EA Turns to Egan-Jones Rating as Angry Bondholders Claim Default

Electronic Arts has told a group of creditors that it secured an investment-grade rating from Egan-Jones Ratings Co. for a subset of bonds, using the designation to counter claims that it owes them a premium after the video-game maker was taken private.

The creditors argue a default occurred because Electronic Arts failed to make a change-of-control payout within the specified period after its buyout, according to people familiar with the matter who asked not to be identified discussing private information.

But Electronic Arts maintains it doesn’t owe them the premium because of an arcane maneuver known as defeasance, which it invoked as part of a February proposal to buy back the bonds ahead of its $55 billion acquisition by a group including Silver Lake Management, Jared Kushner’s Affinity Partners and Saudi Arabia’s Public Investment Fund, the people said.

Under this provision, Electronic Arts would bypass the debt payout by purchasing US Treasuries and using cash from them to cover future payments on its own notes. This government-backed collateral would in theory secure the bonds get an investment-grade rating and avoid the change-of-control rule, which normally triggers a payout only if a buyout sparks a credit downgrade.

If the strategy allowed Electronic Arts, which is being advised by JPMorgan Chase & Co., to avoid the change-of-control obligation, the savings would be roughly $250 million, other people familiar said.

Electronic Arts had been in discussions with multiple ratings agencies to assign the bonds an investment-grade rating, Bloomberg reported in February. But despite those efforts, S&P Global Ratings, Moody’s Ratings and Fitch Ratings either gave the notes a junk rating or withdrew their ratings altogether.

Substitute Rating

While the money at stake for the bondholders isn’t vast, the buyback proposal had immediately rattled creditors who feared the move could undermine the change of control provision, which is seen as one of their most sacred safeguards.

Electronic Arts is now arguing that the high-grade rating from Egan-Jones — which is a private ratings agency — serves as a substitute for a grade on the bonds from Moody’s, according to the people.

But the creditors, who are in a cooperation pact and being advised by Akin Gump Strauss Hauer & Feld and Houlihan Lokey, contend that an alternative grade, even if from another firm designated as a “Nationally Recognized Statistical Rating Organization,” can’t replace a public one, the people said. They also argue that the bond documents prohibit a substitution mid-process, according to the people.

Following the notice of default on Sept. 8, the bondholders’ trustee, U.S. Bank, notified the company it will resign that role due to conflicts of interest triggered by the notice, the people said.

Representatives for the sponsor group, Electronic Arts and Akin Gump didn’t respond to requests for comment. Representatives for JPMorgan, Egan-Jones, U.S. Bank and Houlihan declined to comment.

Debt Safeguards

It also sparked debate among law firms over legal technicalities, including whether a change of control clause is even a covenant, which defeasance would extinguish, or rather a payment obligation, which would not be impacted, Bloomberg reported.

Electronic Arts had offered to repurchase the two sets of bonds in February. Under the terms, holders of 1.85% bonds due in 2031 would get paid roughly 92 cents. Owners of its 2.95% securities due in 2051 would get about 74 cents. A change of control clause typically requires a payout of 101 cents.

S&P Global Ratings had initially privately signaled to some investors that it might grant a high-grade rating to the Electronic Arts bonds as it deliberated whether they met the requisite criteria, Bloomberg reported in February. But shortly after, it announced plans to rate the debt based on Electronic Arts’ overarching credit rating rather than the default risk of underlying Treasury collateral once the deal closed.

In late June, Fitch Ratings withdrew its investment-grade credit rating on the bonds. The Electronic Arts acquisition closed on Aug. 4 and Moody’s Ratings withdrew its ratings on both the company and the bonds the next day. On Aug. 6, S&P assigned the bonds due in 2031 a BB+ grade and gave the 2051 notes a BB rating, both into junk territory.

Egan-Jones in recent years has carved a niche grading off-the-beaten-track transactions despite being much smaller than its rivals.

But the firm has drawn regulatory scrutiny recently, with US Securities and Exchange Commission attorneys looking into whether the firm and some of its senior executives exerted improper commercial influence on its ratings procedures, Bloomberg reported late last year. At that time, a spokesperson for the ratings firm said it takes compliance very seriously and “remains in good standing with our regulator.”