NEW YORK Feb 14 Three years after exiting the leveraged loan market during a wave of bond-for-loan takeouts that saw droves of issuers pushing out maturities via the high-yield sector, Accellent is back to raise $1.13 billion in first- and second-lien loans to fund its $390 milion takeover of Lake Region Medical and to retire those very same bonds.
The contract medical device manufacturer is tapping the market at a time when companies have been flocking to the cash-flush loan market to take advantage of low borrowing costs and issuer-friendly terms, made possible by yield-chasing investors willing to lend at cheap rates.
A sustained supply of repricings, refinancings and opportunistic dividend recapitalization deals have sent yields lower and spreads tighter. Large corporate institutional term loans are yielding 4.52 percent on average, compared with 4.76 percent in the fourth quarter of 2013, and down from 4.85 percent a year ago, according to Thomson Reuters data.
M&A supply remains lean, however, and loan investors are hungry for new paper. Accellent's transaction, despite high leverage and modest pricing relative to the company's risk-return profile, according to investors, could benefit due to its new-issue status.
"Accellent is new-money, new-issue and investors are starved for new money. It's too early to tell if it will come at talk, wider, or tighter," said one loan investor.
Signs were positive on Friday when Accellent pulled forward the commitment deadline to February 20 from February 25 after strong investor demand for the paper resulted in an already oversubscribed book, sources said.
Accellent's deal includes a $75 million, five-year revolver, a $795 million, seven-year first-lien term loan, and a $260 million, eight-year second-lien term loan.
Price guidance on the first-lien term loan is 350bp-375bp over Libor with a 1 percent Libor floor, at 99.5, while the second-lien is guided at 725bp-750bp, also with a 1 percent Libor floor, at 99.
With the lack of new paper, the deal may yet sail through the market even as investors are beginning to push back on aggressively priced and structured transactions, in particular on efforts to slice interest expense and lender protections.
The market is showing some resistance to repricings. Swiss chemicals company Ineos pushed guidance to the wide end of price talk and raised the Libor floors on its $4.1 billion covenant-lite term loan, while Roundy's $460 million covenant-lite refinancing term loan is also encountering some resistance.
Following the announcement of the acquisition of privately held Lake Region Medical, which makes devices for cardiology and endovascular markets, Standard & Poor's placed Accellent's Single B corporate credit rating on negative watch.
"We believe Accellent's pro forma adjusted leverage could approach 8.0 times and the acquisition could impair Accellent's ability to continue generating free operating cash flow, which has been a key support for its ratings," wrote credit analyst Gail Hessol. "We also see risks in integrating a large acquisition."
Accellent is marketing the financing package at 4.76x first-lien debt to Ebitda and 6.32x total debt to Ebitda.
Moody's Investors Service also placed Accellent's ratings under review for downgrade, including the company's B3 corporate family rating. The review will focus on the financial leverage, post-acquisition capital structure and ongoing operating performance at both companies, the rating agency said.
Unless you believe the synergy story, to invest in the first-lien debt at 350bp-375bp, at a slight discount with a likely B2/B3 corporate rating, is a push, the loan investor said. If problems arise, the second-lien becomes the equity, he added.
Accellent said in a regulatory filing that it anticipates all existing senior notes and senior subordinated notes will be repurchased or redeemed in full.
UBS is lead left on the first-lien term loan, while Goldman Sachs is lead left on the second-lien loan. KKR is joint bookrunner.