NEW YORK, Nov 16 (LPC) - US investors are taking advantage of volatility in the equity and fixed income markets to extract pricing concessions and document changes on some recent buyout loans, including a US$4.975bn financing backing Apollo Global Management’s US$5.6bn acquisition of hospital company LifePoint.
Floating-rate loans have been in demand as investors seek a hedge against rising interest rates. But the US equity market selloff is feeding into the loan market, which is helping investors to push back and win more favorable terms on aggressive deals.
The volatility that hit the wider markets in late October is pushing US secondary loan prices lower. The SMi100 index of the top traded loans fell to a year-long low of 98.21 after trading near the year’s highs at 98.91 as recently as October 8, according to LPC data.
“The market has traded off a bit, but it’s still pretty strong overall,” a banker said. “When you see deals struggle, it’s mainly idiosyncratic with unique characteristics.”
LifePoint announced on July 23 that Apollo had agreed to buy it in a deal valued at US$5.6bn and plans to merge LifePoint with its portfolio company RCCH HealthCare Partners. Citigroup led the financing with Barclays, Royal Bank of Canada, Credit Suisse, Deutsche Bank and UBS.
Investors’ concerns about LifePoint or the US hospital sector are secondary, however, to their feelings about Apollo, a private equity firm with a track record of playing hard ball and extracting value from investors involved in its deals.
The sponsor’s aggressive negotiation skills were illustrated when Apollo tangled with investors over the restructuring of gaming company Caesars Entertainment Co in 2016 after a messy bankruptcy that resulted in losses for bondholders.
“There’s definitely an Apollo premium,” a leveraged finance portfolio manager said. “We’ve been scarred. They are extremely competent but can also be brutal.”
This history has left investors keen to extract concessions from Apollo when possible, especially when market volatility strengthens their negotiating hand.
After some resistance from investors, Apollo agreed to increase pricing on LifePoint’s term loan to 450bp over Libor from initial guidance of 400bp over Libor. Strong demand following the concessions allowed the loan to be increased to US$3.55bn from US$3.4bn while a bond offering was cut to US$1.425bn from US$1.575bn. The bonds priced at 9.75%, at the wide end of guidance.
The private equity firm also extended soft call protection of 101 to a full year from six months and added quarterly conference calls. A 50bp most favored nations clause was also added for the life of the loan and the size of restricted payments baskets was cut.
The borrower also added a springing maturity provision tied to the company’s US$150m of senior unsecured notes due in 2024 during syndication.
Investors described the pricing changes as secondary to the other adjustments, as they wanted to ensure that LifePoint’s loan had better investor protection than recent jumbo buyout loans for Refinitiv, formerly Thomson Reuters’ F&R unit, AkzoNobel’s specialty chemicals unit and physician outsourcing company Envision Healthcare, which priced at the end of summer.
Apollo’s concessions were primarily designed to ensure that LifePoint’s loan would perform well in the secondary market after the three jumbo loans were dragged lower by recent volatility. Refinitiv was quoted at 98-98.75 on Friday and Envision was at 97-97.5 after both broke for trading above par upon allocation. The loan backing the AkzoNobel deal has fared the best and is trading around 100.625-101 after it broke at 100.375-100.75.
“The market and how this (LifePoint) would trade were the biggest areas of focus,” said a source familiar with the deal.
LifePoint’s loan broke above its original issue discount of 99 at 99.125-99.375 on Wednesday, but had dropped to 98.5-98.875 on Thursday.
“They (Apollo) definitely wanted to get a good response to the deal,” said a second banker. “They spent a lot more time than they usually spend with investors. They asked what the market wanted.”
Apollo’s new investor-friendly approach and willingness to make concessions helped LifePoint’s deal to close successfully and the secondary market pricing fluctuation was attributed to market conditions, a second source familiar with the deal said.
“Every lender lends to Apollo. This is a supply-and-demand market. It had nothing to do with the sponsor. The market will take advantage where they can just like they were taken advantage of on those buyout deals recently,” the second source added.
The concessions may help Apollo on future deals, a third banker said.
“They (Apollo) seem to be wanting to extend an olive branch of sorts and this was a way to do it,” the third banker said.
Citigroup and Apollo declined comment. (Reporting by Jonathan Schwarzberg. Additional reporting by Kristen Haunss. Editing by Tessa Walsh and Michelle Sierra)