TRI Thomson Reuters Corp

Blackstone group uses a $13.5 billion financing to acquire a stake in a Thomson Reuters unit

By Sam Goldfarb and Soma Biswas 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 19, 2018).

One of the largest-ever sales of speculative-grade debt was completed with ease on Tuesday, a sign of 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 -- comprised $9.25 billion of loans and $4.25 billion of secured and unsecured bonds, with different pieces denominated in U.S. dollars and euros.

Including a $750 million revolving credit line, the bond-and-loan deal amounted to the ninth-largest leveraged financing on record in the U.S. and Europe, and was the fourth-largest since the financial crisis, according to LCD, a unit of S&P Global Market Intelligence.

Refinitiv's cash-raising effort was 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 was a rash of such deals that were quickly followed in some cases by bankruptcy or other forms of distress.

Refinitiv's debt offering was "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.

Still, Refinitiv was able to issue most pieces of its debt package at yields comfortably below what it initially proposed to investors. Among those were $1.575 billion of eight-year unsecured bonds issued at par with an 8.25% coupon, down from original guidance in the low-9% area. The unsecured bonds are rated Caa2 by Moody's Investors Service and B- by S&P Global Ratings, near the bottom of the ratings spectrum.

On Monday, the company had increased the total size of the loans by $1.25 billion and shrunk 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 they would ease efforts to keep banks from straying from them.

High leverage wasn'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."

At the same time, Refinitiv boasts a relatively stable base of customers and 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.

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 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 backing leveraged buyouts 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 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.

As of Monday, the average yield on speculative-grade bonds was 3.18 percentage points above Treasurys, compared with 3.43 percentage points at the end of last year, based on Bloomberg Barclays data. The drop indicates healthy demand for the asset class.

The success of Refinitiv's debt offering bodes well for other large, private-equity deals that are currently in the market and in the pipeline. Among those: a EUR10.1 billion ($11.8 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 19, 2018 02:47 ET (06:47 GMT)

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