Microsemi Corp. is leading U.S. companies this week in seeking $7.69 billion in leveraged loans as investors seek the steepest discounts to buy the debt since the third quarter of 2009.
Microsemi, a maker of microchips for the aerospace and defense industries, is proposing to sell an $800-million term piece to back an acquisition at 97 cents to 98 cents on the dollar, reducing proceeds for the company and increasing the yield for investors. DigitalGlobe Inc. is willing to sell a $500 million financing at a price as low as 97.5 cents.
Junk-rated borrowers are finding it more expensive to borrow in the loan market after prices of the debt are poised to drop for two consecutive months. New issue loan volume for the month through Sept. 28 is $15.1 billion, less than half of the $30.5 billion borrowed during the same period in 2010, according to Standard & Poor's Leveraged Commentary & Data.
“Since early August, the market's been focused on committed supply versus where the demand's coming from on the loan side,” Timothy Broadbent, head of leveraged-loan syndicate for the Americas at Barclays Capital, the investment banking unit of Barclays Plc, said in a telephone interview. “There's enough cash to take down the committed supply, it's just a question of price and whether it will all clear.”
The average original-issue discount needed to sell the loans is at 96.9 cents on the dollar as of yesterday, down from 98.7 cents last September, and the most since the third quarter of 2009's 96.7 cents, according to S&P LCD.
Go Daddy Loan
Go Daddy Group Inc. this week sold a $750 million term loan to support its leveraged buyout by KKR & CO., Silver Lake Partners and Technology Crossover Ventures after it increased the original-issue discount to 93 cents on the dollar from 96 cents initially proposed.
Barclays Plc, Deutsche Bank AG, Royal Bank of Canada, KKR and Goldman Sachs Group Inc. arranged the Scottsdale, Arizona- based company's loan with an interest rate of 5.75 percentage points more than the London interbank offered rate and a 1.25 percent floor on the lending benchmark, Bloomberg data show.
“Everybody would much rather move risk, even if that means losing a little money,” Broadbent said. “This is nowhere near as painful as the crisis days.” The average institutional original-issue discount during the fourth quarter of 2008 was 94.9 cents, according to S&P's LCD.
Education-software maker Blackboard Inc. sold a $780 million first-lien portion of a financing backing its buyout by Providence Equity Partners Inc. at 92 cents on the dollar, compared with 96.5 cents to 97 cents initially proposed. The debt pays six percentage points more than Libor with a 1.5 percent floor, Bloomberg data show. The Washington-based company still hasn't sold an accompanying $350 million second-lien slice.
'Flavor of the Month'
“The flavor of the month is keeping the spread but lowering the OID,” Chief Executive Officer Leonard Tannenbaum of Fifth Street Finance Corp., which has $1.1 billion of assets, said in a telephone interview. “The good thing about bringing the OID down is you don't get refinanced. If you're buying at 92, you're not going to get refinanced at 103 or 102 in a year.”
Investors pulled $117 million from funds that buy floating- rate bank debt for the week ended Sept. 21, down from outflows of $324 million the week ended Sept. 14, according to data from Cambridge, Massachusetts-based EPFR Global. Since August, floating-rate funds recorded $5.45 billion of outflows.
Loan Prices
The S&P/LSTA U.S. Leveraged Loan 100 index fell for the fifth time in six days, decreasing 0.10 cent to 89.07 cents on the dollar yesterday. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has declined from 89.84 on Sept. 21, which was the highest since Aug. 8. The index decreased to 87.47 cents on Aug. 26, the lowest level since December 2009.
Microsemi, based in Irvine, California, is proposing to pay interest on an $800 million term loan of 4.25 percentage points to 4.5 percentage points more than the London interbank offered rate and the lending benchmark will have a 1.25 percent floor, according to data compiled by Bloomberg. Microsemi may sell the debt due February 2018 at 97 cents to 98 cents on the dollar.
DigitalGlobe set interest at 4.25 percentage points to 4.5 percentage points more than Libor on its $500 million term loan. The debt has a 1.25 percent floor on the lending benchmark. Longmont, Colorado-based DigitalGlobe is proposing to sell the debt at 97.5 cents to 98 cents on the dollar, according to data compiled by Bloomberg. Morgan Stanley and JPMorgan Chase & Co. are arranging the transaction.
Flexera Deal
Business software management company Flexera Software Inc. is seeking $330 million in loans to finance its acquisition by Ontario Teachers' Pension Plan. The company may sell a $230 million first-lien piece at 96 cents to 97 cents on the dollar, compared with 98 cents initially proposed, according to data compiled by Bloomberg. Flexera may pay six percentage points to 6.25 percentage points more than Libor with a 1.25 percent floor.
Schaumburg, Illinois-based Flexera may sell a $100 million second-lien portion at 92 cents to 93 cents on the dollar, compared with 98 cents initially offered. The debt may pay 9.75 percentage points to 10 percentage points more than Libor, with a 1.25 percent minimum.
“There are a lot of middle market, smaller deals and they're getting priced pretty tight relative to the bigger deals,” said Tannenbaum, whose Fifth Street has about $400 million to deploy. “We see a very full pipeline going to the end of the year. It's going to be a really nice time for those with capital to put it to work.”
Bloomberg News
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