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US Leveraged Finance Issuance Soars to $27B; Most Since November

U.S. leveraged finance issuance shot to $26.9 billion last week as loan investors continue to throw money at larger deals in anticipation of a dwindling slate of new credits down the road, and as high yield bond issuers worked to wrap offerings ahead of Memorial Day.

US leveraged finance issuance

The weekly total is the most for the combined capital markets segments since the $31.6 billion in early November, according to LCD, an offering of S&P Global Market Intelligence.

In all there was $15.1 billion of new leveraged loans last week, following up on the $16.8 billion the previous week.

“You don’t have to look far to see what’s driving the market forward,” said LCD’s Chris Donnelly, in his weekly market analysis. “The visible institutional loan calendar fell last week … and the larger deals now in market will soon cycle off the calendar.”

Loans of note last week include Dell’s $5 billion credit backing its acquisition of EMC, $2.1 billion of new debt supporting a refinancing by supermarket chain Albertsons, and $1.5 billion of new institutional debt backing a recap by restaurant chain Yum! Brands.

High yield bond issuance last week totaled a hefty $11.8 billion, according to LCD.

“Firm market conditions allowed for a seasonal rush to market ahead of the long weekend,” wrote LCD’s Matthew Fuller. “Even with the $525 million offering from airline wi-fi provider Gogo put on ice … the 17 credits over 20 tranches is the largest one-week sum this year.”

Gogo scrapped its issue – which had been completed, though not settled – after the company “received a proposal from a major airline customer under which Gogo would provide connectivity service on a meaningful portion of the airline’s domestic fleet.”

Also of note in high yield last week, Albertsons wrapped a $1.25 billion offering, alongside its loan, and private equity shop Hellman & Friedman completed a $1.1 billion deal backing the LBO of management consulting services co. Multiplan. – Tim Cross

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Investors Withdraw $562M from US High Yield Bond Funds

high yield fund flows

U.S. high-yield funds recorded an outflow of $562 million in the week ended May 25, according to Lipper. The outflow dents last week’s inflow of $1.1 billion and represents the third outflow over the past four weeks for a net withdrawal of $3.1 billion over that span.

Take note, however, that this week was again essentially all ETF-influenced, with ETF outflows at 91% of the sum. Last week’s big inflow of $1.1 billion was 82% ETF-related, and two weeks ago the breakdown was $1.8 billion of ETF outflows against inflows of $31 million to mutual funds.

Whatever that might say about fast money, hedging strategies, and other market-timing efforts, this week’s outflow drags the trailing four-week average deeper into the red, at negative $785 million, from negative $570 million last week.

The year-to-date total infusion contracts to $6.5 billion, with 25% ETF-related. Last year at this point, after 21 weeks, the $8.4 billion net inflow was similarly 34% ETF-related.

The change due to market conditions this past week was positive $863 million, which is essentially 0.5% against total assets of $190.5 billion at the end of the observation period. ETFs account for about 20% of the total, at $38.5 billion. — Matt Fuller

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Gogo Unwinds $525M High Yield Deal After Striking Airline Deal

Airplane wi-fi provider Gogo today announced that it will be unwinding the sale of a $525 million issue of 12% secured notes due 2022 from earlier this week ahead of settlement today because it “received a proposal from a major airline customer under which Gogo would provide connectivity service on a meaningful portion of the airline’s domestic fleet,” according to a company statement.

All trades will have to be unwound for the paper, including 101.5 and 101.75 most recently and that context generally all week, from quotes of 101/101.5 on the break late on Monday, versus par issuance. As reported, joint bookrunners on the B–/B2 transaction were Morgan Stanley, J.P. Morgan, and Bank of America, with co-managers Evercore and UBS.

This is a rare pre-settlement move by an issuer not seen since Legends Gaming backed out of its placement in late 2007 andCablevision iced an offering after cancelling a dividend back in 2005. Of course, there were unwinds more recently, but related to failed M&A, like Charter and Dish in recent years.

Proceeds from the 144A-for-life deal from Gogo were to be used to pay down all of the company’s term debt, which was roughly $288 million at the end of the first quarter, and additional proceeds will be used to support working capital and for general corporate purposes, including the roll-out of next-generation product and technology.

Details of the airline-deal arrangement remain subject to negotiation, but the bonds will nonetheless not close for settlement today, the company said.

Gogo is Nasdaq-listed, but recall that TCP Capital expanded its investment in the company a year ago through the addition of a $15 million senior secured loan in the first quarter. See “TCP Capital adds more first-lien debt to Gogo in Q1,” LCD News, May 26, 2015. TCP Capital is a BDC that invests in middle market companies.

Chicago-based Gogo provides communications services to commercial and business aviation through strategic alliances with satellite operators, and it’s currently carrying an approximate $820 million market capitalization. Trailing 12-month net revenues of around $527 million boiled down to roughly $49 million in EBITDA, according to S&P Global Market Intelligence. — Matt Fuller

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TransDigm Unveils $950M Triple-C High Yield Bond Deal Backing Data Service Corp. Buy

TransDigm is out to market with a $950 million, 10-year (non-call five) offering of subordinated notes. Morgan Stanley, Credit Suisse, Citi, UBS, Barclays, Credit Agricole CIB, Goldman Sachs, HSBC, and RBC are joint bookrunners. An investor conference call will be held at 10:30 a.m. EDT, for pricing later today.

Proceeds, along with those from a $950 million cov-lite TLF, will be used to fund the acquisition of Data Device Corporation (DCC), and for general corporate purposes, including potential acquisitions and/or a dividend.

For reference, the seven-year cov-lite loan sees Credit Suisse take the lead of the arranger group that contains the same banks as on the bonds. The term loans — which are split $450 million delayed draw, and $500 million funded — are guided at L+300–325, with a 75 bps floor and 99 issue price. A lender call will take place at noon EDT today.

TransDigm announced yesterday that it is to buy DCC for a total purchase price of $1 billion. It said it expected to finance the acquisition through a combination of cash on hand, existing availability under its revolving credit facility, and new debt. TransDigm also says DDC revenues are anticipated to be more than $200 million for the fiscal year ending December 2016, with roughly 75% coming from the defense market and the remainder primarily from the commercial transport market.

The new notes will extend the company’s cash curve beyond its 6.5% notes due both 2024 and 2025, which closed last night respectively at 101.875 yielding 6.07%, and 101.25 yielding 6.2%, according to S&P Global Market Intelligence. The 2025 bonds mark its last visit to the bond market, in May last year.

Banks are guiding accounts to expected ratings of CCC+/B3.

TransDigm supplies engineered components for commercial and military aircraft. The company trades on the New York Stock Exchange under the ticker TDG, with an approximate market capitalization of $13.4 billion. — Luke Millar

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Mortgage co. PennyMac Scraps $300M High Yield Bond Issue

PennyMac Financial Services yesterday announced that it decided to postpone its senior notes offering on account of “current market conditions,” according to a company statement. This is a third sidelined deal so far this year, although one,LeasePlan, successfully re-launched to market and got placed.

PennyMac was planning a $300 million five-year (non-call life) senior notes offering via bookrunners J.P. Morgan, Barclays, Bank of America, Credit Suisse, and Goldman Sachs. Marketing wrapped last week, and it had been held over the weekend. Issuance was to be under Rule 144A for life with B+/B2 ratings, and proceeds were to repay approximately $50 million of revolver drawings, and to support general corporate purposes, according to a company filing.

PennyMac Financial Services is a mortgage specialist operating in three segments: loan production, loan services, and investment management. It trades on the NYSE under PFSI and has a market cap of roughly $300 million. Trailing-12-month net revenues of approximately $921 million turned out roughly $339 million of EBT excluding unusual items, according to S&P Global Market Intelligence. — Luke Millar/Matt Fuller

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Teck Resources Seeks $1B via 1st Bond Deal as Fallen Angel

Mining giant Teck Resources is looking to place $1 billion in the high-yield bond market via joint bookrunners J.P. Morgan, Bank of America Merrill Lynch, and Goldman Sachs, with nine additional joint bookrunners. The 144a-for-life notes are expected to have five-year (non-call two) and eight-year (non-call three) structures, with first call premiums of par plus 75% coupon apiece, according to sources.

The debt began roadshowing today, with pricing expected Thursday, right before the market closes for Memorial Day, the sources added. Proceeds will be used to fund the company’s tender offers for Teck’s four most pressing maturities: the 3.15% notes due 2017, the 3.85% notes due 2017, the 2.5% notes due 2018, and the 3% notes due 2019.

The additional joint bookrunners are Barclays, BMO, CIBC, Citi, Deutsche Bank, Morgan Stanley, RBC, Scotia, and TD, the sources added.

Participation is tied to a four-tier priority scale that fully covers the top three issues, with spillover up to the $1 billion cap addressing the 3% series, according to a company statement. All four are non-call bullet notes, so tender offer consideration generally offers small premiums to par.

The company’s $750 million issue of 3.75% notes due 2023 was trading at 72, offering about 9.5%, ahead of the new-issue launch, but then at 69.5, yielding about 10.14% thereafter, trade data show. Ratings are currently B+/Caa1/B+.

Recall that Vancouver, Canada–based Teck Resources brought $6.9 billion of supply in face value, or $3.9 billion in market value, to the high-yield market in November after S&P Global’s fallen angel downgrade of the credit to BB, from BBB–.

More recently, the company was downgraded by Fitch Ratings when the agency moved its issuer and debt ratings to BB+, from B+, citing low prices in the metal and metallurgical coal sectors and expected high capital spending for the company’s Fort Hills project. Teck Resources holds a 20% interest in the Fort Hills Energy Limited Partnership, co-owner of the Fort Hills oil sands project.

Similarly, in February, Moody’s bumped the issuer’s ratings down to B3, from Ba3, noting “low commodity prices that could push leverage over 7x by the end of 2017, together with potential refinancing challenges after 2018.” This followed its September downgrade to fallen angel status—Ba1 from Baa3—at which time the issuer’s debt traded down slightly in the secondary market (see “Teck Resources bonds trade lower following ratings downgrade to junk” LCD News, Sept. 16, 2015.)

Teck Resources explores, develops, and produces natural resources in the Americas, the Asia Pacific, Europe, and Africa. Its principal products include copper, including copper concentrates and cathode copper; steelmaking coal; and refined zinc and zinc concentrates. For the first quarter, Teck reported $1.7 billion in revenue and EBITDA of $517 million, with $7.6 billion in net debt. — Jakema Lewis

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Gogo Prices $525M High Yield Bond Offering to Yield 12%

Airplane Wi-Fi provider Gogo this afternoon completed its debut offering with a $25 million upsizing, to $525 million, and with terms at the wide end of guidance, according to sources. As reported, joint bookrunners on the B–/B2 transaction were Morgan Stanley, J.P. Morgan, and Bank of America, with co-managers Evercore and UBS. Proceeds from the 144A-for-life deal will be used to pay down all of the company’s term debt, which was roughly $288 million at the end of the first quarter, and additional proceeds will be used to support working capital and for general corporate purposes, including the roll-out of next-generation product and technology. Terms:

Issuer Gogo Intermediate Holdings
Ratings B–/B2
Amount $525 million
Issue secured notes (144A-life)
Coupon 12%
Price 100
Yield 12%
Spread T+1,047
Maturity June 1, 2022
Call nc3 @ par+50% coupon
Trade May 23, 2016
Settle May 26, 2016 (T+3)
Bookrunners MS/JPM/BAML
Co-managers Evercore, UBS
Price talk 11.75-12%
Notes upsized by $25 million; first call par+50% coupon.

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Senate hearing opens discussion on BDC regulation changes

A hearing by the Senate banking committee showed bi-partisan agreement for BDCs as a driver of growth for smaller U.S. companies, but exposed some rifts over whether financial companies should benefit from easier regulation.

BDCs are seeking to reform laws, including allowing more leverage of a 2:1 debt-to-equity ratio, up from the current 1:1 limit. They say the increase would be modest compared to existing levels for other lenders, which can reach 15:1 for banks, and the low-20x ratio for hedge funds.

A handful of BDCs are seeking to raise investment limits in financial companies. They argue that the current regulatory framework, dating from the 1980s when Congress created BDCs, fails to reflect the transformation of the U.S. economy, away from manufacturing.

BDCs stress that they are not seeking any government or taxpayer support.

They are also seeking to ease SEC filing requirements, a change that would streamline offering and registration rules, but not diminish investor protections.

Ares Management President Michael Arougheti told the committee members in a hearing on May 19 that although BDCs vary by scope, they largely agree that regulation is outdated and holding back the industry from more lending from a sector of the U.S. economy responsible for much job creation.

“While the BDC industry has been thriving, we are not capitalized well enough to meet the needs of middle market borrowers that we serve. We could grow more to meet these needs,” Arougheti said.

In response to criticism about expansion of investment to financial services companies, the issue of the 30% limit requires further discussion, Arougheti said.

The legislation under discussion is the result of lengthy bi-partisan collaboration and reflects concern about increased financial services investments, resulting in a prohibition on certain investments, including private equity funds, hedge funds and CLOs, Arougheti added.

“There are many financial services companies that have mandates that are consistent with the policy mandates of a BDC,” Arougheti added.

Senator Elizabeth Warren (D-MA) raised the issue of high management fees of BDCs even in the face of poor shareholder returns. Several BDCs have indeed moved to cut fees in order to better align interests of shareholders and BDC management companies.

She said that Ares’ management and incentive fees have soared, at over 35% annually over the past decade, outpacing shareholder returns of 5%, driving institutional investors away from the sector, and leaving behind vulnerable mom-and-pop retail investors. Arougheti countered by saying reinvestment of dividends needed to be taken into account when calculating returns, and said institutional investors account for 50–60% of shareholders.

Warren said raising the limit of financial services investment to 50%, from 30%, diverts money away from small businesses that need it, while BDCs still reap the tax break used to incentivize small business investment.

“A lot of BDCs focus on small business investments and fill a hole in the market. A lot of companies in Massachusetts and across the country get investment money from BDCs,” said Warren.

“If you really want to have more money to invest, why don’t you lower your high fees and offer better returns to your investors? Then you get more money, and you can go invest it in small businesses,” Warren said.

Brett Palmer, President of the Small Business Investor Alliance (SBIA), said the May 19 hearing, the first major legislative action on BDCs in the Senate, was a step toward a bill that could lead to a new law.

“There is broad agreement that BDCs are filling a critical gap in helping middle market and lower middle market companies grow. There is a road map for getting a BDC bill across the finish line, if not this year, then next,” Palmer said, stressing the goal was this year.

Technically, the hearing record is still open. The Senate banking subcommittee for securities and investment could return with further questions to any of the witnesses. Then, senators can decide what the next stop will be, ranging from no action to introduction of a bill.

Pat Toomey (R-PA) brought up the example of Pittsburgh Glass Works, a company that has benefited from a BDC against a backdrop that has seen banks pulling back from lending to smaller companies following the financial crisis, resulting in a declining number of small businesses from 2009 to 2014.

The windshield manufacturer, a portfolio company of Kohlberg & Co., received $410 million in financing, of which $181 million came from Franklin Square BDCs.

“Business development companies have stepped in to fill that void,” Toomey told the committee hearing. “For Pittsburgh Glass, it was the best financing option available to them.”

FS Investment Corp.’s investment portfolio showed a $68 million L+912 (1% floor) first-lien loan due 2021 as of March 31, an SEC filing showed.

Arougheti cited the example of OTG Management, a borrower of Ares Capital. OTG Management won a contract to build out and operate food and beverage concessions at JetBlue’s terminal at New York airport JFK, but was unable to borrow from traditional senior debt lenders or private equity firms due to its limited operating history.

Ares Capital’s investment in OTG Management included a $24.7 million L+725 first-lien loan due 2017 as of March 31, an SEC filing showed. — Abby Latour

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Albertsons Sets $1.25B High Yield Bond Offering to Refinance ABS/Safeway Debt

Albertsons Companies has announced a $1.25 billion offering of eight-year (non-call three) senior notes. Bank of America Merrill Lynch (left), Credit Suisse, Citi, Morgan Stanley, Goldman Sachs, Deutsche Bank, and Barclays are joint bookrunners. A roadshow will run today through Wednesday, for pricing thereafter.

Proceeds will be used to redeem in full the borrower’s ABS/Safeway notes, and to repay roughly $519 million of the outstanding ABS/Safeway TLB-2.

Note, the first call is at par plus 75% coupon.

The new bonds will sit behind the company’s 7.75% notes due 2026, which closed on Friday at 97, yielding 8.2%, according to S&P Global Market Intelligence.

Albertsons Companies was last seen in December 2015, allocating a $1.125 billion B-5 term loan. The seven-year covenant-lite term loan priced at L+450/99, with a 1% LIBOR floor. Proceeds refinanced term debt.

Albertsons operates as a food and drug retailer in the U.S. — Luke Millar

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Yum! Brands Preps $2.3B of Fallen Angel High Yield Bonds Backing Dividend/Recap

Yum! Brands earlier this week announced its intent to sell $2.3 billion of senior notes as part of its dividend recapitalization ahead of the separation of its businesses in China, according to a company statement. Management has not yet stepped forward with any transaction details, but recall that Goldman Sachs will hold a lender meeting on Monday to launch a coordinated $1.5 billion term loan B, with J.P. Morgan as left lead on the accompanying pro rata facilities, a $1 billion revolver and an $800 million term loan A, which are both rated BBB–, with a 1 recovery rating.

“The new debt is intended to fund the return of capital to shareholders, repay borrowings under the company’s existing revolving credit facility, pay associated transaction fees and expenses, and support general corporate purposes,” according to the statement.

yumS&P Global Ratings has already weighed in on the bond effort, assigning BB issue-level and 3L recovery ratings to the deal, indicating an expectation for the lower end of meaningful recovery (50–60%) in the event of default. At the same time, S&P lowered the fast-food chain’s legacy notes to B+, from BB, and revised the recovery rating to 6, indicating expectation for negligible recovery (0–10%) in the event of default, from 3 prior, due to a view that the new issuance will be structurally senior to the existing paper.

Existing bonds include the fallen angel issuer’s 3.875 notes due 2023, which are pegged on either side of 94, yielding about 4.85%, and the long-tenor 5.35% bonds due 2043, which are marked 80/82, offering about 5.875%, according to sources. The $325 million and $275 million issues, respectively, represent Yum!’s last visit to market, which was in late 2013 with BBB/Baa3 ratings and issuance just under par via a Citi-led syndicate.

Of course, the paper is now B+/B1 since the fallen angel downgrades, and recall that earlier this year after the downgrades, the debt was transitioned to high-yield indexes and portfolios alike. See “HY CDX 26 revision of constituents outlined ahead of March 28 roll,” LCD News, March 15, 2016.

As for the upcoming primary market efforts, Yum! has previously noted it would refinance a $2 billion unsecured term loan with a securitization facility, enter into a new credit facility, and issue high-yield notes as part of a plan to “optimize its capital structure.” The securitization of $2.3 billion covers Taco Bell’s U.S. royalties.

Yum explained that “a key aspect of the company’s strategy is to optimize its capital structure,” further explaining that it’s targeting a company-wide leverage goal of roughly 5x and returning $6.2 billion of capital to shareholders prior to the separation of its China business. And as the next step in this plan, subsidiaries that operate Yum’s KFC, Pizza Hut, and Taco Bell (excluding the Taco Bell subsidiaries included in the securitization facility) businesses would enter into a new senior secured credit facility and issue new high-yield notes, with its legacy publicly traded notes remaining in place as unsecured obligations. — Staff reports

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