The disappearance of collateralized loan obligations and other investors from the credit markets has forced banks to change the way they market and sell debt.
Case in point: Goldman Sachs Group recently convened bank debt and bond investors at the Mandarin Oriental hotel in New York to launch portions of both the loan and bond offerings that back the delisting of cellular service provider Alltel Corp. by
Normally, underwriters launch the bank deal first, wait a week or more, then begin a roadshow for the bonds. Even as the two markets were beginning to be more correlated, the sales strategies for the two pieces of the capital structure had remained different.
But now that many of the loan-exclusive investors have disappeared with their own debt dilemmas, more bond investors, hedge funds and equity mutual funds—fluent in both loans and bonds—are taking up the slack. That requires that they be given a better opportunity to discern the relative value of all the debt being sold by the company.
So arrangers have compressed the timing of the launch of loans and bonds, issuing the price talk for both at roughly the same time. “The theme is convergence of the markets; convergence of timetables,” one high-yield banker said. “The bank loan process and timing now resembles a bond process and timing.” Indeed, Goldman Sachs’s sales and marketing strategy for the LBO debt mirrors the approach taken by Citi’s on the deal for Energy Future Holdings, as the former TXU Corp. is now known.
Bank debt and bond investors used to invest more or less ignorant of each other’s prices. In many cases, savvy bankers would play the two markets off each other. In the past year typically oversubscribed loan commitments came in before bond commitments on the same financing. That gave arrangers the upper hand with bond investors. In several buyout financings, loans were increased in size at the expense of bonds.
“When the market was good, you’d put out the bank deal early, get as much as you could, then maybe play the bonds as well,” the banker said. “Nobody really cared about pricing or timing because you wanted to buy as much as you could.” Arrangers have adjusted to the changes as their bread-and-butter investor clients, CLOs, have virtually disappeared from the market.
“What is going to happen now is that you are going to get timing compression, since CLO buyers purchased 50 percent of the loans for sale, and they are no longer in business for all practical purposes,” another banker said. “The new buyers are hedge funds and other investors that had previously been interested in the high-yield bond deal.”
These crossover investors have put more emphasis on the timing and the pricing of both asset classes. They want to evaluate them at the same time on a relative value basis. The traditional, more disjointed, marketing model made life more difficult for crossover investors. “We used to set the price of the bank deal when we launched it and it wouldn’t move; a month later it will still be the same pricing,” the first high-yield banker said. “Now we are waiting until the last minute to set the pricing for a new deal, just like a bond. This shows you how much more hedge funds are forcing the marketing process to be more like a bond roadshow than a bank roadshow, and they are forcing pricing to change.”
The trend took flight at the beginning of the summer with LBOs such as Dollar General, US Foodservice and ServiceMaster, which coincided with the beginning of the credit crunch. “Those deals getting done in July and August really forced the issue of relative value and timing because people were uncomfortable buying the loans when they didn’t know when the bond was pricing or vice-versa,” the first high-yield banker said.
Alltel is marketing roughly $6 billion of its $14 billion term loan B and at least $3 billion of its $7.7 billion of cash-pay and PIK notes. The loan will be split into three term loan B tranches with different call structures. Just like its two predecessors earlier this autumn, the B2 piece is expected to kick off the process. The company will also be adding a maintenance covenant to what was a covenant-lite deal. Citi, Barclays and RBS are also lenders.
Joy Ferguson and Michelle Sierra Lafitte cover leveraged lending for IFR, a sister publication of Thomson Financial.