NEW YORK, July 29 (Reuters) - The private equity buyers of mixed martial arts franchise Ultimate Fighting Championship (UFC) are taking advantage of a thin supply of leveraged loans and investors' increasingly desperate hunt for yield to win extra concessions on the financing backing the US$4bn acquisition despite aggressive leverage and sector concerns, sources said.
Strong demand from investors and reverse enquiries to arrangers Goldman Sachs and Deutsche Bank, allowed private equity sponsor Silver Lake Partners and co-investors to switch a planned US$500m high-yield bond into a more flexible second-lien loan, which is more expensive but will help the company to close the acquisition faster and repay at will.
UFC launched a US$1.3bn first-lien loan on July 22 and strong demand for the paper suggested that a second-lien loan was possible, a source said. Deals are in short supply and buyside demand is mounting as investors struggle for yield against a backdrop of low US interest rates.
Second-lien volume totaled just $2.58bn during the first half of 2016, which was well below the pace of 2015 when US$13.55bn of second-lien loans were arranged.
"I think that will be gobbled up in the second-lien market," said Michael Terwilliger, global portfolio manager at Resource America. "There is not a lot of yield left in the loan market."
Goldman Sachs is leading the first-lien deal and Deutsche Bank is leading the second-lien loan. Despite high leverage, both loans are oversubscribed before the deadline of August 2, which was brought forward from August 4.
UFC's deal is the first large US leveraged loan to launch since the UK's Brexit vote to leave the European Union rocked global markets and is being viewed as a test of sentiment.
The second-lien is expected to be in high demand due to its yield. Banks are guiding the loan at 850bp over Libor with a 1% floor. The first-lien loan is being guided at 450-475bp with a 1% floor.
"It's a yield-chasing kind of exercise," a second banker said, noting that second-yield loans have been largely sold as private placements since volatility hit the leveraged loan market in late 2015 as oil prices slumped and China's economy slowed.
The wider distribution on UFC's second-lien is good news for investors that do not make the cut for private placements as it offers yields of 9% to 10%, despite high leverage, although pricing could be reverse flexed due to high demand.
Second-lien coupons could drop below 800bp if demand stays strong, in stark contrast to average yields of 10.86% in the second quarter of this year, according to LPC data.
UFC's leverage is as high as 8.5 times, according to Moody's Investors Service, which rated the first-lien loan B1 and the second-lien Caa1, but falls using adjustments which typically include synergies, lease and one-time adjustments.
Some investors are also concerned with the sector's lack of precedent in the US leveraged loan market. The company was founded in 1993 and gained a broad following only after signing a broadcast agreement with FOX Sports Media Group in 2011.
Financing the deal with a second-lien loan rather than a high-yield bond will be expensive initially for UFC but will give its private equity owners the option to repay the most expensive debt more quickly as loans have less onerous call protection than bonds.
The second-lien loan is being offered with hard call protection of 102 cents on the dollar for the first year and 101 cents on the dollar the second year. Most high-yield bonds are not callable for at least three or four years.
The sponsors will also benefit from a revenue sharing agreement that gives them more revenue if the deal closes sooner rather than later, according to a banking source.
"I think that at the end of the day that deal will get done because of the yield," Terwilliger said.
The amount of equity in the deal has also helped investors to get more comfortable. Sponsors are putting up US$1.42bn of new equity and existing investors and management are rolling over US$325m of existing equity, according to Moody's. The deal is also being financed with US$400m of payment-in-kind preferred equity.
Goldman Sachs, Deutsche Bank and Silver Lake Partners declined to comment. (Reporting by Jonathan Schwarzberg; Editing By Michelle Sierra and Tessa Walsh)