Hedge funds and traditional investors continue to pile into new deals, pushing book orders to very impressive levels and lending strong support to secondary market prices.
Last week’s jumbo deal from Freescale, which helped fund the LBO led by the Blackstone Group, through a consortium including European private equity house Permira was no exception. The chipmaker garnered orders that far exceeded the US$5.95bn deal.
“It is pure momentum right now,” said one high-yield manager. “Hedge funds and most accounts are just padding orders in dramatic levels. Technicals are powerful right now and high-yield continues to be in its sweet spot.”
In the year to date, the high-yield market has doled out US$130.1bn in new paper, up dramatically from the US$83.3bn seen last year at this time. 2005 never broke US$100bn, coming in at US$98.8bn. Even with so much paper in 2006, the extra return investors demand to own high-yield bonds had narrowed to 304bp over Treasuries last week from 350bp at the start of the year.
The market certainly proved able to take down Freescale’s mega-deal, which now ranks as the second-largest US bond deal behind RJR Nabisco’s US$6.1bn trade in 1989. HCA’s deal fills in the third place spot, after it placed US$5.7bn through Citigroup, Banc of America, JPMorgan, Merrill Lynch, Deutsche Bank and Wachovia two weeks ago.
Left lead Credit Suisse, along with Citigroup, JPMorgan, UBS and Lehman Brothers as joint books, priced the US$5.95bn multi-tranche deal for Freescale on Thursday afternoon, with all tranches pricing at lower levels than initial price talk.
The deal comprised four parts. The largest tranche was made up of US$2.35bn in eight-year non-call four senior notes. These priced at par to yield 8.875%, tighter than the 9%–9.25% price talk.
Another US$1.5bn eight-year non-call four toggle note priced at par to yield 9.125%, in line with talk of 25bp–50bp above the main fixed note tranche. The coupon for this leg steps up to 9.875% if paid-in-kind.
The third tranche consisted of US$500m in eight-year non-call two senior floating rate notes, which priced at three-month Libor plus 387.5bp, also inside initial price talk of Libor plus 400bp–425bp. A final US$1.6bn 10-year non-call five fixed rate senior subordinated tranche priced at par to yield 10.125%, 125bp above the fixed rate notes and also on the tight end of talk. The first three tranches were assigned a B1/B rating from the two main agencies, with the 10-year notes rated B2/B.
Initially, the deal also included two euro tranches, but these were dropped after the leads received more support for the dollar notes from European accounts.
Compared with the recent offerings from NXP and HCA, which both came with lower leverage and better ratings, Freescale’s ability to price inside of pro forma talk was impressive. The offering included a toggle tranche, a structure that is growing in popularity.
HCA’s 10-year toggle tranche paid 37.5bp more than its 10-year cash pay tranche. Freescale’s toggle priced tighter by comparison, at a level that was 25bp wider than the eight-year fixed notes.
Investor concerns about the deal’s weak covenants and relatively aggressive leverage of 5.2x pro forma earnings were assuaged by Freescale’s convincing broad credit story. The chipmaker has a track record as a successful leveraged company.
In 2004 Motorola spun off its semiconductor business, with Freescale emerging as a Ba2/BB+ senior unsecured rated credit. Management was able to pay down debt and sell equity, eventually bringing the credit up to an investment grade level.
Management was also said to have done a good job presenting the company’s story on the road. They outlined Freescale’s solid chip business, which is seen to be fairly defensible and in growth sectors of the market.
Its main areas of business are in the automotive, networking and wireless spaces, and 70% of the company’s revenues are from product areas in which the company holds the number one or number two market position.
Syndicate officials said that roughly 370 accounts participated in the deal, which included high-profile traditional high-yield accounts, as well as hedge funds, European buyers, high-grade and loan accounts.
Strong bidding pushed the deal up in secondary trading. The 8.875% notes moved up to 101–101.50, the floaters pushed out to 100.75–101.25 and the 10.125% tranche saw the most gains at 102.50–103.
On the loan side, price talk on Freescale’s US$4.25bn credit facility is L+225bp across the board but may flex down. The facility comprises a US$3.5bn seven-year term loan and a US$750m six-year revolver and is covenant light. It allows Freescale to add one or more incremental term loan facilities and to increase commitments under the revolver of up to US$1bn.
Leverage through the bank debt is 1.6x and 5.3x total. Citigroup and Credit Suisse launched the deal’s retail round on November 6. Moody’s has assigned a rating of Baa3 to the loan package of the transaction. S&P said it would assign a BB rating to the financing upon completion of the transaction.
The buyout group, which includes Blackstone Group, Carlyle, Permira and Texas Pacific Group, will pay US$40 per class A and B share, for a total transaction value of US$17.6bn.
The sponsors will contribute US$7.15bn total equity, with Blackstone committing US$4.15bn and the rest committing US$1bn each. The transaction is slated to become the largest buyout in the technology sector.