| NEW YORK
NEW YORK May 4Strong investor demand is
allowing US private equity firms to use increasingly large
second-lien loans to maximize the amount of debt and leverage
that they can raise to finance buyouts such as financial
software provider Misys.
Misys arranged a US$6.2bn loan package in April to back its
merger with fintech company DH Corp. The deal included a
US$1.245bn second-lien term loan. This is the largest since a
US$1.515bn facility for wireless venture LightSquared in April
2015 that was part of its bankruptcy exit financing.
Prior to that, second-lien loans of more than US$1bn had not
been seen since 2013 when four similar deals were priced,
according to Thomson Reuters LPC data.
Despite its size, Misys’ second-lien loan was successfully
placed. Pricing was lowered during syndication to 725bp over
Libor with a 1% floor from initial guidance of 775bp-800bp after
Misys has highlighted good appetite for second-lien loans,
which offer investors higher yields in return for a second claim
over assets in the event of bankruptcy and are more flexible to
repay than high-yield bonds.
“Historically, prior to (Misys), one would have said it was
too big. The size of the deal sets a new benchmark for what
issuers might be able to do.” said Judah Frogel, a leveraged
finance partner at Allen & Overy.
US companies have issued US$9.5bn of second-lien loans in
2017 so far, showing a increase on US$1.65bn in the same time
last year, LPC data shows. Second-lien volume started to rise in
the fourth quarter of 2016, when US$8.59bn of loans were issued,
bringing 2016’s full-year tally to US$17.47bn.
“There’s a lot of capital out there and people want to put
it to work. If there’s an instrument with higher yield people
are going to run to it despite higher risk,” Frogel said.
In March, real estate investment trust Capital Automotive
arranged a US$690m second-lien term loan alongside a US$1.115bn
first-lien term loan to back a dividend recapitalization. The
second-lien loan priced at 600bp over Libor with a 1% floor.
Aftermarket auto parts provider Truck Hero Inc is in market
with a US$250m second-lien loan with a US$675m first-lien loan
as part of the financing for its buyout by CCMP Capital
Although second-lien loans are riskier, investors are still
seeking yield. Second-lien debt is attracting institutional
investors outside of Collateralized Loan Obligation (CLO) funds,
especially from firms that can buy both high-yield bonds and
Second-lien loans are typically illiquid and investors
prefer larger deals of more than US$500m that can be traded, the
first banker said.
Some are counseling against using Misys as an example as a
highly valued fintech company owned by Vista, a well regarded
private equity firm.
“Not every second-lien deal can get done even in this hot
market,” the banker said.
The real prospect of credit losses in a downturn can make
riskier second-lien lending a binary decision as investors are
choosier about credit.
“The further down the capital structure you go the more
likely you’re going to be picky,” a second banker said.
(Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh)