By Sam Goldfarb and Soma Biswas
One of the largest-ever sales of speculative-grade debt is set
to be completed Tuesday, underscoring the favorable environment for
U.S. borrowers at a time of robust economic growth and strong
demand from investors.
The $13.5 billion sale -- which a Blackstone Group LP-led
investor group is using to acquire a 55% stake in a Thomson Reuters
Corp. data business called Refinitiv -- includes $9.25 billion of
loans and $4.25 billion of secured and unsecured bonds, with
different pieces denominated in U.S. dollars and euros.
Once finished, the bond-and-loan deal should be the
ninth-largest leveraged financing on record in the U.S. and Europe,
and the fourth-largest since the financial crisis, according to
LCD, a unit of S&P Global Market Intelligence.
Refinitiv's cash-raising effort has been viewed on Wall Street
as a test for how much debt companies with poor credit ratings can
issue in the current market and how aggressively they can set the
terms of such deals.
While they have been rare in recent years, supersized buyouts
inevitably stir memories of the years immediately preceding the
financial crisis, when there were a rash of such deals that were
quickly followed in some cases by bankruptcy or other forms of
distress.
Refinitiv's debt offering is "reminiscent of the kind of deal I
would have seen in 2006 and 2007," said Scott Roberts, head of
high-yield investments at Invesco.
Along with the total debt being issued, "you have a covenant
package that's extremely weak" and ambitious assumptions about
future cost savings, he added.
Refinitiv on Monday lowered proposed yields on all but one piece
of the debt package, while increasing the total size of the loans
by $1.25 billion and shrinking the size of the bonds by the same
amount. In a gesture to investors, it also adjusted the terms of
its loans to reduce the amount of future debt it can issue relative
to its initial proposal.
Institutional investors led by Blackstone are paying $17 billion
to take the 55% stake in Refinitiv, which serves banks, money
managers and other financial institutions. Thomson Reuters will
retain the remaining 45%.
Excluding $650 million of annual projected cost cuts,
Refinitiv's debt will amount to a little more than seven times its
adjusted earnings before interest, taxes, depreciation and
amortization, or Ebitda, according to the research firm
CreditSights. Some investors estimate leverage is above eight times
Ebitda.
Lending guidelines issued by U.S. regulators in 2013 tried to
discourage banks from underwriting deals where debt totaled more
than six times Ebitda. Regulators, however, have softened their
stance over the past year, emphasizing that the guidelines are
nonbinding and suggesting that they would ease efforts to keep
banks from straying from them.
High leverage isn't the only way Refinitiv has tested investors.
Under the proposed terms of its bonds, the company could pay
dividends to its owners even if it came under severe financial
distress, a provision that the research firm Covenant Review
described as "wildly off market."
Still, it appears that large numbers of investors are willing to
buy the bonds and loans, reflecting a general view that the company
should be able to handle its heavy debt load.
Boasting a fairly stable base of customers, Refinitiv generated
free cash flow of more than $1 billion over the 12-month period
ended June 30, according to CreditSights. That number should go up
if Blackstone can cut costs and if it can use its connections on
Wall Street to reach new customers, investors said. That, in turn,
should allow it to reduce leverage.
Refinitiv's debt offering includes eight-year unsecured bonds
expected to total $1.575 billion that the lead underwriter of the
bonds, JPMorgan Chase & Co., was marketing Tuesday with a yield
of around 8.25%, down from the low 9%-area originally. The bonds
are rated Caa2 by Moody's Investors Service and B- by S&P
Global Ratings, near the bottom of the ratings spectrum.
Even before regulators softened their stance on lending
guidelines, companies interested in taking on a lot of debt could
go to unregulated banks. Regulated banks also sometimes exceeded
the six-times leverage test on deals where they could argue that
there was a clear path to reducing leverage in the future.
In the second quarter of this year, nearly 15% of new U.S. loans
were issued by companies with debt-to-Ebitda ratios of at least
seven times, the highest percentage since the third quarter of
2014, when 20% of deals were in that category, according to
LCD.
The recent uptick in highly leveraged deals comes as overall
corporate leverage has been on a modest downward trend. The
slowdown in borrowing is one reason why investors say that there
has been a warm reception to companies such as Refinitiv, as
investors look to put their cash to work in the face of limited
supply of new debt.
The successful completion of Refinitiv's debt offering would be
good news for other large, private-equity deals that are currently
in the market or in the pipeline. Among those: a EUR10.1 billion
($11.7 billion) purchase including debt of Dutch paints giant Akzo
Nobel NV's specialty-chemicals unit by a consortium led by Carlyle
Group LP that is being funded in part by EUR6.5 billion of bonds
and loans, which are expected to include euro and U.S. dollar
tranches.
--Miriam Gottfried contributed to this article.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Soma Biswas at
soma.biswas@wsj.com
(END) Dow Jones Newswires
September 18, 2018 09:50 ET (13:50 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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