Electronic Arts takes bond fight to court, says no default after buyout

What EA filed and who is involved

EA sued the bondholder trustee, US Bank, in the US District Court for the Southern District of New York, seeking a declaration of no default. Titled Electronic Arts Inc v US Bank Trust Co., the lawsuit bears docket number 26-cv-9623. EA alleges creditors who have acquired more than $1.4 billion of its outstanding notes are asserting a default.

Representatives for both EA and US Bank declined to comment, and attorneys for the creditor group did not respond right away to a request for comment. EA told the court that any effort to force an early premium payment would cause "serious irreparable harm."

The takeover, the debt and the premium dispute

In August, Saudi Arabia's investment fund spearheaded a $55 billion leveraged buyout that took EA private, leaving about $18 billion of debt on the company's books. According to an earlier Bloomberg report citing people familiar, the creditors contend a default occurred because EA did not make a change of control payment within the specified window after the deal.

EA also warned in its filing that attempts to exercise remedies would disrupt its business and financing and could trigger cross-default provisions tied to approximately $18 billion of debt at its parent, Oak-Eagle AcquireCo Inc.

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The defeasance plan, earlier offers and potential savings

EA says it invoked defeasance within a February plan to buy back the bonds before the acquisition closed. In plain English: buy US Treasuries and use those cash flows to meet future payments on EA's notes, aiming to secure an investment grade mark and avoid the change of control rule that typically requires a payout only if a buyout triggers a downgrade.

Bloomberg estimates that, if the tactic avoids the obligation, EA would save roughly $250 million. In February, EA offered to repurchase two bond series at about 92 cents on the dollar for the 1.85% notes due 2031 and about 74 cents for the 2.95% notes due 2051, compared with the usual 101 cents in a change of control clause.

EA says the notes have an investment grade rating from Egan-Jones Ratings Co. It also says in the suit that Egan-Jones's high-grade ratings serve as a substitute for a Moody's grade, after earlier talks with multiple agencies and subsequent actions where S&P Global Ratings, Moody's Ratings and Fitch Ratings either rated the notes below investment grade or withdrew their ratings.

What this means for your portfolio

The court's decision on whether a default occurred and if a change of control premium applies will shape EA's cash outflows and financing flexibility. EA also argues that any creditor remedies could set off cross-default provisions linked to about $18 billion at the parent level, a risk parameter for both the bonds and the equity.

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