September 19, 2017 / 5:22 PM / a month ago

UPDATE 1-Avantor debt gets more costly as buyside pushes back

(UPDATES throughout)

By Davide Scigliuzzo

NEW YORK, Sept 19 (IFR) - Wary bond investors are forcing Avantor to pay much more than it wanted for the capital to fund the company’s hotly debated US$6.4bn takeover of much larger rival VWR International.

Avantor sharply raised the yields Tuesday on two US dollar bonds and one euro offering by as much as 150bp - a massive increase on the US$4.25bn-equivalent junk-rated offering.

Private equity owner New Mountain Capital will saddle the combined company with over US$7bn in debt and increase leverage to 7x - a high level that could well end up being even higher.

If the synergies and cost savings outlined in the bond prospectus are omitted, leverage would actually be closer to an eye-watering level of 9x, according to IFR calculations.

“Avantor is simply pushing the leverage limits of comfort,” one portfolio manager told IFR.

That kind of skepticism forced the hand of Avantor, as the life sciences company raised price talk on the riskiest part of the bond deal to 8.75%-9%.

That was roughly 150bp above the low-to-mid 7% figure Avantor had hoped for on its US$2.25bn senior unsecured eight-year note.

Talk on the US$1.4bn senior secured seven-year was set at 5.75%-6%, up from low-to-mid 5%. A €500m seven-year is now being marketed at 4.75%-5% from low-to-mid 4%.

A PAINFUL DEBT

Private equity-led buyouts with high levels of debt can end up being disastrous for the companies concerned, most notably in the case of Toys R Us, which filed for bankruptcy on Monday.

Under the weight of a US$5bn debt pile stemming from its 2005 leveraged buyout, the largest US toy chain has struggled to compete against online rivals such as Amazon.

New Mountain Capital, founded about two decades ago by Goldman Sachs and Forstmann Little veteran Steven Klinsky, currently has some US$20bn of assets under management.

On its website, New Mountain says it emphasizes growth and business-building rather than excessive debt as the best path to high returns.

In its Avantor presentation, it said it has never had “write-offs, bankruptcies or business failures” on any of its private-equity investments.

The firm did not immediately respond to a request for comment.

But in a sign of the contortions often wrought in such mergers, Avantor - with US$673m of annual sales - is buying a company with nearly seven times that (US$4.6bn).

“It is basically David buying Goliath,” said one buyside source who has been closely following the deal. “You just have some question marks about execution.”

The US$3.65bn dollar portion of the trade - the second-largest junk bond of the year - is also coming to market at a time when investors are pushing back some on riskier deals.

While many junk-rated deals are sailing through the market - a market that has priced more than US$20bn in September so far - lower-rated offerings are sometimes encountering headwinds.

“There is insatiable appetite for middle-of-the-fairway, sleep-at-night credits,” said the source.

“For names that require more due diligence and credit work, it is harder to figure out what the pricing is. It is a bifurcated market.”

Goldman Sachs is lead underwriter on Avantor’s bond offering, which is expected to price on Thursday.

Barclays, JP Morgan and Jefferies are also involved in the financing, which includes a US$3bn-equivalent term loan. (Reporting by Davide Scigliuzzo; Addional reporting by Mike Gambale; Editing by Marc Carnegie)

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