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
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.
"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."
Market participants have expressed frustration 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.
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 Investment Holdings, 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 so many 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
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)