Leveraged buyouts stack up bifurcated loan pipeline

NEW YORK, July 31 (LPC) - Leveraged buyouts (LBOS) are crowding a relatively bifurcated loan pipeline, with a series of transactions giving investors their fill of new money deals that are expected to price through early August.

Borrowers including internet security provider DigiCert, insurance technology company Sedgwick and Canadian airline WestJet all launched acquisition-related loans in excess of US$1bn this week, taking advantage of a split marketplace rewarding well-known borrowers above highly-levered, single B-rated companies.

“We’re seeing a steady flow of new issuance in the term loan B market,” said Arturo de Peña, head of loan syndicate and distribution at MUFG Securities. “As a result, the market technicals are balanced, allowing investors to be selective.”

Investors’ appetite, for instance, allowed auto racing body NASCAR to tighten the spread on a Ba2/BB rated US$1.41bn loan on July 24 by 25bp to 275bp over Libor, and B3/B rated healthcare analytics firm Press Ganey on July 23 to shave 25bp off its US$1.25bn TLB to clear at 350bp over Libor, banking sources said.

“These are trusted borrowers the market loves,” said a portfolio manager at a US private equity shop. “But then you look down the spectrum, single-B names in cyclical industries are facing additional investor scrutiny.”

Chemicals firm Ineos Enterprises, meanwhile, offered on July 26 a series of lender-friendly amendments to documentation attached to its more than US$1bn in dual-currency loans. The most-favored nation (MFN) clause, which ensures all lenders are treated equally if the company tacks on incremental debt, was set at 50bp for 24 months as opposed to 12 months, while the cap on Ebitda add-backs – proposed cost savings designed to reduce leverage – was lowered, sources said.

“Investors want MFN protection and more controls on restricted payments. They also want to tighten lending structures in order to avoid potential leakage of capital from first-lien lenders,” added de Peña.


After a tepid start to the year, new loan issuance in the last two weeks has spiked thanks in part to private equity-backed acquisition financings, which are keeping investors busy at a time of year when the market typically takes a step back for summer.

“I do expect another wave of LBOs through September and incrementals for acquisition-type deals,” said Ryan Kohan, a portfolio manager with Western Asset Management. “They are mid-range in size, but we’ve seen a step-up in PE-driven LBOs, which is good for supply.”

DigiCert’s proposed US$1.55bn seven-year loan will fund its acquisition by Clearlake Capital and WestJet’s US$1.955bn loan will support its takeover by private investor Onex.

While most transactions in market, generally in the US$800m-US$1bn mark, pale in comparison to the multi-billion-dollar deals seen over the last two years, market sources are buoyed by the new money flowing into leveraged loans.

New money continues to lag in comparison to 2018, logging roughly US$89.4bn for the second quarter of 2019 compared to US$124.8bn a year earlier, according to data from Refinitiv LPC.

The pipeline is still dominated by refinancing and incremental transactions, but the uptick in acquisition-linked financing and a healthy dose of investor pushback has some confident that a bifurcated asset class will more accurately reflect credit risk in leveraged loans.

“Investors’ approach to credit is idiosyncratic. They’re demanding wider spreads and tighter structures to be compensated appropriately for higher risk,” said MUFG’s de Peña, adding that conversely, performing credits that are known to the market are pricing inside or at the low end of guidance. (Reporting by Aaron Weinman. Editing by Michelle Sierra)