Riverbed launched a $1.525 billion seven-year term loan and a $100 million revolver on Feb. 12 and is also planning to sell $625 million of senior notes to back its $3.6 billion buyout by Thoma Bravo LLC and the Ontario Teachers’ Pension Plan.
The deal has leverage of around seven times, according to ratings agencies. U.S. regulators view leverage over six times as problematic and also focus on a borrower’s ability to pay off debt within a specific time frame.
Riverbed’s loan is a tougher ask than recent deals, including a $4.3 billion buyout loan for pet retailer PetSmart Inc and a $3.95 billion acquisition term loan for discount Dollar Tree Inc, due to higher leverage levels and a lower credit rating and is expected to set a new benchmark for pricing for B rated companies.
Deals are in short supply. U.S. leveraged loan volume of $79.5 billion on Feb. 19 is 43 percent lower than the same time last year, according to Thomson Reuters Loan Pricing Corp (TRLPC) data, due to a drop in refinancing activity after a rise in pricing in late 2014.
Riverbed is being guided at 525bp over Libor. Strong investor demand amid thin deaflow allowed both PetSmart and Dollar Tree to cut pricing to 400bp and 350bp, respectively, showing that yield-hungry investors have little objection to relatively high leverage levels.
The hardest part of financing buyouts is now getting arranging banks to commit, several sources said. Riverbed’s loan is being led by Credit Suisse, Citigroup, Barclays and Morgan Stanley.
Banks reluctance to cross regulators means that private equity firms now have to talk to more regulated banks to secure financing and are also using unregulated financial institutions.
“I’m seeing sponsors go to more banks because banks are more likely to pass on a deal, and it’s usually a mix of regulated and unregulated banks,” said Michael Chernick, a leveraged finance partner at Paul Hastings LLP.
Not the only one
Although PetSmart and Dollar Tree were able to cut pricing, market participants are wondering how much of the deals’ success was due to low dealflow. While Riverbed is gaining good traction, it is unlikely to be able to cut pricing as much as PetSmart and Dollar Tree as it has less flexibility as a result of its lower credit rating, an investor said.
PetSmart was able to tighten pricing twice on its $4.3 billion loan to 400bp over Libor with a 1 percent Libor floor from a proposed range of 450-475bp over Libor. It has lease-adjusted leverage between 6.2 times and 7.2 times, according to the rating agencies, which Moody’s expects to drop below 6.0 times in a couple of years.
“This is what happens when there isn’t much supply,” a market source said.
Dollar Tree Inc’s pricing of 350bp over Libor with a 1 percent Libor floor on its $3.95 billion term loan was also flexed down from guidance of 375bp over Libor. Moody’s anticipates that leverage will be less than five times within two years of the deal.
Riverbed also has a lower credit rating. It was rated B2 by Moody’s with a B1 rating on the term loan. Leverage at close will be between 6.5 and seven times, although it is nearly eight times using September 2014 numbers, Moody’s said.
Moody’s expects leverage to drop to around six times by the end of 2016 but said in a research note there is “little cushion if the restructuring falters” for the company to keep a B2 rating.
S&P rated Riverbed and the term loan B and said that it expects Riverbed to generate positive free cash flow after the deal closes and to remain a top player in the wireless network performance market, and gave the company a stable outlook.
By Jonathan Schwarzberg, TRLPC
(Editing By Tessa Walsh)