September 20, 2013 / 5:45 PM / 4 years ago

Dell, Hilton lower debt costs amid strong demand

Dell logos are seen at its headquarters in Cyberjaya, outside Kuala Lumpur September 4, 2013.Bazuki Muhammad

NEW YORK, Sept 20 (IFR/RLPC) - Dell Inc DELL.O and Hilton Worldwide BLKSHW.UL look set to fund their respective management buyout and refinancing at significantly lower costs than expected thanks to strong demand for their leveraged loans.

Computer giant Dell scrapped a US$1.25 billion second lien high yield bond on Friday in favor of cheaper loans, while Hilton similarly increased the size of its loan financing.

Loans on both deals have covenant-lite structures.

Dell, which set price talk on its US$2 billion seven-year non-call three first lien high-yield bond at 5.5%-5.75%, will price the bond on Monday after books close at noon.

The debt will finance the US$25 billion management buyout of the business by founder Michael Dell and private equity group Silver Lake Partners.

Dell originally planned to sell US$2 billion of first-lien seven-year non-call three bonds, on which initial price thoughts were heard in the high 5% area, as well as a US$1.25 billion second-lien eight-year non-call three notes with initial price thoughts heard in the high 6% area.

IFR and RLPC reported on Thursday that a new euro-denominated Term Loan B, totaling at least 500 million euros, has been added to the debt package following reverse enquiry from investors, and that the bonds may be reduced as a consequence. <ID:L5N0HF37O>

Pricing on the euro loan is expected at 400bp over Euribor with a 1% floor and a 99 original issue discount, 25bp wider than the 6.5-year US$4 billion dollar Term Loan B, which is guided at 375bp over Libor with a 1% Libor floor and a 99 original issue discount.

Credit Suisse, Barclays, Bank of America Lynch, RBC and UBS are leading the bond financing. Bank of America Merrill Lynch, RBC, Barclays, Credit Suisse and UBS are lead managers on the loan side.

Strong Demand for Hilton

Demand for Hilton's debt was strong, with books on the bond heard to be in excess of US$6 billion.

Hilton's new US$10.1 billion loan and bond package, consisting of a US$7.6 billion seven-year term loan B-2, $1.5 billion eight-year non-call three senior bonds, and a $1 billion revolver, will refinance existing debt ahead of a planned initial public offering that is expected to raise US$1.25 billion.

Proforma net debt to adjusted Ebitda is expected to be 6.5x after the refinancing, sources say, which is considered reasonable for a public listing. The proceeds of the IPO will be used to pay down debt, and will most likely target the loan portion which does not have punitive early repayment penalties.

Owned by private equity group Blackstone, the company previously planned to issue an $850 million, five-year term loan B-1, a $1.25 billion senior note, and a $2 billion unsecured note, in addition to a $5 billion, seven-year term loan B-2. The term loan B-1 and the senior note issuance have been eliminated.

"Hilton has replaced the senior secured bonds with even cheaper like-for-like loans," said one market source.

"There was some uncertainty about whether the loan market was deep enough to take a bigger loan, so the issuer started out cautiously, but the whole $9 billion could have been done in the loan market."

One investor said it had been "a perfect time to come to market" after the Federal Reserve's surprise decision on Wednesday to hold off on tapering for the time being, which sent Treasury yields - and financing costs - sharply lower.

"The bonds were a blowout," said another market source.

"That deal was in great shape, pricing as tight as it possibly could, but it could not compete with the pre-payability, flexibility and low coupons of the bank debt."

Before the decision to ditch the two other bond tranches, demand was heard to be around US$14 billion.

Price talk on Hilton's bond was set at 5.75% area. Books closed at 2pm Friday, and the deal priced at par to yield 5.625% late afternoon. It had initially been expected next week.

Price talk on the loan finalized at LIB+300 basis points, with a 1 percent Libor floor at 99.5, the tight end of the range of 99-99.5 given earlier in the day. Pricing includes a 25 basis-points step-down after the completion of Hilton's IPO, and a 25 basis-points step-down when net first-lien leverage is below 3.85 times.

At launch, the TLB-2 was guided at LIB+325-350, with a 1 percent Libor floor and an OID of 99.

"The fact that Hilton has been able to increase the size of the loan, and still squeeze pricing, is remarkable," said the first market source.

Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Morgan Stanley, JP Morgan, and Wells Fargo are leading the Hilton financing. Deutsche Bank is left lead on the loans, and BofA is left on the bonds.

Books on the loans close on Friday, and they will allocate and be free to trade on Monday.

The US$3.5 billion CMBS portion of the Hilton debt financing - which will be the largest post-crisis CMBS deal to date - is expected in two weeks, according to an investor in securitized products. Banks are not yet sharing any information beyond that, he said.

Reporting by Natalie Harrison, IFR Markets, and Natalie Wright, RLPC; Additional reporting by Rachelle Kakouris and Adam Tempkin; Editing by Christopher Mangham and Marc Carnegie

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