PetsMart leverage at 6x as retailers test wary market

  • PetSmart floats debt for BC Partners buyout
  • Dollar Tree offers $7 bln loan facility
  • Market seen as volatile, cautious

Dollar Tree Inc’s $6.95 billion loan facility, which backs the acquisition of fellow discount chain store Family Dollar Stores Inc, is the biggest U.S. M&A loan and biggest leveraged loan of the year to date and is a positive sign for continued M&A in 2015 after a record 2014.

Meanwhile, PetSmart brought a $1.9 billion bridge loan to the market ahead of plans to line up a $4.3 billion financing to back its buyout by a BC Partners-led group.

The two loans are hitting a market in price discovery mode with a mixed picture on demand. Net demand dipped negative for the second time in a year after strong outflows from loan funds in December, but demand was supported by collateralized loan obligation buying.

Banks and investors are focusing firmly on credit amid a flight to quality and are showing a clear preference for bigger, more liquid deals for stronger credits with lower leverage ratios to avoid attracting unwanted government attention.

“It’s a very credit-specific analysis in the syndicated market,” an industry source said. “There are deals being flexed up and deals being flexed down, and deals being pushed back with the credit or the sponsor.” 

Dollar Tree is viewed as the stronger credit, with a Ba2/BB rating, which is reflected in pricing. A $5.2 billion seven-year Term Loan B is guided at 375bp-400bp, which one lender described as slightly wide as the company is paying a premium for size. The yield is about 5 percent, well below the 6.4 percent average yield for new first-lien loans in January. Leverage on the deal is around five times.

PetSmart is at the other end of the credit spectrum and is on negative CreditWatch with a BB+ rating by S&P. The company is in the market with a $1.9 billion 364-day bridge loan with guidance in the 700bp over Libor area before a planned $4.3 billion term loan. This puts the company’s leverage above the six times level at which scrutiny from Federal regulators increases.

(By Jonathan Schwarzberg and Michelle Sierra, with additional reporting by Mariana Santibanez)