January 30, 2015 / 2:26 PM / 5 years ago

TRLPC: Retailers test wary US leveraged market

NEW YORK, Jan 30 (Reuters) - Two jumbo M&A loans totaling $12 billion in the challenging retail sector are giving a volatile and cautious U.S. leveraged loan market its first test of the year as increased government scrutiny makes it more difficult to syndicate riskier deals.

Dollar Tree Inc’s $6.95 billion loan facility, which backs the acquisition of fellow discount chain store Family Dollar Stores Inc, is the biggest U.S. M&A loan and biggest leveraged loan of the year to date and is a positive sign for continued M&A in 2015 after a record 2014.

U.S. M&A volume last year totaled $457 billion, some 27 percent higher than the $361 billion in 2013 and the highest figure since the financial crisis.

Meanwhile, PetSmart brought a $1.9 billion bridge loan to the market ahead of plans to line up a $4.3 billion financing to back its buyout by a BC Partners-led group.

The two loans are hitting a market in price discovery mode with a mixed picture on demand. Net demand dipped negative for the second time in a year after strong outflows from loan funds in December, but demand was supported by collateralized loan obligation buying.

Banks and investors are focusing firmly on credit amid a flight to quality and are showing a clear preference for bigger, more liquid deals for stronger credits with lower leverage ratios to avoid attracting unwanted government attention.

Several deals have been priced wider than expected, including a $600m covenant-lite term loan for information technology consulting company Presidio, which was priced at 525bp over Libor, up from 475bp, after pushback from investors citing credit concerns. The loan was allocated and started to trade, but the company’s high-yield bond was cancelled.

“It’s a very credit-specific analysis in the syndicated market. There are deals being flexed up and deals being flexed down, and deals being pushed back with the credit or the sponsor,” an industry source said.

Poles apart

Although they both hail from the retail sector, Dollar Tree and PetSmart are very different credits and could see differences in appetite and pricing as a result.

Dollar Tree is viewed as the stronger credit, with a Ba2/BB rating, which is reflected in pricing. A $5.2 billion seven-year Term Loan B is guided at 375bp-400bp, which one lender described as slightly wide as the company is paying a premium for size. The yield is about 5 percent, well below the 6.4 percent average yield for new first-lien loans in January. Leverage on the deal is around five times.

PetSmart is at the other end of the credit spectrum and is on negative CreditWatch with a BB+ rating by S&P. The company is in the market with a $1.9 billion 364-day bridge loan with guidance in the 700bp over Libor area before a planned $4.3 billion term loan. This puts the company’s leverage above the six times level at which scrutiny from Federal regulators increases.

Some banks pulled out of PetSmart’s deal in December due to concerns over leverage and investors are also wary about buying loans that may be viewed suspiciously by the government.

“(PetSmart and Dollar Tree) are both retailers, so the fact that they’re receiving very different treatment indicates that people are looking at credits and leverage and risk returns,” said Steven Rutkovsky, a finance partner at Ropes & Gray.

Additional reporting by Mariana Santibanez. Editing By Tessa Walsh, Jon Methven

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