The leveraged loan market is a shadow of its former self. The raw statistics are stark – sponsor-related loan volume of US$22.4bn has dropped eight-fold through the first half; and non-sponsor related loan volume has plummeted to US$178.2bn, down from US$432.7bn a year ago. It is certainly not a good sign for sponsors that maintain billions in cash that they can no longer rely on quick and cheap access to debt to fund acquisitions.
Indeed, they have had to alter the way they do business. An increasingly popular strategy is to use existing portfolio companies to make strategic acquisitions or, alternatively, to partner with a public company in the same industry.
“This looks like the only way these buyout shops can make any deals,” a leveraged finance banker said. “The guys that are sitting on US$10bn–$12bn in cash have to be perceived to be in the deal-making business and not just buying huge chunks of the LBO overhang debt.”
The US$3.5bn acquisition of The Weather Channel from Landmark Communications may prove to be a model. Bain Capital and The Blackstone Group teamed up with NBC Universal in what, significantly, was largely a self-funded transaction. In the past consortia were used to increase purchasing power; now, they also diffuse risk.
The acquisition is notable for a number of reasons. It combines two of the most active buyout shops with a strategic buyer, any one of which probably could have financed the acquisition on their own. While exact terms of the purchase weren’t disclosed, the debt components were funded largely through internal sources.
Deutsche Bank, which advised the buyers, committed to backstop a portion of the debt financing. Additional debt was provided by GE Commercial Finance, a subsidiary of NBC parent GE; GSO Capital, a Blackstone affiliate; and Sankaty Advisors, a Bain affiliate. Another distinguishing feature is speed. Deutsche launched the senior managing agent round of the loan financing shortly after the acquisition was announced last week.
While the use of Bain and Blackstone subsidiaries to provide financing naturally might reflect how difficult it is to fully syndicate credit facilities in this market, it also more acutely shows how active buyout shops firms have become in the secondary debt markets. Blackstone, Apollo Management and TPG Capital all purchased chunks of leveraged debt from Citi and Deutsche Bank earlier this year. And buyout firms are understood to be discussing similar bail-outs with other banks. Self-sourcing is a logical extension.
Private equity shops are also expected to be more active in using their own portfolio companies to make strategic acquisitions, banking on potential operating synergies to unlock operating economies. Oak Hill Capital, for example, is cobbling together assets from its Local TV, a portfolio company it created last year to acquire nine stations from the New York Times Company.
It is now using the platform to acquire eight television stations from News Corp for US$1.1bn. Oak Hill is financing the deal with a US$565m loan. The facility, which comprises a US$50m revolver and a US$515m term loan, was oversubscribed when syndicated last month. The term loan B pays Libor plus 425 with a discount at 97. Leverage through the bank debt is 5x with 7x total, reasonable multiples by public market standards.
Part of the reason these new transactions are beginning to look more attractive is that almost all of the unattractive buyouts and the debt that backs them have been revised to current market standards or annulled completely. Often with the help of the courts, sponsors and debt arrangers have nearly cleared the decks for new deals, though investors still have few alternatives.
However, there are still a few financing packages that will have to be syndicated before the wreckage from the LBO boom can be considered over.
Citi is still in the middle of a difficult syndication process for the revised US$10.7bn debt package that backs Clear Channel Communications‘ buyout. The arrangers initially launched a US$3bn tranche of the loan at price talk of Libor plus 365bp and a 90–91 discount. Citi, together with Deutsche Bank, Morgan Stanley, Credit Suisse, RBS and Wachovia, funded the debt so their need to get it off their books is urgent.
And in an unfunded transaction, Huntsman and Hexion Specialty Chemicals are looking to the courts to settle what has become a nasty battle (see News).
And this month, in what would be the largest ever LBO, BCE and the investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Fund, reached an agreement on revised terms for a C$51.7bn (US$52.4bn) buyout of the Canadian telco.
One of the more vital changes to the agreement is an extension of the agreed closing date. The reworked deal leaves the purchase price unchanged at C$42.75 (US$42.08) a share but moves the closing date to December 11 from June 30. Agreeing to suspend its common stock dividend through closing will save about US$900m, enhancing the credit quality and liquidity of the telecom.
As a result, the buyout consortium and the banks were able to renegotiate terms of the debt package to make them more palatable in this market. Only time will tell if the buyout group will remain amenable; if not, they will pay a C$1.2bn termination fee, up from C$1bn. Citi, Deutsche Bank, RBS and Toronto-Dominion have now recommitted to the new transaction.