A debt financing of about US$3 billion backing CVC Capital Partners and Canada Pension Plan Investment Board‘s US$4.6 billion acquisition of Petco Animal Supplies is joining a US$14 billion pipeline of U.S. leveraged buyout loans that are waiting to be sold after a US$5.5 billion deal for data storage provider Veritas was pulled last week.
While Petco is viewed as one of the higher-quality credits that investors are still keen to lend to, the deal is likely to be syndicated next year, sources said. Conditions in the U.S. market remain challenging and a volatile market and low average secondary prices continue to pose a threat to new issue.
The SMi index of the most actively-traded names was 95.70 on November 24, according to Thomson Reuters LPC data, which makes syndicating new deals at 100 percent of face value or par difficult as the secondary market continues to offer cheaper alternatives.
“It’s a sloppy – to say the best – environment,” said one investor.
The completion of Petco’s buyout shows that banks are still willing to take risks and underwrite deals for companies that are viewed as strong credits. Chipmaker Avago Technologies was able to increase a term loan by US$2.25 billion to US$9.75 billion and added a 900 million euro tranche to the deal that backs its purchase of Broadcom immediately before Veritas was pulled on November 17.
“For now there seems to be a continued bid for the better market,” said a banker. “But sentiment can turn on a dime and already people are in the mode. You don’t even have to be too bad to fall into the bad bucket.”
The decision to go ahead with Petco’s debt financing, which was underwritten by Barclays, Citigroup, Royal Bank of Canada, Credit Suisse, Nomura and Macquarie, reflects the company’s strong credit profile and a good following with investors after multiple recapitalizations, which is reflected in its trading profile in the secondary loan market.
Petco’s existing US$1.2 billion loan traded up to par after the buyout was announced, as expected, but the loan was trading at around 99.75 before the deal was announced – well over the 95.70 average bid.
Underwriting banks were also helped by the trading profile of a comparable deal for PetSmart Inc, which syndicated a US$4.3 billion term loan backing its buyout by BC Partners in February. That loan was priced at 400bp over Libor with a 1 percent floor before being repriced at 325bp over Libor in May.
PetSmart has traded well in secondary and was priced at around 99 percent of face value after the announcement of Petco’s sale, which is expected to close in early 2016.
PetSmart’s relatively high secondary pricing is boosting Petco’s prospects as a comparable deal, however, due to current market dislocation, Petco’s deal is unlikely to match PetSmart’s pricing of 325bp in May.
“I would think the (Petco) loan would be very appealing to accounts given it is priced correctly,” said a loan investor.
Petco is the second-biggest pet retailer in the U.S., a senior banker said, after PetSmart. Petco’s buyout is expected to be well supported when the deal is launched in early 2016. The deal is seen as a stable – almost defensive – play due to customers’ affection for their pets.
“People have pets, and they have to buy the food. It’s a pretty steady business. So why are they going to turn their noses up at an leveraged buyout that will, roughly speaking, have a capital structure similar to another deal that has performed very well?” the banker asked.
Although precise details of Petco’s debt financing have yet to be released, the financing is expected to mirror PetSmart’s recent deal, with a similar loan and bond structure and leverage in the same range of around 4.0-4.5 times senior debt and 6.0-6.5 times total debt side, banking sources said.
Standard & Poor’s put Petco on negative ratings watch after the announcement. The company is currently rated B, but S&P noted the deal will increase leverage to “well above” the current level of 5.0 times and that higher interest could keep the company from reinvesting in improving the customer experience.
Petco repriced its US$1.2 billion loan at 300bp over Libor with a 1 percent floor in February 2013.
By Jonathan Schwarzberg
(Additional reporting by Lisa Lee) (Editing By Tessa Walsh and Jon Methven)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
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