Refinancings Take Off As Market Accommodates

Well, don’t tell the multiplying critics of private equity. But the leveraged loan market shows continuing signs of stabilization, and perhaps even vigor, as portfolio companies are finding ways to borrow to refinance existing debt and, in some cases, pay dividends to their sponsors.

Cequel Communications announced at the end of January that it plans to refinance its existing $2.5 billion credit facility with a new $2.7 billion credit facility, in the process paying a $370 million dividend in March and another $70 million in May to its sponsor, the Quadrangle Group.

Realogy Corp., the troubled real-estate agency holding company backed by Apollo Global Management, issued $918 million in a new debt in January. A year earlier, the company had struggled to swap $2.75 billion of notes, under the burden of an ailing U.S. housing market. This time around, the refi barely caused a ripple in the market, and Moody’s affirmed Realogy’s speculative rating.

In a somewhat different vein, Roundy’s Supermarkets announced a new $900 million credit facility, as the retail chain backed by Norwest Equity Partners plans a February IPO that could raise $250.9 million. Some of the IPO proceeds will go to pay off the company’s existing $875 million facility.

While a handful of examples does not constitute a “refinancing wave,” issuers prefer to act now rather than later, as the credit market has opened following the short but disruptive cycles of volatility that the market went through for much of the second half of 2011, according to sister service Thomson Reuters LPC, which tracks the loan market.

Still, borrowers will want to move while the market is accommodating, and in many cases they are seizing the opportunity to refinance all of their debt, or at least large parts of it, even if only some parts of their credit facilities are nearing maturity.

“It’s a tougher environment once you get to the smaller end of the market,” said Dean D’Angelo, co-head of private credit at Houston-based Stellus Capital Management, a lender that recently spun off from the D.E. Shaw hedge fund group. “They’re all getting done, but they’re getting done cautiously. They may need new sponsor money if they’re overlevered, and a lot of thought goes into it.”

Indeed, a weak economic recovery is making lenders cautious about making fresh loans to highly leveraged borrowers, and macro-level nervousness about issues such as the euro zone could cause the lending window slam shut with little notice, market watchers say.

And for borrowers that cannot qualify for new loans, lenders are willing to give them amend-and-extend deals, at least for now. “Because the debt finance window has opened up, you see sales at reasonable rates,” Emanuel S. Cherney, a partner at Kaye Scholer LLP and co-chair of the law firm’s corporate department, told Buyouts. “Interest rates are low. It’s a favorable time to do refinancing and M&A.”

Over the next five years, U.S. non-financial companies will face about $1.3 trillion in maturing debt, Moody’s Investors Service reported at the end of January. The majority, $668 billion, is in speculative-rated issues, and of that, the biggest share, $246 billion due in 2016, represents close to 40 percent of the total, the rating agency said. The tally is similar to the five-year outlook that Moody’s did a year earlier.

In recent weeks columnists and other opinion-makers have taken private equity firms to task for, in some cases, sponsoring dividend recaps that appear to leave their portfolio companies too weak to survive a market downturn.

By Steve Bills