U.S. loan market readies 2019’s first jumbo buyout loan

The U.S. leveraged loan market is looking forward to its first jumbo buyout loan of 2019 after the US$13.2 billion acquisition of Johnson Controls International Plc’s power solutions business by Canadian private equity firm Brookfield Business Partners.

The sale of the unit, which makes car batteries, is supported by an underwritten debt financing of US$10.2 billion, which will include dollar- and euro-denominated loans and bonds, a banker said.

The deal has more debt and less equity than most of 2018’s buyout loans as private equity firms issue increasingly aggressive deals to take advantage of strong investor demand for floating-rate debt in a rising interest rate environment.

Brookfield is partnering with Caisse de dépôt et placement du Québec (CDPQ) to purchase Johnson Controls with a combined US$3 billion of equity, which gives an equity contribution of just 22.7 percent of the purchase price.

Private equity firms provided average equity of 38.31 percent of buyout purchase prices in the first three quarters of 2018, down from 40.95 percent in 2017, according to LPC data.

JP Morgan is leading the dollar-denominated loan for the business, while Barclays will lead the euro-denominated loan, the banker said. Credit Suisse is leading the bond offering, which is expected to be issued in dollars.

The company’s Ebitda is US$1.75 billion, which will give unadjusted leverage of 5.8 times on a US$10.2 billion debt financing.

The leads have assembled a large cast of supporting banks to help syndicate the deal, including Bank of America Merrill Lynch, BMO, CIBC, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Royal Bank of Canada, Scotiabank and TD Securities.

Loan market

Market conditions will determine if the deal is launched in the first or second quarter, the banker said. Brookfield and CDPQ said that the acquisition is expected to close by the end of June 2019, when the deal was announced on November 13.

Leveraged buyouts have run into choppier market conditions in recent weeks. U.S. private equity firm Apollo Global Management had to make several changes to the financing backing its buyout of hospital company LifePoint, which will be merged with portfolio company RCCH HealthCare Partners.

The loan was increased to US$3.55 billion and pricing was hiked to 450bp over Libor from guidance of 400bp over Libor, while the bond was cut to US$1.425 billion and priced at 9.75 percent at the wide end of 9.5 percent-9.75 percent guidance. Several investor-friendly structural changes were also made.

“The hope is that the market will be more constructive and ready for more big deals in the New Year,” the banker said. “JCI is a massive company and is considered a good credit. It’s a large cap industrial LBO, which tend to go well.”

Leveraged finance investors will have to familiarize themselves with the business, a second banker said. The unit is being spun out of Johnson Controls, which is currently rated BBB+ by S&P.

The company, which produces and distributes about 154 million lead-acid batteries for cars and trucks, is expected to attract interest as a steady, high margin, market leading business. It is relatively easy to model cash flows for the company as even electric cars use batteries, the second banker said.

“Batteries wear out and you have to replace them whether there’s a recession or not,” the second banker said. “It doesn’t really have cyclicality.”

Potential buyers met the company’s management in late July and bankers were working on the financing in August. Second round bids were submitted in early September.

(Reporting by Jonathan Schwarzberg. Additional Reporting by Natalie Harrison. Editing by Tessa Walsh and Michelle Sierra)

(This story has been edited by Kirk Falconer, editor of PE Hub Canada)