Blackstone's financing for Merlin deal unsettles bond market

(This October 17 story refiles to change Thursday to Wednesday in fifth paragraph)

FILE PHOTO: A LEGO Windsor Castle is worked on by staff at Legoland, in Windsor, Britain May 10, 2018. REUTERS/Peter Nicholls/File Photo

LONDON (Reuters) - A buyout consortium led by Blackstone BX.N sent a frisson through debt markets this week as it took advantage of a booming appetite for bonds to push through aggressive terms on financing for its leveraged buyout of Merlin Entertainments.

Merlin, which owns and operates Legoland and Madam Tussauds, took on more than $3 billion of debt to help to fund Blackstone’s bid to take the company private in a deal worth $7.5 billion agreed in June, one of the largest European private equity transactions in recent years.

Analysts and investors are worried that the European Central Bank’s unprecedented stimulus program is driving investors into riskier debt. They expressed concerns about aggressive terms both on pricing and in the debt documentation on the Merlin fundraising.

Blackstone did not immediately respond to a request for comment.

Merlin had already taken out a £2.193 billion ($2.81 billion) loan as part of the leveraged buyout.

On Thursday, Merlin issued around $821 million-equivalent of bonds to help fund the buyout.

Analysts and investors said the bonds, split between a 370 million euro ($411.63 million) eight-year issue with a coupon of 4.5% and a $410 million eight-year dollar tranche with a coupon of 6.625%, was pushing new boundaries in terms of yields achieved on such debt.

“We don’t think at this yield you are remunerated for the risk associated with some of Merlin’s planned projects,” said Benjamin Sabahi, head of credit research at independent analyst firm Spread Research.

“Merlin has a very strong track record, is well diversified, and has long-term agreements in place. But this time it’s something larger, more aggressive from a credit perspective,” he said.

Bond issues for leveraged buyouts generally tend to have a higher yield.

Blackstone’s buyout of Refinitiv in September 2018 was considered one of the most aggressive deals at that time, International Financing Review, a Refinitiv company, reported.

Thomson Reuters, the parent company of Reuters News, holds 45% of Refinitiv.

Analysts highlighted the terms in the debt documentation on the Merlin debt deal, which was seen by Reuters, as a particular area of concern.

The terms give Merlin significant leeway to raise further debt, allowing it to convert double the amount of its dividend payment allowance into capacity to raise debt, analysts at Covenant Review said. The analysts also said they had never seen such terms in a high-yield deal before.

High-yield bond documents typically include restrictions on how much debt an issuer can raise, as well as how much it can pay in dividends and other distributions away from creditors – known as restricted payments.

Sabahi of Spread Research said the terms allowed the company to take on another 1.2 billion euros of debt for future projects and acquisitions, which would increase leverage by an additional 2.4x. Merlin will have a leverage of 5.9 times after the buyout, analysts said.

There have been a string of aggressively priced deals in the European junk bond market as investors demand for bonds has been supercharged by low supply and the ECB’s decision to restart asset purchases, including corporate bonds.

“ECB purchases are providing a broad-based demand for risk. You go to these [investor roadshow] lunches and they are unbelievably well-attended,” said a London-based senior fixed-income analyst, who asked not to be identified speaking about the Merlin deal.

“I think that the language on these deals is broadly recognized. But the ability for people to do some sort of cohesive pushback against these deals is simply not materializing as people are hunting around for risk.” he said.

Reporting by Abhinav Ramnarayan. Editing by Rachel Armstrong and Jane Merriman