LONDON May 3 The 4 billion pound ($6.20 billion) refinancing of Acromas, the private equity-owned firm behind travel company Saga and British motoring services firm the AA, will see a splitting of the two businesses into separate entities.
An IPO is planned for Saga and the AA will be turned into a Triple B rated investment-grade company by having its debt restructured into a whole-business securitisation.
The refinancing is expected to launch within a month and around 10 banks are working on the deal. Acromas is owned by private equity firms Charterhouse, CVC and Permira and was formed in 2007 through the 6.2 billion pound merger of the AA and Saga.
"We have made it clear that we will do something in good time before September 2015 when the first capital repayment is due. We remain focused on delivering for our customers," Acromas director of communications Paul Green said.
Ernst & Young was appointed last year to carry out due diligence and explore valuations for the companies as two separate entities.
By splitting up the two businesses, the majority of Acromas's 4 billion pound debt pile will be put on to the AA, leaving Saga relatively light in debt and able to undertake an IPO.
Around 2.5 billion pounds of underwritten bridge loans, with a maturity of around three to five years, will be slowly sold to the sterling bond market as a WBS where they are expected to gain up to a 30-year maturity. In addition, around 650 million pounds of high-yield bonds will be issued by the AA, outside the WBS.
Deutsche Bank and RBS are driving the WBS, while Barclays and Mizuho - the banks that were left with Acromas's existing debt for six years after they were unable to syndicate it due to the onset of the financial crisis - are likely to form part of the wider bank group making up the refinancing. Other banks close to the deal include Bank of America Merrill Lynch, Bank of Tokyo-Mitsubishi, HSBC, Lloyds, RBC and UBS.
By becoming investment grade, the AA's debt will be cheaper to service compared with a leveraged refinancing. The loan will have an interest margin of around 250bp that will step up over time.
Acromas has performed well since its 2007 acquisition, which was backed with 4.8 billion pounds of debt. Its net bank and other borrowings stood at 4.1 billion pounds in the 2011-2012 financial year.
The decision to refinance comes amid stronger credit market conditions, with an excess of liquidity and a willingness from banks to do deals.
WBS are gaining favour as they produce attractive investment-grade paper with a good yield - something that is hard to come by in the current environment.
"The WBS on the AA absolutely makes sense as it is a way to get in place a solid, sensible financing in a market that has the liquidity to support it," said a banker involved. "Sterling leveraged financing is not easy to come by, so the WBS gives the AA access to the investment-grade market that will be supportive and it gives it a capital structure which can survive a change of control."
"The AA is credit that people recognise: it is a strong credit and investors know, understand and like it, so it should be well received." ($1 = 0.6447 British pounds) (Editing by Christopher Mangham)