August 4, 2017 / 2:32 PM / 4 months ago

LPC: Jumbo US buyout loans launch before summer slowdown

NEW YORK, Aug 4 (Reuters) - More than US$6.3bn of acquisition loans hit the US leveraged loan market this week as private equity firms launched three jumbo buyout loans in a bid to beat the summer slowdown and take advantage of favorable market conditions.

The deals include a US$2.4bn term loan backing Staples Inc’s buyout by private equity firm Sycamore Partners, which is the largest US LBO since the first quarter of 2016, a US$2.25bn financing backing nutritional supplement maker Nature’s Bounty’s acquisition by private equity firm KKR, and another US$1.7bn financing backing KKR’s acquisition of medical information website WebMD.

“The market used to shut down in the second week of August,” a banker said. “But that’s just not the case now.”

News of the acquisitions pushed the pipeline to US$20bn, and with US$58bn of loans completed so far this year, bringing the tally for US leveraged loans to US$78bn, according to Thomson Reuters LPC data. This puts the US market on track for the biggest year for leveraged loans since 2007, when US$206.5bn of leveraged deals were issued before the credit crisis.

Private equity firms are choosing to tap the market now to make the most of a receptive investor base and remove the risk of any change in currently favorable market conditions. Political uncertainty in the US also suggests that it could pay to syndicate sooner rather than later, sources said.

Strong appetite from US leveraged loan investors, including hedge funds, collateralized loan obligation managers and foreign buyers, is helping deals to launch before the underlying acquisitions are closed and deals are selling quickly.

A US$525m term loan backing USI Insurance Service’s acquisition of Wells Fargo Insurance Services was syndicated before the anticipated close of the M&A trade in the fourth quarter. The acquisition was announced on June 27. The loan was launched on July 27, while the deal priced on August 3 before its deadline of August 4.

Staples had already lined up orders exceeding its US$2.4bn amount by the time it launched its financing on Wednesday. Sycamore’s acquisition of Staples, which was announced on June 28, is expected to close by the end of the year.

“The market is so hot and there’s a ton of cash out there,” said a CLO investor. “It’s the perfect time to launch these deals. People are dying to put money to work.”

KKR’s acquisition of Nature’s Bounty and WebMD were announced on July 24. The WebMD deal is expected to close in the fourth quarter and the Nature’s Bounty buyout is anticipated to close by the end of the year, KKR said in a statement.

Credit Suisse is leading the financing for the Nature’s Bounty buyout and the first-lien portion of the WebMD buyout while UBS is leading the loan for the Staples deal. Both banks declined to comment.

FEAR OF THE UNKNOWN

Sponsors usually wait until acquisitions are close to complete to syndicate the loans to avoid paying unnecessary interest on the debt but are choosing to tap the market while it is robust with few obvious problems other than broad concerns for volatility due to potential problems such as the debt ceiling and the general political situation in the United States.

Bankers are taking the view that it is better to price deals now while pricing is clearly defined rather than hold the risk on their balance sheets over the summer period and risk a possible pricing reset when the market reconvenes in September.

“Issuers want to get the best possible execution with respect to attractive pricing and terms, and that is unquestionably happening now,” said another senior leveraged finance banker. “It’s unclear if the market will be as receptive in the fall.”

While it is unusual for so much supply to be hitting the market in August, when activity traditionally slows, loan funds have seem inflows almost every week this year and there is huge interest from separately managed accounts and collateralized loan obligations. (Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh and Michelle Sierra)

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