Jefferies has become the non-bank lender of choice in the U.S. market as it is able to finance companies with higher leverage levels, including software company Epicor Software Corp and network security company Blue Coat Systems.
The investment bank is also leading a new highly leveraged $1.4 billion loan to finance private equity firm Veritas Capital’s acquisition of aircraft engine maintenance and repair services StandardAero, market sources said. The deal, which was announced on Tuesday, has yet to launch.
U.S. leveraged lending guidelines were introduced in March 2013 which view leverage over six times as problematic and also focus on a borrowers’ ability to pay off debt in a specific time frame.
The guidelines have divided the U.S. leveraged loan market into banks regulated by the Fed, the OCC and the FDIC and non-regulated institutional capital providers, which are able to do deals that many banks are unable to arrange or underwrite.
Constraints on banks are helping Jefferies to rise up the league tables. The investment bank was 11th in Thomson Reuters LPC’s sponsored bookrunner league tables in the first quarter, compared to 13th in 2014.
“We do see them [Jefferies] being more aggressive. They are currently finalizing the Epicor dividend recapitalisation which has leverage of more than seven times,” an industry source said.
Despite Jefferies’ recent focus on highly leveraged loans, the firm has a long track record as a lender in the U.S. leveraged loan market.
“We have been building our leveraged finance business for 25 years and entered the loan business by establishing Jefferies Finance over 10 years ago. In the last five years alone, we have provided over $60 billion in loan commitments to our increasingly diverse client base,” said Richard B. Handler, Jefferies Chairman and Chief Executive Officer.
Strong demand from investors after limited dealflow in the U.S. leveraged loan market in 2015 so far is ensuring that even highly leveraged deals are receiving a good response from investors.
Jefferies, Macquarie and Nomura syndicated a $1.5 billion leveraged loan for Epicor in early May, which had leverage of 7.3 times total debt based on annual revenue of $855 million and $269 million in EBITDA, sources said.
The loan, which includes a $1.4 billion, seven-year covenant-lite term loan B and a $100 million revolving credit, refinanced and recapitalized Epicor’s existing capital structure and paid a dividend to shareholders led by financial sponsor Apax Partners.
The term loan priced at 375 basis points (bp) over Libor, lower than guidance of 400bp with a 1 percent Libor floor, after strong investor appetite.
Jefferies also arranged a $1.15 billion term loan in May supporting Blue Coat’s $2.4 billion sale to private equity firm Bain Capital from previous sponsor Thoma Bravo.
The loan, which had total debt of 6.2 times, was increased from $1.05 billion in syndication and the spread and discount were also tightened due to robust investor demand.
Both companies have strong free cash flow and good EBITDA margins, but banks are less willing or able to arrange loans with higher leverage levels for fear of being penalized for having too many “criticized” deals on their books.
“The deals are not bad deals,” a banker said.
Several of Jefferies’ recent deals are in the technology sector, which can typically sustain higher leverage levels due to strong free cash flow – a measure of financial performance that shows a borrowers’ ability to reduce debt among other things.
Jefferies established itself as one of the most high profile alternative lenders last November when it teamed up with three others, including one bank – JP Morgan – to underwrite Vista Equity Partners’ $4.3 billion buyout of Tibco Software, which had leverage of more than eight times.
Jefferies also partnered with Nomura, Guggenheim Partners and Apollo to finance Vista’s $1.5 billion acquisition of payment processing company TransFirst Inc last October, which it is now repricing.
TransFirst’s $700 million first-lien term loan repricing launched on Thursday along with a $130 million incremental facility which will push the company’s leverage back to 7.2 times total debt, which is the level it had after its buyout last year, sources said.
Jefferies’ recent focus on highly leveraged loans supplements its typical role as a middle-market lender, but the bank still faces stiff competition from banks to arrange bigger deals with lower leverage.
“For deals under six times, I still see them as a secondary alternative to the regulated banks, except perhaps in their traditional smaller deal size space,” the industry source said.
(Additional reporting by Jonathan Schwarzberg)