| NEW YORK, July 29
NEW YORK, July 29 The private equity buyers of
mixed martial arts franchise Ultimate Fighting Championship
(UFC) are taking advantage of a thin supply of leveraged loans
and investors' increasingly desperate hunt for yield to win
extra concessions on the financing backing the US$4bn
acquisition despite aggressive leverage and sector concerns,
Strong demand from investors and reverse enquiries to
arrangers Goldman Sachs and Deutsche Bank, allowed private
equity sponsor Silver Lake Partners and co-investors to switch a
planned US$500m high-yield bond into a more flexible second-lien
loan, which is more expensive but will help the company to close
the acquisition faster and repay at will.
UFC launched a US$1.3bn first-lien loan on July 22 and
strong demand for the paper suggested that a second-lien loan
was possible, a source said. Deals are in short supply and
buyside demand is mounting as investors struggle for yield
against a backdrop of low US interest rates.
Second-lien volume totaled just $2.58bn during the first
half of 2016, which was well below the pace of 2015 when
US$13.55bn of second-lien loans were arranged.
"I think that will be gobbled up in the second-lien market,"
said Michael Terwilliger, global portfolio manager at Resource
America. "There is not a lot of yield left in the loan market."
Goldman Sachs is leading the first-lien deal and Deutsche
Bank is leading the second-lien loan. Despite high leverage,
both loans are oversubscribed before the deadline of August 2,
which was brought forward from August 4.
UFC's deal is the first large US leveraged loan to launch
since the UK's Brexit vote to leave the European Union rocked
global markets and is being viewed as a test of sentiment.
The second-lien is expected to be in high demand due to its
yield. Banks are guiding the loan at 850bp over Libor with a 1%
floor. The first-lien loan is being guided at 450-475bp with a
"It's a yield-chasing kind of exercise," a second banker
said, noting that second-yield loans have been largely sold as
private placements since volatility hit the leveraged loan
market in late 2015 as oil prices slumped and China's economy
The wider distribution on UFC's second-lien is good news for
investors that do not make the cut for private placements as it
offers yields of 9% to 10%, despite high leverage, although
pricing could be reverse flexed due to high demand.
Second-lien coupons could drop below 800bp if demand stays
strong, in stark contrast to average yields of 10.86% in the
second quarter of this year, according to LPC data.
UFC's leverage is as high as 8.5 times, according to Moody's
Investors Service, which rated the first-lien loan B1 and the
second-lien Caa1, but falls using adjustments which typically
include synergies, lease and one-time adjustments.
Some investors are also concerned with the sector's lack of
precedent in the US leveraged loan market. The company was
founded in 1993 and gained a broad following only after signing
a broadcast agreement with FOX Sports Media Group in 2011.
Financing the deal with a second-lien loan rather than a
high-yield bond will be expensive initially for UFC but will
give its private equity owners the option to repay the most
expensive debt more quickly as loans have less onerous call
protection than bonds.
The second-lien loan is being offered with hard call
protection of 102 cents on the dollar for the first year and 101
cents on the dollar the second year. Most high-yield bonds are
not callable for at least three or four years.
The sponsors will also benefit from a revenue sharing
agreement that gives them more revenue if the deal closes sooner
rather than later, according to a banking source.
"I think that at the end of the day that deal will get done
because of the yield," Terwilliger said.
The amount of equity in the deal has also helped investors
to get more comfortable. Sponsors are putting up US$1.42bn of
new equity and existing investors and management are rolling
over US$325m of existing equity, according to Moody's. The deal
is also being financed with US$400m of payment-in-kind preferred
Goldman Sachs, Deutsche Bank and Silver Lake Partners
declined to comment.
(Reporting by Jonathan Schwarzberg; Editing By Michelle Sierra
and Tessa Walsh)