Jane Street came to market this week with a $14.6bn multi-tranche monster bond issue. The lion’s share was used to refinance existing debt. Nothing unusual about that: most new bonds are issued to repay existing debt.
However, the proprietary trading firm famed for both its financial acumen and fastidious secrecy paid through the nose to retire existing debt that had no business being retired.
Why? MainFT, when they broke the story that Jane Street was looking to refinance existing debts with a small group of lenders, wrote (our emphasis) that:
[a] shift towards private markets would . . . allow the proprietary trading firm to limit disclosures on its financials, which it currently reports quarterly to a large group of debt holders.
Bloomberg’s follow-on story repeated this point. These regular updates to lenders are a lot shorter and less detailed than the ones that public companies have to make. They’re also private, and just sent to Jane Street’s creditors. However, given the immense amount of interest in the trading firm, the numbers have tended to leak out to journalists fairly quickly.
For an intensely private company, headlines about how you’ve made more money than Walmart or AT&T are a bit embarrassing. So Alphaville strongly suspects that the desire to avoid having to make these disclosures is the main reason for the move.
MainFT also noted that Jane Street’s interest costs could increase as part of the refinancing from a small group of lenders. With the new bonds priced, we can now say that interest costs did, in fact, increase. They increased a lot.
By our calculations, Jane Street ponied up a one-off $200mn to do the deal and then locked in a further $200mn of costs per annum, at least in part, to avoid us gawping at their numbers every quarter. Wowsers.
Jane Street is junk?
But let’s back up a minute. Jane Street had, as of Tuesday, around $11.1bn in long-term borrowings — consisting of a term loan and senior secured notes — according to S&P Global Ratings. Perhaps surprisingly to readers not professionally engaged in money lending, the company is rated double-B: the top end of junk.
At $4.2bn, its broadly syndicated term loan counts as one of the world’s largest leveraged loans. And it had a further $5.65bn of public bonds, making it the 27th largest issuer in the BB-rated US corporate bond market.
However, repeatedly reporting blowout profits has helped Jane Street debt trade mighty tight to US Treasuries (and a hint from S&P that its credit rating might get upgraded to investment grade). Jane Street’s 2031 bonds were marked on ICE BofA indices at Treasuries +103bps last Thursday, before the FT’s refinancing scoop. Its longer-dated 2033 bonds were marked at Treasuries +131bps. This compared to average double-B index spreads of Treasuries +160bps.
But when the new debt came, it printed at spreads much much wider than existing bonds:
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The par-weighted average spread on the old bonds was +152bps. While it wouldn’t be weird to expect new bonds to come maybe a few basis points back versus the existing curve, the average spread on the new bonds was more than double, at +311bps. This looks wild.
If we assume that Jane Street could have issued a set of public benchmark bonds — which would require it to continue reporting the oodles of billions it was making every quarter — at, say, Treasuries +165bps, how much more has Jane Street locked in pay by issuing these new, special, secrecy-friendly bonds instead?
Just multiplying the difference in credit spreads between new and old bonds (311bps — 165bps = 146bps), by the size of the new issuance ($14.625bn) gets us to an answer of $214mn. And that’s $214mn per annum.
Even for a money-well as deep as Jane Street, $214mn looks like a high price to pay to avoid the tedium of a terse quarterly report to lenders and keep us from pointing to quite how much cash the prop trading firm keeps making.
And sure, this number is real finger-in-air stuff. It takes no account of the extension to average maturity, and maybe other rinkydinks we’ve failed to spot in the new bonds’ description. Moreover, there’s more new debt than old — with the difference reported by both MainFT and Bloomberg to be used to invest in AI or whatever — so there’s that too.
We’d be delighted to have our calculations corrected. But before readers sharpen their pencils and add their own guesses to the mix, there’s more.
Making the doomsday call
Loans get pre-paid all the time, and the big $4.2bn leveraged loan looks eminently prepayable without penalty. But prepaying — aka calling — fixed-rate bonds, when they’re not scheduled to be called, is harder.
Almost every high-yield bond tends to be issued with an embedded call option. This is because junk bond issuers don’t like the idea of paying junk bond interest rates forever. And so, if a junk bond issuer delivers their business plan, hits stretch targets, and graduates into investment grade-land, the embedded call options in its bonds can be triggered. This gives the company the ability to issue cheaper investment grade bonds to repay those expensive junk bonds early. (NB: this optionality is why credit nerds always quote ‘option-adjusted spreads’ when talking about credit spreads.)
A call schedule, specifying the date at which the call option can be exercised, and the price at which the company can redeem their bonds, is etched into each bond’s prospectus. These call prices tend to drift down over time, eventually hitting 100.
The chart below shows the call schedules for the four Jane Street bonds, along with a line showing how each of their prices jumped over the past week. Prices of the 4.5 per cent bonds due in 2029 jumped from 97.4 straight up to their call price of 101.25. But the rest of them don’t have call prices at all until 2027 at the earliest.
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How do you call a bond before the call date? You invoke the make-whole doomsday call.
These are things sometimes inserted into bond prospectuses as big red levers — far too expensive to ever be used by any normal company under conditions anything other than extraordinary. They are designed only really to cater for some event or circumstance that sits beyond the horizon of legal imagination.
Try as we might, we haven’t been able to access the original prospectus to read the terms of the doomsday call. But the Terminal tells us that it was indeed a doomsday call that was invoked on August 12 for an effective date of August 26 for each of the 2031, 2032 and 2033 bonds.
If we add up the amount payable by Jane Street over and above their pre-doomsday call market value — basically the amount Jane Street is paying to rid themselves of bonds that come with pesky reporting requirements — we get a figure almost touching $200mn.
We’re tempted to say that the prop trading money-hydrant otherwise known as Jane Street has more money than sense. But people spend money on all kinds of odd stuff. And collectively, they’re probably a lot smarter than us.
Jane Street declined to comment.
Further reading:
— Jane Street in talks to shift its $11bn in debt to investors including Pimco (MainFT)
— How does Jane Street’s trading haul stack up against the hedge fund elite? (FTAV)
— A non-comprehensive list of companies that made less money than Jane Street last year (FTAV)
— Jane Street interns make more than Keir Starmer and Jay Powell (FTAV)
— All you never wanted to know about corporate bond market issuance (FTAV)
