Merger Mania Meets Junk Unease With $56 Billion of LoansChristine Idzelis
Dealmakers planning to borrow about $56 billion to finance the biggest spree of acquisitions since 2007 are starting to get pushback as investors sour on junk debt.
Cerberus Capital Management LP-controlled Albertsons boosted the interest rate it will pay on about $4.6 billion of loans by as much as 0.75 percentage point for its purchase of grocer Safeway Inc., among the biggest deals this year where funding costs have risen. Apollo Global Management LLC did the same on $620 million of debt to back its takeover of the television programmer Endemol, data compiled by Bloomberg show.
As speculative-grade loans suffer the first monthly loss in a year, debt investors lulled by almost six years of near-zero interest rates by the Federal Reserve are starting to demand better terms. The timing can hardly be worse for junk-rated borrowers that need to finance purchases in what stands to be the busiest year for deals since before the credit crisis.
“The market has gotten a little sloppy,” said Jonathan Insull, a New York-based money manager at Crescent Capital Group LP, said in a telephone interview. “Things are going to have to price at the wide end.”
Albertsons increased the proposed rates on two term loans to fund its $9.2 billion takeover of Safeway. For the $3.04 billion portion, it’s now offering 4.25 percentage points to 4.5 percentage points more than lending benchmarks, from 3.75 percentage points when it started marketing the debt on July 29, data compiled by Bloomberg show.
Peter Duda, a spokesman for New York-based Cerberus at public relations firm Weber Shandwick, declined to comment on the funding. Christine Wilcox, a spokeswoman for Boise, Idaho-based Albertsons, didn’t immediately return a telephone call seeking comment.
“It’s a big deal, a lot of financing has to be soaked up by the market,” John Fraser, the managing partner at 3i Group Plc’s U.S. debt business, said in a telephone interview.
Managers of U.S. loan funds are struggling with redemptions following record net deposits of $62.9 billion last year as investors sought to protect themselves against a rise in interest rates, according to Lipper. Investors have pulled $8.3 billion in 2014 since April as a rate rise never materialized, leaving net outflows at $443 million.
The redemptions came as junk-rated corporate loans lost 0.25 percent in July, the first loss in 11 months, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index.
Interest-rate margins for new loans sold to institutional investors have also risen, with the average rate climbing to 4.03 percentage points above lending benchmarks last month, from 3.92 percentage points in June, according to S&P Capital IQ Leveraged Commentary & Data.
“We are seeing more deals struggle at initial new-issue pricing,” Fraser said. “An increasing number are offering wider spreads or larger discounts to lenders.”
Endemol, the Dutch television producer being purchased by Apollo in a debt restructuring, increased the discount on its loans. The company offered investors in a $610 million portion a price of 97 cents on the dollar, versus 98 cents previously, data compiled by Bloomberg show.
Such discounts reduce proceeds for the borrower while increasing the yield to investors, prompting Endemol to increase the loan to $620 million to cover the reduction, Bloomberg data show.
The company also lifted the interest margin on the debt by a half-percentage point to 5.75 percentage points, data compiled by Bloomberg show. Matthew Hiltzik, a spokesman for Apollo who works for Hiltzik Strategies in New York, declined to comment on the acquisition financing.
The market for bank-debt financing is also feeling the impact of high-yield bond fund managers grappling with redemptions, according to Insull, whose firm oversees $14 billion of speculative-grade debt. They are being forced to sell off their holdings, which include leveraged loans, he said.
U.S. junk bond funds have seen $5.6 billion of redemptions since mid-July resulting in net outflows this year of $445 million, according to Lipper.
Yields on the debt have risen to about 6 percent, from 5.1 percent at the end of June, according to the Bloomberg USD High Yield Corporate Bond Index.
Blackboard Inc., the education-software maker owned by Providence Equity Partners LLC, last week scrapped its effort to lower borrowing costs on a term loan, Bloomberg data show.
“The shift in mix of loan deals toward M&A from refinancing has been pretty dramatic,” Insull said.
A total $908 billion of mergers and acquisitions have been announced by U.S. companies this year, an increase of 89 percent from 2013, according to data compiled by Bloomberg.
There are $56 billion of term loans and revolvers backing acquisitions under mandate to be sold or currently being marketed to investors, the data show.
Some of the loan fund redemptions have been mitigated by demand from new collateralized obligations, according to an Aug. 1 report from Barclays Plc. About $75 billion of CLOs have been issued this year in the U.S., on pace to surpass a record $101 billion pooled in 2007, according to Wells Fargo & Co.
“It’s not a market meltdown by any means,” said 3i Group’s Fraser, who is based in New York. “But deals have had to back up a bit.”