By Timothy Sifert and Joy Ferguson
All eyes are now fixed on First Data’s $29 billion mega-deal, as company management, sponsor
First Data’s $16 billion credit facility could hit the market as early as this week, the first in a long line of some $300 billion of debt packages set for issuance in the coming months. Banks underwrote these deals before the market soured in late June, and they remain on the hook for these credit deals regardless of whether they can syndicate the loans to other investors.
Optimistic bankers contending with mammoth piles of paper stacked on their balance sheets had marked Labor Day on their calendars as the date when investor hunger for high-yield bonds and LBO-backed bank loans would return after a summerlong hiatus. The reception of the First Data deal should offer a preview of how well the other debt packages will fare.
It looks as though the banks holding First Data’s loan agreements are willing to sell cheap in order to move the debt into others’ hands. Bankers on the transaction spent the last week of August contacting buyside accounts to gauge a clearing price for the loan. The $14 billion term loan B will likely be offered at a discount to par, probably between 95 cents and 97 cents on the dollar. As opposed to pricing for bonds, bank loan discounts are rare and reflect either a company’s shaky prospects or a diminished investing climate.
Credit Suisse, Citi, Deutsche Bank, Merrill Lynch, Goldman Sachs, Lehman Brothers and HSBC lead the deal. Another $8 billion in high-yield bonds is expected to follow, and pricing for those hasn’t yet become clear. The size of the First Data deal could be an issue, especially as the debt markets try to get off the ground after a protracted lull. Even at a discount, it just might be too much to swallow all at once.
“In my opinion, the deal is too big to clear the market,” said a banker not tied to the buyout. “They will clear some of it, but the banks will be holding paper for some time. That’s a scene that will get played out frequently as this pipeline gets partially digested.”
The pipeline includes TXU’s massive $45 billion buyout, sponsored by KKR and
In August, Bain Capital, The
As part of the restructured deal, Home Depot agreed to shoulder $1 billion in debt and the buyout club took out a $5.9 billion asset-backed loan. The buyers had initially planned to rely on a standard cash-flow revolver and bank loan to fund the deal, with no participation from Home Depot.
Although the renegotiated HD Supply deal was likely a one-off occurrence, other sponsors and their underwriters are assessing the flexibility of their current agreements on their pending LBOs.
“Mostly the firms have no way out of transactions, and the underwriters will be obligated to provide the debt,” the banker said. “But there are a handful of situations where that is not the case and underwriters are using what leverage they have to change the terms. For now, people are just waiting to see what happens to First Data, and if that gets restructured.”
The banks are also floating some creative schemes. In one proposed arrangement, the investment banks holding the most paper would form a new company that would assume all of the stalled debt deals, according to The Wall Street Journal. This new company would function like a collateralized loan obligation.
Sifert and Ferguson cover leveraged loans and high-yield bonds for IFR, a sister publication that tracks the world’s financial markets.