September 7, 2018 / 4:39 PM / 2 months ago

Jumbo deals push U.S. buyout loans over US$100 billion

NEW YORK (LPC) - A pair of huge loans backing the buyouts of Refinitiv, Thomson Reuters Finance & Risk division, and Akzo Nobel’s specialty chemicals business hit the Transatlantic loan markets after Labor day, pushing year-to-date volume over US$100bn along with other jumbo loans in the pipeline.

US buyout volume of US$105bn in 2018 so far is showing a 32% increase compared to the same time last year, according to LPC data. The surge in new money deals has grabbed investors’ attention and the buyside is prioritizing the huge deals over more routine private equity lending.

“The true new issue in the market – not just sponsor-to-sponsor deals or refinancing deals – is great to see. I think most market participants are very happy about that and eager to see these transactions.” said Jonathan Insull, managing director at Crescent Capital.

An US$8bn-equivalent term loan B backing Blackstone’s acquisition of a majority stake in Refinitiv, which is the biggest buyout since the crisis, is in the market and is competing for investors’ attention with a roughly US$6bn-equivalent loan backing private equity firm Carlyle Group’s acquisition of Akzo Nobel’s chemicals unit.

The two massive single-B deals launched as the markets get ready to mark the 10-year anniversary of Lehman Brothers’ bankruptcy filing on September 15, 2008, which started the global financial crisis.

“It’s unusual to have two very large marquee deals at the same moment, but neither set of bookrunners could wait any longer. The good news is that they’re coming in a more robust market than June,” a London-based investor said.

Bankers and investors like both of the huge buyout loans, which are carveouts and new money deals. Although the deals are complex, carveouts are some of the most lucrative deals ever done by private equity firms and investors expect them to be placed with relatively few problems other than some haggling over pricing.

Yields for single B issuers have widened this year as supply increased and investor demand failed to keep up, which boosted investors’ bargaining power before the summer break.

Average yields for first-lien loans of 6.68% in the third quarter are 43bp higher than 6.25% in the second quarter and 114bp higher than 5.54% in the fourth quarter of 2017, according to LPC data.

Libor rates have continued to climb and hit 4% in the third quarter, up from 3.74% in the second quarter and 3.48% in the third quarter, having quadrupled from 1% in early 2017, the data shows.

The large size of the deals and the fact that they need wide market support may give investors the upper hand in price negotiations, but technical factors continue to favor issuers as US CLO formation nears record levels again. CLO issuance totaled US$78bn through July, which is 29% higher than the same time last year, and retail investors continue to add money to loan funds with nine straight weeks of inflows.

LBO LOAN VOLUME

The volume of US leveraged buyout loans completed in 2018 so far stood at US$87bn on September 4, with US$18bn of loans in the pipeline, the data shows.

In addition to Refinitiv and Akzo, physician services provider Envision Healthcare is expected to launch a US$5.05bn term loan to back its US$9.9bn buyout late this month or in early October, said a senior banker. Financing for rural healthcare services provider LifePoint Health’s US$5.6bn buyout is also in the works.

Banks are also preparing for a financing of up to US$10bn to support a potential buyout of Johnson Controls International’s power solutions business.

Investors are predictably excited to see the new money buyouts coming to the market after a barrage of refinancing and repricing deals that lasted in the first half of 2018 as well as much of 2017.

In July, 86% of deals were new money transactions, up from 74% in August. These are the highest levels seen since 96% in February 2016, according to LPC data. In August, US$16.8bn of new money loans were completed, of which US$11.2bn, or 66.7%, backed leveraged buyouts.       

So far this year, net loan issuance, which does not include refinancing and repricing activity, stands at US$210bn, which is 21% higher than the same period of 2017, according to JP Morgan.

The jumbo deals will help to keep spreads elevated as investors have the opportunity to choose between the new deals, as opposed to simply buying loans to put their money to use.

“In terms of the investment opportunity set, I’m as excited about that as I’ve been in many, many months,” Insull said. 

This is an opportunity for investors, who have spreads tighten until this year. Yields on large corporate deals increased to 6.21% as of last month, up from 5.03% a year ago, according to LPC data, and are not expected to drop soon.

“On pricing, they are going to try to extract the max,” the banker said. “But demand is not a problem.”

Reporting by Jonathan Schwarzberg; Editing by Tessa Walsh and Michelle Sierra

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