As opportunistic HY issuers step way, M&A borrowers move in

NEW YORK, June 15 (IFR) - While opportunistic issuers step away from the high-yield primary market amid the current volatility, M&A borrowers have had to step in.

Several acquisition-led bond offerings have launched recently for pricing in the coming weeks or months.

Leveraged buyout (LBO) transactions include Zayo Group, which yesterday priced a US$1.25bn offering to help fund its acquisition of AboveNet Inc for US$2.2bn and repay Zayo and AboveNet debt.

Next week, P.F. Chang's China Bistro will price a US$300m Triple C rated eight-year non-call four bond offering to fund its buyout by Centerbridge.

Also in the pipeline, Interline Brands is expected with US$675m in a two-part offering to fund its LBO by GS Capital and P2 Capital. The go-shop period ends on June 29, with pricing expected later this summer.

Among corporate M&A deals, Peninsula Gaming will bring a US$350m bond offering later this year to fund Boyd's acquisition of the casino operator.

Elsewhere, WideOpenWest Finance is expected with a US$1.02bn bond to fund its acquisition of Knology. Meanwhile, Wolverine World Wide should be out this month with a US$375m bond to fund its purchase of Collective Brands' Performance + Lifestyle business. And Hologic is financing its acquisition of Gen-Probe with a US$500m bond, slated for this summer.

The timing isn't great for these issuers, but unlike opportunistic borrowers, they have little choice in the matter. Most of the transactions were started earlier in the year when markets were rallying -- and are simply reaching their conclusions.

"Obviously, pricing will be wider given all the volatility and the sell-off. But even with the outflows, there still seems to be enough money looking for these deals," said one banker involved in one of the transactions.

SMALLER DEALS

Underwriters have protected themselves on the latest round of M&A transactions. For one, bankers are not committing to deals in size. Whereas in 2006 and 2007, the market saw huge commitments -- sometimes US$10bn or more -- from a small group of banks, nowadays smaller capital raises, with more underwriters, are the norm.

Underwriters also prefer shorter closing dates in order to protect themselves on market moves. P.F. Chang's acquisition was announced May 1, less than two months ago. Zayo Group's purchase of AboveNet was announced in mid-March, with AboveNet shareholders approving the merger on June 5.

That's a quick turnaround compared to some of the mega LBOs of the last buyout boom. Clear Channel's buyout by Bain Capital and TH Lee Partners, announced in 2006, for instance, took nearly two years to close.

"You could have a deal close in a month when there's no shareholder vote and they are sponsor to sponsor," said the banker.

Finally, underwriters are protected through greater pricing flexibility. Cap rates, or the amount of flexibility that underwriters demand when pricing a bond deal, are wide.

Depending on the credit, some cap rates are set at 200-250bp, meaning that an underwriter has the right to price a client's bond offering 2% to 2.5% wider than original expectations, if necessary, to clear the deal. In that scenario, anything higher than the cap would come out of underwriting fees.

Despite the current downturn in the market, bankers noted that a few divestitures from large corporations, as well as some sponsor to sponsor transactions, are in the works.

But activity is slow overall, as it was at the start of the year, given the ongoing uncertainties in the market. Just US$27.25bn in acquisition and LBO related deals out of a total of US$140.25bn in US high-yield issuance has priced in the market so far this year, according to Barclays data.

"Trying to find the right market window is not very easy," said the first banker. "That's the hazard of M&A."

"We are happy to write a commitment in this environment," a second banker said, "but I think if you are a private equity sponsor or corporate looking to make an acquisition, you probably wonder with assets prices if there will be some dip. It's hard to price assets in volatile environments."

He noted that while the bid/ask spread may have narrowed somewhat since the financial crisis, it's still quite wide among buyers and sellers.

Zayo Group's US$1.25bn two-part bond offering priced on the tight end of talk and traded up in the secondary market, which was viewed as a positive for the market.

The deal was divided into US$750m 7.5-year non-call three senior secured notes, which priced at 8.125% at par versus talk of 8.25% area. This tranche, rated B1/B, was led through Morgan Stanley, Barclays and UBS.

Another US$500m in eight-year non-call four senior unsecured notes, rated Caa1/CCC+, priced at 10.125% at par, also on the tight end of its 10.25% area talk, through Morgan Stanley, Barclays and SunTrust Robinson Humphrey.

The notes performed well in the aftermarket, rising 2.75 points.

The fact that the bridge loan was fully syndicated at the start of the process paved the way for a strong reception for the bond deal, despite the ongoing weak market conditions.

The deal was also bolstered by the fact that top tier equity sponsors GTCR and CharlesBank contributed US$290m. Another US$1.5bn came from a new senior secured term loan.

Zayo Group, a provider of fiber bandwidth infrastructure solutions and carrier neutral collocation, is looking to increase its high-bandwidth fiber network through the acquisition of AboveNet, a provider of high-bandwidth connectivity solutions for business and carriers.

For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol:

U.S. corporate bond price quotations...

U.S. credit default swap column........

U.S. credit default swap news..........

European corporate bond market report..

European corporate bond market report..

Credit default swap guide..............

Fixed income guide......

U.S. swap spreads report...............

U.S. Treasury market report............

U.S. Treasury outlook...

U.S. municipal bond market report......