LBO Firms Save $425 Million Cutting Rates in Loan Renaissance
Blackstone Group LP (BX), Carlyle Group and other buyout firms have already reaped a $425 million windfall this year after companies they own refinanced debt in the biggest loan market rally since the 2008 financial crisis.
The annual interest savings come from private equity-backed companies getting better terms on $25 billion of loans during the first quarter, according to data compiled by Bloomberg. Blackstone’s SeaWorld Parks & Entertainment and Carlyle’s NBTY Inc. each lowered payments to lenders by about 32 percent.
Investor demand for loans is surging as the Federal Reserve, which begins a two-day meeting today, signals no urgency to raise its target interest rate for overnight loans between banks from a record low range of zero to 0.25 percent. That’s allowing buyout firms to cut the debt costs of companies they own and fueling speculation for a comeback of large leveraged buyouts.
“The debt markets have been so kind and forgiving,” said Josh Lerner, a professor of investment banking at Harvard Business School in Boston. “Massive” intervention in financial markets by the Fed has helped drive the recovery in bonds and loans faster than anyone anticipated, he said.
Speculative-grade, or junk-rated, companies raised $163.5 billion of leveraged loans in the first quarter, the most since the last three months of 2007, Bloomberg data show. Such debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.
Buyout firms are again getting cheap credit two and a half years after Lehman Brothers Holdings Inc.’s collapse caused lending to freeze and borrowing costs to jump. The three-month London interbank offered rate, which banks charge each other, is currently at 0.27 percent. It peaked during the buyout boom at 5.52 percent in July 2006.
“Libor is so low, the cost of debt is at or below where it was at the peak of the market,” Vikrant Sawhney, a senior managing director at Blackstone, said in a telephone interview.
Leveraged buyout firms raise money from investors such as pension funds and endowments and use the cash to buy companies. They finance their deals with about two-thirds debt, aiming to profit by selling the business at a later date or taking it public.
While the viability of the industry’s biggest deals was in question as the credit crisis deepened, the value of private equity firms’ holdings has risen in the recovering economy.
Blackstone’s private equity portfolio increased in value by 29 percent last year, thanks to improving cash flows and “healing” markets, Chairman and Chief Executive Officer Stephen Schwarzman said in an earnings call in February. TPG Capital founder David Bonderman said last month it’s now possible to do a $10 billion to $15 billion LBO.
Private equity-owned firms raised $14.3 billion of loans in the first quarter to help pay themselves dividends and repurchase shares, more than double the $6.4 billion issued in the first quarter a year earlier, according to S&P Leveraged Commentary & Data. They raised $30.5 billion in loans for that purpose in all of 2010, up from $440 million in 2009.
Lenders have balked at some refinancing efforts as geopolitical unrest in North Africa and Middle East sent oil prices above $100 a barrel for the first time since September 30 2008, threatening the economic recovery.
A government report this week may show that the U.S. economy’s growth rate likely slowed to 1.9 percent in the first quarter from 3.1 percent in the final three months of 2010, according to the median of 72 estimates in a Bloomberg survey.
In mid-March, Toys “R” Us Inc., the Wayne, New Jersey- based toy retailer bought by KKR & Co., Bain Capital LLC and Vornado Realty Trust in 2005, canceled an attempt to refinance a $700 million term loan and raise $400 million of additional debt, according to Bloomberg data.
The company hoped to pay 3 percentage points to 3.25 percentage points more than Libor, with a 1.25 percent to 1.5 percent minimum, two people briefed on the matter said before the deal was pulled. It currently pays interest on the $700 million loan at 4.5 percentage points more than Libor, with a 1.5 percent floor, Bloomberg data show.
“The tragic and calamitous events around the world” are giving lenders an opportunity to push back, said Eric Goodison, a New York-based partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. “It’s more of a temporary blip.”
Interest rate margins on first-lien institutional loans rated BB/BB- averaged 3.05 percent in March, down from last year’s peak of 4.17 percent in June, according to S&P LCD. Margins on loans rated B+/B dropped to about 4.3 percent in March, from the high in July of 5.48 percent.
The drop in the rates on riskier loans represents $11.8 million in annual interest savings on every $1 billion borrowed.
The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks prices in the secondary market, closed yesterday at 95.91 cents on the dollar, up 62 percent from a low of 59.2 cents in December 2008, and less than 1 percent below this year’s high of 96.48 cents on Feb. 14.
Investors poured $13.8 billion into bank loan funds last quarter, according to an April 1 report from JPMorgan Chase & Co. That compares with $17.9 billion for all of last year.
Fed Chairman Ben S. Bernanke has sought to spur growth and lending by keeping rates near zero since December 2008.
Following Lehman’s bankruptcy, the Fed’s quantitative easing program pumped $1.7 trillion of liquidity into the market by purchasing Treasuries and mortgage-related assets tied to the government, aiming to push investors into riskier corporate credit. The Fed is buying a further $600 billion of Treasuries through June.
Blackstone’s SeaWorld, rated BB- by S&P, cut annual interest expense by about 32 percent, or $19 million, when it refinanced a $1.05 billion term loan, Bloomberg data show.
SeaWorld replaced the debt with a $900 million term loan B that pays lenders 3 percentage points more than Libor, with a 1 percent floor. Under the refinancing, it also obtained a $150 million term loan A that charges 2.75 percentage points more than Libor, with no minimum on the lending benchmark.
A term loan A is sold mainly to banks, while a term loan B is sold mainly to non-bank lenders such as hedge funds, mutual funds and collateralized loan obligations.
SeaWorld’s old term loan, which was signed in December 2009 to fund its $2.3 billion buyout by Blackstone, paid 3.5 percent more than Libor, with a 2.25 percent floor, Bloomberg data show. The savings from the refinancing reflects the $1.04 billion that S&P said was outstanding under the senior credit as of Dec. 31.
“A reduction in the cost of borrowings or in total borrowings is a good thing for our investors and their returns,” Blackstone’s Sawhney said in a Question & Answer briefing posted on the firm’s website in late February.
Refinancing gives SeaWorld, the second biggest theme park operator in the U.S. behind Walt Disney Co., even more financial and operating flexibility, he said in the phone interview. The Orlando, Florida-based company will increase capital spending to attract customers after a decline in attendance and earnings last year, according to a Feb. 8 S&P report.
Previous lack of spending was “a particular disadvantage to SeaWorld” given the many new attractions introduced by its rivals last year, S&P analyst Ariel Silverberg wrote in the report. She cited Universal Studios’ Wizarding World of Harry Potter, which had its grand opening in Orlando in June.
In February Carlyle’s Ronkonkoma, New York-based vitamin maker NBTY cut the rate on $1.75 billion of term loans to 3.25 percentage points more than Libor, with a 1 percent floor, Bloomberg data show.
A new $1.75 billion term loan B replaced a $1.5 billion term loan B that charged a margin of 4.5 percentage points, and a $250 million term loan A that paid lenders a spread of 4.25 percentage points.
NBTY, which previously had a 1.75 percent Libor floor on both loans, will save $34 million a year, Harvey Kamil, president and chief financial officer, said in a March 18 earnings call.
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