Funds News

Staples US$3.2bn dividend loan tests US market's recovery

NEW YORK, March 29 (LPC) - Opportunistic and aggressive loans financing dividend payments to private equity firms, such as a US$3.2bn loan for office supply company Staples, are back on the agenda as sponsors exploit excess investor demand while dealflow remains thin.

The deal will finance a US$1bn dividend payment to Staples’ sponsors, which are led by private equity firm Sycamore Partners, and will test the strength of the US loan market’s recovery.

Retail loan funds saw a record outflow of more than US$10bn in a volatile December but secondary prices have rallied to 97.11 from a low of 94.57 on December 28, when fears of a global slowdown pulled prices lower.

“I’m not saying you just throw anything out there and it sells itself,” said a head of leveraged finance. “There is differentiation…But we’re essentially back to normal.”

Staples dividend recapitalization will repay more than half of the original US$1.6bn investment made by the private equity firms in Staples’ take private buyout in 2017.

As well as the US$3.2bn term loan B, the current dividend deal includes US$750m of secured notes and US$1.375bn of unsecured notes.

The strength of investor demand for a recent US$6.4bn buyout loan for Power Solutions, Johnson Controls battery unit is encouraging sponsors and banks to revisit dividend recapitalizations, which are traditionally less popular with lenders as they add extra debt to pay dividends to shareholders.

Power Solutions dual-currency loan was increased by US$1bn to US$6.4bn and pricing was reduced to 350bp over Libor on the dollars from guidance of 400bp-425bp and 375bp over Euribor from 400bp-425bp on the euros after the deal proved popular with investors. The deal came to market in early March.

Loan outflows have continued and are in their 19th week, but demand from Collateralized Loan Obligation (CLO) funds and institutional investors is offsetting this loss of liquidity and allowing borrowers to consider aggressive dividend deals as dealflow remains low.

Arrangers are marketing Staples loan with total leverage of 4.7 times and secured leveraged of 3.5 times using adjusted Ebitda of US$1.25bn.

The company’s reported Ebitda is US$927m, and the adjustments take cost savings and Ebitda from acquisitions earlier this year including office technology company DEX (which will add US$50m of Ebitda), and workplace items distributor Essendant (which will add US$40m of Ebitda), the banker said.

Staples has a good track record and has performed in line with the private equity firms’ projections, according to the banker familiar with the deal.

“The business has done better than Sycamore even expected,” the banker said.


Staples private equity owners restructured the business into a delivery company, a US retail business and a Canadian retail firm.

The current dividend recapitalization is being raised via the delivery business, which potentially makes the deal more attractive to investors wary of online retailers such as taking market share.

“Retail is not the easiest sector right now,” said a senior banker not involved in the deal. “It’s a little bit bold to go out there with an opportunistic deal of this size in that sector.”

Although Staples specializes in office products, the delivery business does not have traditional retail exposure as it sells office supplies directly to large Fortune 500-type companies, which avoids online competition, the banker familiar with the transaction said.

Some investors, however, are still struggling to differentiate Staples’ delivery business from the wider retail industry.

“It’s not a retail business, and there has been this disconnect from the beginning,” the investor said. “The company should have changed its name. The business that Sycamore bought was the distribution. This is not a brick and mortar retail business.”

Price guidance on the dividend deal is 475bp-500bp over Libor, as investors seek a higher coupon to compensate for the additional leverage, despite Staples robust performance, investors said.

Staples buyout in August 2017 was initially financed with a US$2.7bn term loan that was priced at 400bp over Libor and the company added US$350m in February to back the DEX acquisition.

It also included a US$1bn 8.5% eight-year non-call three year bond which has rallied by around 10 points to a cash price of 109.5 since the dividend deal was announced, according to MarketAxess.

Staples is using a make-whole provision to redeem the bonds, not callable until September 2020 at 104.25, which is a boon for investors as the company pays up to refinance the debt.

UBS is leading the loan while Goldman Sachs is leading the notes. The banks declined comment.

The dividend loan is part of the sponsors’ long-term plans for Staples, which also include an expected Initial Public Offering (IPO) in 2020, the head of leveraged finance said.

“Taking money off today makes a load of sense in terms of their eventual returns,” the banker said. (Additional reporting by Natalie Harrison) (Reporting by Jonathan Schwarzberg; Editing by Michelle Sierra and Tessa Walsh.)