EXTRA CREDIT: Financing For Buyouts, Mergers Pumps Life Into Junk Market
July 12 2011 - 2:46PM
Dow Jones News
Market jitters have inhibited most high-yield bond issuance, but
merger-and-acquisition financing has remained steady as companies
already committed to takeovers have to raise capital despite higher
borrowing costs.
M&A-related activity, which usually accounts for 10% of new
junk bonds, rose to half of all new issues in June--$9.7 billion
worth, the biggest month for M&A since October 2007, according
to Barclays Capital research.
While recent concerns about European sovereign debt levels have
made investors leery of risk and discouraged many companies from
tapping the markets, companies that are part of a buyout or a
merger have no choice as they need the financing in order to close
deals within the stipulated time frame, market participants
said.
"Recent deal activity has been centered around LBO and M&A
related activity," said John Cokinos, head of leveraged loan and
high-yield capital markets at Bank of America Merrill Lynch. "These
transactions tend to be driven by a certain timeline and
deal-specific terms which limits the issuers ability to avoid
market corrections."
For the year so far, refinancing continues to account for the
lion's share of the high-yield market, with $287.7 million in
issuance, up 126% from the same time last year. But as rising
investor skepticism damped that part of the market, deal finance
stepped up--and is likely to continue, as more M&A deals
close.
"The surprise to us is only that it's taken this long for
M&A-related supply to materialize," said Peter Toal, head of
Americas leveraged finance syndicate at Barclays Capital in New
York. "In our view, this trend is a trend that will continue."
On Monday, for instance, Capsugel Holdings US Inc. launched an
effort to raise $1.07 billion in senior secured credit as part of a
leverage buyout the private-equity firm Kohlberg Kravis Roberts
& Co. arranged in April. Barclays Capital is a banker on the
deal.
This is in addition to Warner Music, which wants to raise $1.05
billion before it merges with the companies owned by Russian
billionaire Len Blavatnik, and Trader Corp., acquired by
private-equity firm Apax Partners in March, which wants to sell
$275 million in notes.
Acquisition financing deals are expected to make up nearly 35%
to 40% of all high-yield transactions in the remaining half of this
year, depending on the resolution of macroeconomic factors, Toal
said.
Investors also are getting selective and have pushed back on
some deals, market participants said.
"Investor interest is not as much as it was in the first five
months of this year, when there was a frenzy to buy new issues,"
Barclays' Toal said.
Last month, Golden Gate Capital brought to market notes to
finance its purchase of Lawson and integration with Softbrands, a
company that the San Francisco-based private-equity firm already
owned. The Softbrands/Lawson entity sold $560 million to investors
after much backtracking by underwriters including lowering the term
by a year, paying a much higher price than first intended and
selling $440 million of the term loan portion only a week after the
initial issuance was priced.
What is happening is that deals that were signed in spring were
based on market conditions then, when issuers didn't have to
discount prices on bonds, are being financed in the current weaker
market. So companies have to pay investors higher yields than
expected.
But the slight pushback is not expected to derail the rise in
acquisition financing.
Market participants say the increased cost of doing these deals
is not going to hurt sponsors, and deal activity will continue to
pick up.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2227;
prabha.natarajan@dowjones.com
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