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Financials

REFILE-Jefferies seizes on barren US loan market with US$1.275bn in risky debt

(Refiling for a wider audience.)

NEW YORK, April 16 (LPC) - Investment firm Jefferies has propped up an otherwise barren US leveraged loan market in April, bringing US$1.275bn worth of new supply at enticing terms to lure a yield-hungry investor base still weighing the impacts of the coronavirus.

The volatility brought on by the virus has rocked markets, forcing companies to cease operations and shore up cash. The decline in productivity has pushed the economy towards a recession.

US leveraged loans went virtually a month without a widely syndicated transaction. Since April 6, however, Jefferies stunned the market with three deals that offered investors double-digit yields to lend to companies the global pandemic has left in dire need of cash.

“When Jefferies has a lot in the market while nothing else is happening, we know there’s a sense for an opportunity,” said one managing director at a bank. “They work with a lot of companies in sectors that are hurting from the virus like restaurants or retail, so Jefferies can come in and structure a deal with high coupons.”

The investment firm’s flurry of activity is a timely reminder of the ability of so-called ‘non-bank lenders’ to support highly leveraged companies during a downturn when more heavily-regulated institutions shy away from risk.

Following guidelines released by regulators in 2013 that pushed some of the largest investment banks to cut back on lending to some of the riskiest deals, Jefferies, which was not handcuffed by the same rules, was able to step in and offer more debt compared to a company’s earnings than its competitors.

On Tuesday, cosmetics firm Revlon unveiled a Jefferies-led US$850m first-lien loan at a margin of 1,050bp over Libor and added a 2% payment-in-kind feature, according to three sources familiar with the transaction.

Jefferies on Tuesday also finalized a US$125m incremental loan for Everi Payments. Investors oversubscribed to the deal, enabling the equipment provider to the gaming industry to tighten the margin on offer by 200bp to 1,050bp over Libor, the three sources said.

Both deals come a week after Jefferies priced a transaction for Golden Nugget. The financing is the third deal the investment firm has led in seven months for the casino operator owned by Texas businessman Tilman Fertitta. Demand was enough to allow the company to increase the loan by US$50m to US$300m, Refinitiv LPC reported on April 8.

“Jefferies has certainly been busy. Some accounts got just US$50,000 allocations on (Golden Nugget’s) loan. There is a ton of money chasing stressed or distressed names right now,” said an investor.

Jefferies’ opportune risk-taking comes not without consequence.

On Wednesday, S&P Global Ratings revised Jefferies’ outlook to negative and affirmed its BBB rating. The market stress brought on by the coronavirus will reduce the investment firm’s profitability in the coming months due in part to lower earnings at its investment banking arm Jefferies Group LLC, the ratings firm said in a report.

Jefferies Finance LLC, a joint venture between the investment firm and MassMutual that syndicates corporate loans, had over US$2bn of underwritten commitments at the end of February and is now faced with a tall-order to syndicate this debt when market conditions are at their most difficult, the ratings agency said.

Spokespersons for Jefferies, Everi, and Golden Nugget did not respond to a request for comment.

HIGH-STAKES GAME

Investors have gladly absorbed new, smaller loans for Golden Nugget and Everi, enabling both to tighten their offer terms, but Revlon’s larger transaction comes as the company tackles an erosion in earnings and cash flow, according to an April 3 report from Moody’s Investors Service.

Launched under the subsidiary Revlon Consumer Products Corp, the new US$850m term loan is one part of a company recapitalization aiming to enhance liquidity and improve the borrower’s maturity profile.

The first-lien term loan comes alongside a US$950m second-lien facility, and a third-lien loan for an undetermined amount, according to a lender presentation from Revlon on Tuesday.

The newly issued debt will repay a US$200m loan it signed with Ares Management last August, refinance a part of a US$1.8bn seven-year loan Revlon raised in 2016 and fund general corporate purposes, according to the three sources cited earlier.

Moody’s downgraded the subsidiary to Caa3 from Caa1 and lowered its senior secured loan to Caa2 from B3, according to the April 3 report.

Saddled with a high debt to earnings before interest, tax, depreciation and amortization ratio of roughly 11.0 times, Revlon must also repay a US$500m bond due in February 2021 and a US$82m loan maturing in July of next year, Moody’s added.

To get lenders on board, Revlon not only offered a juicy 1,050bp margin but also attached a 1.5% Libor floor and set the loan’s due date for June 2025, according to the three sources. Typically, first-lien loans have a seven-year maturity.

Lenders can also draw comfort that the new financing will be secured against company assets, including foreign subsidiaries that hold certain intellectual property on well-known brands such as Elizabeth Arden and American Crew, according to the lender presentation.

A spokesperson for Revlon was not immediately available to comment.

Companies tied to the travel, leisure and retail sectors, have been particularly hard-hit by the coronavirus as consumers stay indoors, and their debt has plummeted.

Revlon’s existing term loan, due in 2023, has struggled to recover alongside other transactions in the secondary market this month. The loan was quoted at an average bid of 37-42 cents on the dollar on Tuesday, up from an average bid of 31-35 cents when the US leveraged loan market bottomed on March 23, according to two sources.

“These sectors are most tied to the virus, so their loans have traded down a lot more,” said George Goudelias, a managing director at asset manager Seix Investment Advisors. “Not only are these companies impacted by the volatility, but it’s going to be an expensive exercise if you raise debt first in a market that has not been active.” (Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)

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