the company buys a portfolio of U.S. treasuries and then locks them in an irrevocable trust. So, treasuries are economically matched to cover every future interest and principal payment.

Once that trust is funded, the company is legally released from its restrictive covenants like the change of control put that we were talking about and effectively turning the corporate notes into treasuries that stay outstanding until maturity.

Chris Osborne:
And I guess the question here coming back to you, Steven, is, Anthony has explained it, it makes sense to me, fine. We’re substituting paying some of the cash now with paying some of these treasuries now, but why would the company go through this? How are they actually saving money if they're still having to, in effect, pay the total amount of interest and principal that would be due on these bonds?

Steven Price:
Yeah. So the reason that it looks cheap here is just because of where treasury yields are relative to the coupons on the notes.

And so treasury yields currently are quite high compared to the coupons. So the way that the tender works is that it values the bonds by discounting the remaining cash flows at the relevant treasury yield. So for the 2031s, that's about 3.6%, and for 2051s, that's about 4.7%.

And so higher discount rates means lower present value, especially for the longer-dated bonds. And so the present value can be meaningfully below par, hence the large discount to 100, especially for those longer-dated 2051 notes.

Chris Osborne:
So how much savings are we kind of talking is possibly on offer here, going down the defeasance route for Electronic Arts or I guess it's acquirer?

Steven Price:
Yeah. So based on our calculations, if the company were to defease the notes, it would save around $65 million on the 2031 tranche and $197 million on the 2051 tranche compared to if it called them at 101. And so around $262 million altogether.

And if it successfully tendered, it would save about $28 million on the 2031s and $160 million on the 2051s. So even despite a $55 billion purchase price, this is quite substantial money and very meaningful savings for the company.

Chris Osborne:
Enough for some lawyers to come up with some creative ways here to pay for their own fees, I take it. And I wouldn't sneeze at $200 million dollars of savings.

Okay, so we're talking about real money here. And so Anthony, turning it over to you now, can you maybe tell us how does the defeasance work for EA's indenture here?

Anthony Park:
The company will likely use the defeasance of the certain obligations provision under Section 7.4. The company stays on the hook for the money, but they're released from the restricted covenants, specifically the change of control put. This tactical move lets the acquirer keep the cheap debt in place, while unilaterally stripping away the most expensive covenants.

Chris Osborne:
There is a lot of this detail set out in the article published last week, so I do encourage anybody to go check that out. But maybe you can give us a high level here.

So what are some of these key conditions for this defeasance to actually become effective, Anthony?

Anthony Park:
To execute a covenant defeasance under 7.4, the company must satisfy three key hurdles.

First, they must make an irrevocable deposit with a trustee of enough cash or U.S. government obligations to cover all future interest and principal payments through maturity. And second, they must deliver a tax opinion confirming that the maneuver will not trigger immediate tax liabilities for holders, which is often the most contested legal hurdle. Third, and finally, they must navigate a 91-day survival period after the deposit to ensure the funds are shielded from bankruptcy preference claims before the covenants are officially extinguished.

Chris Osborne:
Okay, but I guess one of the things here that's important to remember is the announcement itself does seem to say the proposed amendments do not need to be adopted in order to defease one or both series of the notes in accordance with the terms of the indenture.

So I think we're assuming that they seem to think they'd be able to clear this gating item.

But a couple of the other conditions you highlighted do bring up some interesting timing points that I think we wanted to walk through. You talk about the 91-day period from the deposit of the funds, as well as the fact that when you deposit these securities, it's an irrevocable deposit with the trust.

And so, Steven, I mean I’m maybe going to come back to you to ask about a couple of commercial points related to that and then maybe we’ll wade through some of these timing points. Does it seem very commercially likely that EA or the acquirer would look to irrevocably deposit the treasuries in trust for these notes prior to the acquisition closing?

Steven Price:
Yeah, I think in this case it seems unlikely. They'd probably want to do it at or around the closing.

Chris Osborne:
And also, depending on how many people actually tender, they'd need to know the results of any sort of tender, so how many or what amount of the notes they actually have to defease.

And I think this kind of brings in the second point, which is, Anthony, you kind of talked about the different conditions and how one of them was this kind of 91-day period and that the defeasance wouldn't necessarily be operational until that period expired.

And if that 91 days doesn't start , Steven as we were just saying, until at or around the closing of the acquisition, it does come back into one of the earlier points, Steven, you had mentioned, which I believe the change of control typically kicks in within 30 days of both conditions occurring.

And therefore, we kind of have a slight timing mismatch.

But, I guess one of the things we glossed over a little bit about the beginning of the change of control conditions, and Steven maybe I’d come back to you on this, is the expected rating and whether we think there would be a downgrade.

So, EA, as you highlighted at the beginning, the notes weren't trading down from any credit risk, and I think it was still quite firmly an investment-grade rated corporate. But I think there's quite a lot of leverage being looked to add into this structure post-acquisition, Do you have any kind of estimate on what we'd be looking at from a likely rating standpoint here, post-acquisition?

Steven Price:
Yeah, so almost certainly we would expect a downgrade. The company operated with $1.9 billion of entirely unsecured debt prior to the buyout, and they were effectively unlevered on a net basis.

And so, pro forma to the buyout, the cap stack is expected to now include $15.5 billion of first-lien debt and net leverage of five and a half times, which also includes $657 million of run rate add-backs.

So, if you're a bearish credit investor that wants to scrutinize that and remove it, the net leverage actually jumps to 7.1 times.

So, almost certainly they're going to get downgraded into the high-yield space.

Chris Osborne:
That sounds sub-investment-grade to me, based off where a lot of companies end up.

So I guess then, if we're assuming then both of those conditions are going to get met, and then it would trigger a change of control within 30 days, but the defeasance wouldn't start till 91 days, we're kind of stuck with an interesting sort of timing issue.

And I guess this is us kind of speculating a little bit, because, as we said, they say they would be able to defease the notes in the tender offer announcement. And one of the things that we haven't really discussed is there is kind of this concept of economic defeasance, which is basically where the company places the cash or the securities in trust for the bondholders, such that the company almost becomes kind of already backed by that particular government obligation, like Anthony had already spoken about, satisfying one of the conditions. But not necessarily having satisfied the other two conditions to formally operate the defeasance under the terms of the indenture.

But, I think one of the questions is, would the rating agencies necessarily still downgrade the notes at acquisition if there have been securities irrevocably deposited on trust for them? And we've kind of heard conflicting reports on what some of the rating agencies may or may not do.

And sometimes there seems to be an issue that maybe they only will anchor it within two to three notches of the corporate rating, but because some of the events of default risk are still limited. But here, I think there's an argument to be made, and I suspect perhaps the acquirers are making it that for those 91 days, you're not necessarily, or at least the risk becomes more remote about an event of default.

And are they able to kind of economically defease these notes for those kind of 91 days before the formal defeasance kicks in? Because I guess going back to it, if the notes are never downgraded, the change of control offer trigger never really hits. And I think this kind of feeds a little bit into what we're kind of all seeing here.

And, Steven, you kind of talked a bit about the notes are trading right now around the tender offer price.

Steven Price:
Yeah, correct. So at the time that we're discussing, the 2051s are quoted at just under 82, and the 2031s are quoted at around 93.

So, notably for the 2031s, this is actually still a discount to the tender price based on our calculations, whereas the 2051s are trading at a premium to the tender price, which likely reflects the potential substantial gains in the event of a 101% change-of-control, even if it's unlikely.

It could also be reflective of where investors think rates will go by the time of the settlement date, which really impacts the present value of the longer dated notes specifically.

Chris Osborne:
But I guess also, because the tender offer is being paired with a consent solicitation to, or proposed amendments, to some of the terms, all of these may be moot. All this discussion about how to do the defeasance could become moot, depending on if they get 50% plus one of people for the various series to accept this for tender.

And I guess the question after hearing all this, and we'd love to hear from anybody that's out there, feel free to check out our 9fin articles. I guess it comes down a little bit to a game of chicken, of do bondholders think that they would be able to defease the notes like they've said they would be able to. And if on that basis, it's probably trading down there.

Steven, I think, as you said, there's still maybe a little premium of, if some people think there could be some upsides to still push for either a greater premium, or if there are questions about how feasible the defeasance is, would it actually push it up closer to a change of control put, right, or here perhaps a redemption, which is still cheaper than the 101.

So lots of things for people to mull on and chew over. And, hopefully we've given a little bit of clarity on what some of these issues are.

Anthony and Steven, thank you very much for both stepping through all of this.

Feel free to check out the show notes to dive into any of these other articles or reach out to anyone here at 9fin as well. We'd love to hear from you and good luck.

Have a great day.