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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