Markets start to thaw

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Among curiosity and enthusiasm First Data‘s US$5bn term loan B1 tapped the market last week. The chunk of the US$15bn financing, which was seen as a litmus test of the market’s sentiment for the second half of the year, attracted buyers that were quick to write their tickets.

Only US$5bn of the US$15bn total bank package was offered, yet the order book was said to be north of US$8bn by Thursday, with talk of a possible size increase or a sale of some of the B3 tranche.

There was also talk of reverse inquiry into the bridge loan. This describes a distinct change in attitude from weeks ago when the idea of First Data’s loan evoked more panic than commitment. “The market has certainly gained some momentum,” a banker said.

The loan was launched at a well-attended bank meeting at the Pierre Hotel in New York City. It was introduced at price talk of L+275bp with a 96 original issuer discount. The piece is expected to get done on the current terms, a trader said, adding that lead lenders could have cleared the market at an even smaller discount. Earlier market chatter had suggested a discount as low as 93.

Last week’s Fed rate cut generated some support but arrangers Credit Suisse, Citi, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch pushed for necessary term alterations.

They encouraged investors to step up after the sponsor allowed them to add a senior leveraged covenant to what had been a covenant-lite deal. Investors now shun covenant-lite transactions, especially ones as large as First Data’s.

What is more, the arrangers included a most favoured nation clause through to the year-end, ensuring protection for the first buyers if the arrangers offer more of the loans at a cheaper rate.

“That is very key because if you think the price will go down no one will buy,” said one investor. “They are putting a belt and suspenders around the pricing action of these loans to encourage people to step up. It’s very smart.” Also, any unsold portion up to US$5bn is subject to a lock-up.

Allison assists

External factors are also assisting the deal. First Data comes on the back of Allison Transmission‘s successful loan sale, which reopened the loan market two weeks ago and confirmed demand. The company sold US$1bn of its US$3.5bn senior secured LBO term loan facility two weeks ago at 275bp over Libor at a discount of 96.

Last Thursday, it returned to sell an additional US$500m at 96.50. As further evidence of the opening up of the loan market, last week’s sale came without the most favoured nation clause that the first portion included.

“First Data, which is a good credit, came on the heels of the Allison trade. You have US$1.5bn of demand that came out at a better level than the market had expected, so it’s advantageous,” a banker said.

According to the investor, Allison’s arrangers Citi, Lehman Brothers and Merrill Lynch could have printed the entire US$3.5bn at 95 or 94.5 but chose not to – a move that ensured less of a loss on a strong underlying credit.

“Banks are giving signals to the market place that this isn’t a fire sale. They are not going to cut the price to move the merchandise,” the investor said.

Fed cut boost

The Fed’s 50bp rate cut seems to have been just the catalyst needed to kick-start the leveraged credit markets. Aside from generating momentum for the First Data deal, other loan deals are likely to emerge soon. Among other transactions, Symbion’s US$350m senior secured credit facility is now in the market through Merrill Lynch and Citi is out with a US$2.5bn term loan for Flextronics.

Meanwhile, the US high-yield market saw a handful of new issues priced following weeks of inactivity. RH Donnelley issued a substantially increased US$1bn offering through JPMorgan. With plenty of cash on hand, investors jumped at the chance to own a sliver of the B3/B rated trade.

RH Donnelley’s success spurred other high-yield issuers to take advantage of the open window last week – and syndicate officials say more paper is expected soon. Allison Transmission’s US$1.1bn senior unsecured notes offering could emerge next month.

Ryerson launched a US$575m fixed/FRN deal through Banc of America on Friday, with pricing expected the first week of October.

Still, the market is not out of the woods yet. According to a trader, the renewed buoyancy seems to ignore the obvious – that the leveraged market has not recovered its strength and the considerable amount of supply yet to tap the market, coupled with weakening economic fundamentals, are weighing on it more than ever.

While solid corporate deals such as RH Donnelley will be viewed as highly attractive given the high levels of cash and a scarcity of quality issuance, investors will remain cautious on weaker rated names, and risky LBOs will face continued challenges.

Potential legislative changes have JC Flowers & Company and Friedman Fleischer & Lowe trying for a lower price for Sallie Mae, citing a possible material adverse change. The group agreed to buy the student loan company for US$25bn, with Banc of America and JPMorgan committed to provide the financing.

Clear Channel Communications‘ shareholder will vote this Tuesday on the company’s US$26.8bn buyout proposal by Thomas H Lee Partners and Bain Capital Partners. The deal is expected to be approved, but is likely to face financing hurdles.