February 21, 2019 / 9:17 PM / 8 months ago

US corporates tap term loans as they look to avert downgrades

NEW YORK, Feb 21 (LPC) - US high-grade companies including Fiserv and Keurig Dr Pepper have increasingly turned to term loans, which are cheaper to issue and easier to prepay than longer-term bonds, as they prioritize debt reduction to avert credit rating downgrades.

Heavy long-term debt loads incurred in large mergers and acquisitions (M&A), and in some cases slower than expected repayment of that acquisition debt, has spurred a wave of downgrades to the lowest investment grade rungs or even to junk status.

Looking to prevent that, new borrowers are refinancing existing term loans with smaller new loans, while others are quickly applying excess cash flow to deleveraging, looking to show they can cut back on the debt loads incurred in costly M&A.

Awash in funds to invest, many banks are clamoring to provide these loans, though they can be more expensive for lenders because they have to hold added capital against them.

Investment grade term loan issuance has shot out of the gate , with almost US$18bn so far this year, after a record US$140bn last year, according to LPC.

“You’ve got asset-hungry banks that are willing to put term debt out there, and that has not wavered one iota even with the capital markets volatility in the fourth quarter” of last year, said Steve Woods, head of corporate banking at Citizens Bank. “The pro rata market has been very strong and I expect continued strong M&A activity as we get into 2019.”

Technology provider Fiserv jumped in this month with plans for a US$5bn term loan, which along with US$12bn of notes will replace a temporary bridge loan supporting its US$22bn acquisition of payments processor First Data.

The companies, in a January investor presentation, said “significant free cash flow generation should allow rapid debt reduction over 24 months,” allowing Fiserv to maintain investment grade ratings of Baa2 by Moody’s Investors Service and BBB by S&P. These ratings are one notch above the lowest investment grade credit rankings.

Last year there were 19 fallen angels – companies that saw their ratings sink to junk status from investment grade quality – up from 12 the prior year, but well below 63 in 2016, Moody’s said in a report.

“Fiserv publicly disclosed that they have in the range of US$3.5bn in free cash flow projected, and plan to use that to prepay that term loan debt,” said Woods. “We have seen a lot of that, and I think we will continue to see a lot of very healthy companies take their excess cash flow and repay or prepay their debt at banks.”

PLEDGES EYED

The ratings agencies did affirm Fiserv’s rankings, with stable outlooks, based largely on robust cash flow generation and pledged debt repayment.

“The stable outlook reflects our expectation that following the close of the acquisition of First Data, Fiserv will prioritize reducing leverage back to historical levels while tempering share repurchase and M&A spending,” Moody’s said in a report.

S&P said Fiserv’s leverage will initially grow to 3.9 times Ebitda from 2.5 times at the end of last September with the refinancing of about US$17bn of First Data debt, but is estimated to drop to about or below 3.0 times within two years of the deal’s close.

In other February examples of reduced term debt exposure, US beverage company Keurig Dr Pepper agreed to a US$2bn term loan refinancing a larger US$2.7bn term loan entered a year ago as part of the Dr Pepper Snapple Group tie up with Keurig Green Mountain.

American Tower Corp, an independent owner and operator of wireless and broadcast communications real estate, signed a new US$1.3bn term loan replacing a prior US$1.5bn facility entered last March.

“Most of the deals have been oversubscribed, and for high-grade loans the demand has been there with deals clearing well,” a senior banker said.

BRISTOL-MYERS

Term loans last year made up 32.2% of a record US$235bn of US investment grade acquisition loans, the highest share since the financial crisis and far above 20.9% in 2017.

Bristol-Myers Squibb kicked off this year’s rush in January, with US$8bn of term loans to reduce a US$33.5bn bridge loan put in place for its US$74bn purchase of Celgene Corp, the biggest ever pharmaceutical merger.

The healthcare juggernaut said it was committed to maintaining strong investment grade credit ratings.

“Bristol-Myers was pushing banks away,” said another senior banker. “There’s definitely a deep bid for investment grade funded loans as long as a company is respected, performing and ratings are stable.”

The term debt was issued in three tiers: US$1bn of 364-day, US$4bn of 3-year and US$3bn of 5-year floating-rate loans. The maturity mix was meant to signal a focus on debt repayment, bankers said.

“The motivation for these multi-tiered loans, with a significant portion having short-dated tenors, is to demonstrate the intention to reduce exposure and delever to get back to where the company was before the acquisition,” said a third senior banker. (Reporting by Lynn Adler Editing by Michelle Sierra)

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