Portfolio Companies Buy More Time With ‘Amend And Extends’

With a revolving credit maturity looming nine months out, and a term loan coming due 18 months after that, ABRY Partners didn’t want to gamble on whether or not its portfolio company Atlantic Broadband Finance would be able to pull off a full-scale refinancing in the current illiquid market. And frankly, the Boston firm wasn’t looking forward to the increased loan pricing even if such a deal was in the cards.

Instead, ABRY Partners chose a path that’s gaining favor with buyout professionals. The firm went back to Atlantic Broadband’s lenders in June and struck a deal to extend the maturity on portions of its existing debt in exchange for an amendment that would increase the pricing on the affected leverage.

These so-called “amend-and-extend” deals are growing in popularity among borrowers looking to stave off loan maturities in a market lacking traditional refinancing and exit opportunities. Through July, S&P tracked a total of 56 issuers that have sought amend-and-extend deals this year, 24 of which were sponsor-backed companies. Among these is SunGard Data Systems, a financial software and IT company taken private in 2005 by a Silver Lake-led investor consortium, and Graham Packaging Co., a maker of plastic containers for food and drinks that has been owned by The Blackstone Group since 2004.

In ABRY Partners’s case, lenders extended the maturity on $325 million of Atlantic Broadband’s approximately $445 million term loan debt to June 2013 from September 2011. Meanwhile, pricing on the extended amount, which had been LIBOR + 2.5 percent, was increased to LIBOR + 4.5 percent with a LIBOR floor of 2 percent. Lenders today often include LIBOR floors in their pricing terms to ensure a minimum yield for themselves, regardless of actual LIBOR fluctuations.

The portion of the term loan that was not extended remains outstanding at the older, less expensive rate, with no LIBOR floor, at the prearranged amortization schedule. ABRY Partners also extended $40 million of the cable and Internet services provider’s revolving credit facility at a price increase comparable to the term loan.

“It really was just a cost optimization play,” said Jay Grossman, a managing partner at ABRY Partners, comparing the deal to a full-scale refinancing, which would have been more expensive. “What we wanted to do was extend what we needed to extend, make sure we didn’t have any issues meeting the amortization payments, and nothing more.”

In the near-term, it’s likely that the pace of amend-and-extend deals will quicken as borrowers try to stay ahead of a swelling wave of debt maturities set in motion by the 2004–2007 lending craze. According to S&P, there’s nearly $400 billion in loans backing leveraged buyouts scheduled to come due in the next five years, about $300 billion of which matures in 2013 and 2014 alone.

“When the tenure on these loans comes due, it’s like the sponsor is looking down the barrel of a gun,” said Christopher Williams, a senior managing director at mid-market lender Madison Capital Funding. “They need to act, but their choices today are limited.”

Indeed, traditional senior-for-senior refinancings are difficult to come by as much of the lending universe is either still sitting on the sidelines or else being highly discriminating with respect to the few deals they do choose to pursue. Changing out a maturing slug of senior debt for a new round of high yield or mezzanine debt is an option, but it can be significantly more expensive, given the higher spreads on sub-debt.

Meanwhile, at today’s depressed multiples, few sponsors are willing to sell their companies in order to pay down the debt

“If the market stays as slow and illiquid as it is right now, I think over the next 18 months you’re going to see a ton of activity around loan extensions,” Williams said.

The upshot for the issuers, however, is that, in exchange for the extension on their debt maturity, lenders typically insist on raising pricing on the debt to market terms—which today adds up to a significant premium compared to the 2004–2007 timeframe when most of these loans originated—and charge an amendment fee to boot.

In June, when SunGard extended $2.5 billion worth of its term loan to February 2016 from February 2014, it agreed to a 162.5 basis point spread increase to LIBOR + 3.625 percent and a 25 basis point amendment fee, according to Thomson Reuters LPC

Graham Packaging’s extension the month before on $1.2 billion in term loan debt to April 5, 2014 from Oct. 7, 2011 saw pricing increase to LIBOR + 4.25 percent with a LIBOR floor of 2.5 percent from its original pricing of LIBOR + 2.5 percent, according to regulatory filings and Thomson Reuters LPC.

In July, the average amend-and-extend spread increase and fee came in at 160 basis points and 38 basis points, respectively, according to Standard & Poor’s Leveraged Commentary and Data. March saw the highest average spread increase so far this year at 221 basis points, while May generated the highest fees at 47 basis points.

Because of the additional price burden on the part of the issuer, and the prolonged exposure to a legacy asset on the part of the lender, amend-and-extend deals are not right for every company looking to stave off a near-term maturity. William Shields, a partner at law firm Ropes & Gray, said companies out of compliance with their covenants or those that lack some semblance of stability need not apply.

According to the S&P data, the lowest rating on a sponsor-backed company that opted for an amend-to-extend deal in 2009 was ‘B-’, six steps below investment-grade and nine steps above default on the agency’s credit rating scale. More than half of the issuers, however, were ranked somewhere in the ‘BB’ category.

Shields also cautioned that the amend-and-extend route is a remedy that the market risks over-utilizing. “This is largely a structure set forth to deal with the wall of debt due in 2013 and 2014,” Shields said. “If every borrower out there started pushing their term loans out a couple of years beyond that, you’d essentially be creating a lot of the same problems a couple years later. There are some practical, structural limits to this.”