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Risk-on mood prevails even as Presidio falters
January 30, 2015 / 4:48 PM / in 3 years

Risk-on mood prevails even as Presidio falters

NEW YORK, Jan 30 (IFR) - Investor pushback on a bond backing private equity group Apollo’s leveraged buyout of Presidio Inc has raised questions again about aggressive underwriting practices in the junk bond market, but it may still not be a big enough catalyst for banks to curb their risk appetite.

Investors have become increasingly picky in the US high-yield market over the past few months, and Presidio is the latest victim. Its US$400m bond was postponed this week, and underwriters are now scrambling to find a clearing level for the debt amid market talk that they will likely bear losses.

But in the same week, Altice attracted almost US$60bn in demand for its acquisition finance bond and other smaller leveraged buyouts also saw a decent execution - reassuring market participants that the mood is actually pretty good overall.

Last week, a US$225m bond backing private equity firm Golden Gate Capital’s acquisition of US-based Angus Chemical Company, for example, was oversubscribed by multiple times and priced at the tight end of 8.75%-9% talk - even though its leverage, at around 7x, was even higher than Presidio‘s.

The mixed performance suggests Presidio’s woes are more credit specific, and in itself therefore, will unlikely dent bankers’ risk appetite for underwriting buyouts.

“While it may start to weigh on banks’ appetite for risk, there hasn’t been a huge sign of that happening yet,” one leveraged finance banker told IFR.

There are also other reasons for bankers to be fairly upbeat.

US high-yield volumes are roughly on par with year ago figures at just over US$21bn, according to IFR data, and bankers are now looking ahead to a number of large M&A financings being lined up for the high-yield bond market in the coming weeks - all of which should be more telling of the strength of demand.

A US$2bn bond for PetSmart, a EUR700m-equivalent bond for Onex Corp’s acquisition of Swiss packaging group SIG Combibloc, and a sizeable issue for the US$3.6bn acquisition of Riverbed are all on the horizon.

Other bankers also highlighted well-received jumbo acquisition related deals for the likes of Calpine Corp this week as a promising sign for the asset class that saw returns abruptly slide last year on the back of the energy sector rout.

High-yield returns so far this year are running at 0.64% versus 2.45% for the whole of 2014, according to Barclays data. Back in 2013, they were well over 7%.


The latest flow data also bodes well with Lipper reporting a US$2.765bn inflow into high-yield funds for the week ending January 28 - the fifth largest on record.

Still, other casualties like the Presidio transaction cannot be ruled out. It may the first major buyout deal to face pushback in 2015, but several others struggled to get done last year as banks got caught in the crossfire of an unforeseen change in market sentiment.

Those that struggled included software firm Tibco and Scientific Games - both highly leveraged at 6.7x and 11x respectively.

The banks that underwrote the Presidio transaction - Barclays, Credit Suisse, Citi, Goldman Sachs and RBC - are now trying to revive the bond deal.

Left lead Barclays is talking to a select number of investors to gauge interest in a newly structured two-part bond that will be split between a senior and junior tranche, according to market sources. The original bond, US$400m in size, consisted of just one eight-year non-call three senior unsecured tranche and was pulled on the back of lacklustre demand at 10.75%-11% price talk.

One investor told IFR he would need to be paid at least 13%-14% to buy the bond - levels that market participants said would likely mean underwriters break even at best, but most likely suffer losses.

The new offering is also expected to have stricter covenants to protect investors.

According to Covenant Review, the debt and liens covenants in the old deal had “serious flaws that may greatly increase secured debt capacity.” That would allow owner Apollo to pile on an unlimited amount of secured debt, and potentially leave unsecured bondholders with less recovery in a restructuring.

That, some investors said, was a particular worry as unsecured bondholders stand to make losses on Caesars Entertainment - another Apollo owned firm.

Under the Caesars restructuring support agreement (RSA), second lien holders would get 30 cents on the dollar if they sign up for the restructuring, and less if they don‘t.

“I don’t know what the Apollo premium was but for a deal like this, the market was saying we need to get over twice the average high-yield yield,” one investor said.

“That speaks to concerns about the credit, not just Apollo, but they are all connected.” (Reporting by Mariana Santibanez; Additional reporting by Lisa Lee; Editing by Shankar Ramkarishnan and Natalie Harrison)

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