It was a record week for European high-yield bond issuance, helped by the pricing of the year’s biggest deal to date, the €4.5bn equivalent issue for Dutch semiconductor manufacturer NXP.
The proceeds will be used to refinance the US$4.5bn bridge loan incurred to fund the acquisition of 80.1% of Phillips Semiconductors by KKR, Silver Lake Partners and AlpInvest for €6.4bn.
The five-tranche jumbo was brought by joint books Morgan Stanley, Deutsche Bank and Merrill Lynch, together with joint lead managers Bank of America, ABN AMRO, Mizuho Corporate Bank, HSBC and co-managers BNP Paribas and Rabobank.
The three senior secured tranches were all rated Ba2/BB+ (stable/stable) and comprised a US$1.535bn seven-year non-call two (102, 101, 100) floating rate note, a €1bn seven-year non-call one (102, 101, 100) floating rate note, and a US$1.026bn eight-year non-call four (103.938, 101.969, 100) fixed-rate note.
All three secured pieces priced in line with talk and at par to yield three-month Libor plus 275bp, three-month Euribor plus 275bp, and 7.875% respectively, with the fixed coupon equating to 330bp over the treasury bill.
The two senior unsecured tranches were rated B2/B+ (stable/stable) and comprised a US$1.25bn nine-year non-call five (104.75, 103.167, 101.583, 100) fixed-rate note and a €525m nine-year non-call five (104.313, 102.875, 100) fixed-rate note.
The euros priced at par with a coupon of 8.625%, an eighth higher than talk, equating to a spread of 497bp over the benchmark, while the dollar piece priced at par with a coupon of 9.5%, the high end of a quarter point range, to give a spread of 493bp over the benchmark. Settlement is October 12.
Although the result on the senior secured tranches was never in doubt, the unsecured tranches were always going to come in for some resistance on account of the sheer size of this deal, which demanded that the leads search for every available drop of liquidity across the US and European markets.
The key challenge on this deal was selling the semiconductors story to the investor base as the industry is notoriously cyclical, which can lead to cash generation experiencing periods of noticeable drought.
This is the key reason why NXP was keen to borrow via the high-yield market, whereby it can avoid the need for stable cash generation and restrictive covenants that it would have had to bear if borrowing in the loan market.
However, the leads perhaps made this process more difficult for themselves than they needed to, judging by their original decision to exclude the high-margin Singaporean joint venture SSMC from the restricted payments group, a decision that they were persuaded to renege on in order to encourage some investors to commit.
As a joint venture, the entity remains outside the guarantor group, although the one-third of NXP’s Ebitda that it represents clearly created a significant comfort factor for investors.
Having resolved this issue, it seems the fairly demure leverage ratio of 4.5x and the realistic coupon did the rest, not to mention the fact that the deal is destined to become a market benchmark, and therefore impossible to ignore.
Distribution was on a 144a/Reg S basis with registration rights. Not surprisingly, the book was covered by every type of investor, from traditional long only investors to hedge funds.