UPDATE 1-Dearth of lenders for Multiplan puts focus on regulation

Fri Mar 21, 2014 7:49pm EDT

(Adds comments from Starr Investment Holdings)

By Mariana Santibanez

NEW YORK, March 21 (IFR) - Healthcare company Multiplan blazed a trail in the US high-yield market last week with a USD1bn issue that priced at the tightest level ever seen for a Triple C rated leveraged buyout bond.

But many banks opted to stay well away from the trade, apparently for fear of falling afoul of regulators - and that has put unclear US lending regulations back in the spotlight.

Multiplan attracted a whopping US$6bn in demand for the Caa1/CCC+ eight-year non-call three, which priced at par with a 6.625% coupon.

That was well inside the 6.75% price talk - not to mention the Triple C index's current 8.96% level - and yet the bond still jumped three points in the aftermarket.

Yet only two banks opted to underwrite the deal: Barclays and JP Morgan.

That's an unusually small number for a US$3bn-plus debt financing that also included a US$2.2bn seven-year term loan and a US$75m revolver.

Starr Investment Holdings, who bought the business, said it was their choice to stick with just two banks.

"It was decided by the sponsor group and the company, despite significant pressure from other major underwriters to be included, to keep this a two-handed financing with JP Morgan and Barclays Capital in recognition of the value they added as advisors in the process," said Geoffrey Clark, senior managing director at Starr.

But it's clear that market participants are frustrated over what they see as a muddle created by the different guidelines set by the Federal Reserve, the FDIC and the Office of the Comptroller.

"No one knows why one bank passes on deals and others don't," said Richard Farley, leveraged finance partner at law firm Paul Hastings.

"The only thing I can conclude is that different banks are getting different feedback from regulators."

MURKY WATERS

The guidelines, aimed at stamping out reckless underwriting, focus specifically on leveraged loans but take into account the whole capital structure.

A loan can be criticized or considered "non-pass" if a company cannot amortize or repay all senior debt from free cashflow, or half of their total debt, in five to seven years.

Leverage levels exceeding six times debt to Ebitda after asset sales are also viewed as problematic.

In the case of Multiplan, it has five times leverage through senior secured debt - but 7.3 times through total debt.

"The magic number is 6x leverage, but even if you are 6x leverage you can be a 'pass'", said Farley.

Yet even Multiplan being bought out by a high-profile name - Starr, headed by former AIG boss Hank Greenberg - was not enough to lure some bankers to the trade. Swiss investment firm Partners Group is the other lead investor in the consortium acquiring Multiplan.

Those who stayed away - and turned down the lucrative fees on the deal - wanted no part of the risk of US regulators coming down on them.

But with even the ratings agencies looking favorably on Multiplan, the fact that some lenders stayed away has renewed focus on the regulatory uncertainties in the US market.

"The company has a solid historical track record of cash flow generation and debt repayment," Moody's corporate finance group analyst Daniel Goncalves told IFR.

In 2010, the company levered up substantially to over 6x following an LBO and acquisition of Viant, and subsequently delevered to the low 4.0x range by the end of 2012.

Its short term goals are now centered on reducing leverage through both earnings growth and debt reduction.

The B2 Corporate Family Rating from Moody's is predicated on the company reducing leverage to the mid-6x range by the end of 2014, with further progress to below 6x in 2015.

"It's a good proven business that's been around, and it's a repeat issuer," one investor said.

"Leverage is a bit aggressive and pricing is a bit tight, but it is a credit that the market is generally comfortable with."

Multiplan's LBO isn't the only potential "non-pass" this year; market sources suggest the buyout of Nine West is also a likely candidate with leverage exceeding 6x.

But one thing is clear: frustrated bankers want to make it known that what they see as a broadbrush approach from regulators is not the right one.

"The Fed continues to come out and say: 'Don't do levered deals,'" one leveraged finance banker told IFR. "But then we see a deal this big that blows away the market." (Reporting by Mariana Santibanez; Editing by Natalie Harrison and Marc Carnegie)

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