Photographer: Ahmad Al-Rubaye/AFP/Getty Images

How KKR Beat Citi in Loan Deal for Perelman’s Humvee Maker

  • Wins mandate for transaction originally marketed by Citigroup
  • KKR bought big chunk of debt for credit unit, sold rest

When Citigroup Inc. started hawking $300 million of loans for the maker of the Humvee, investors were willing to buy almost any deal for sale.

Almost. Even after three weeks of talks, investors looking under the hood of AM General LLC weren’t convinced they wanted to lend to a company heavily reliant on one product, the famed military combat vehicle.

As the Citigroup deal foundered, AM General’s owner -- a firm controlled by billionaire Ron Perelman -- decided to switch tack in November, abandoning one of the biggest underwriters in the loan market for a much smaller rival: the debt sales team of KKR & Co.

The deal highlights how power is shifting in the market for junk-rated loans as non-banks take a bite out of Wall Street’s business. With trillions of dollars in capital hunting for fat yields in a low interest world, firms including KKR, Golub Capital Partners and Ares Capital Corp. can lend companies their own money to anchor a deal, and sell the rest of the debt to other investors. Banks, under pressure from regulators to take less risk with their own balance sheets, are struggling to compete.

‘New Marketplace’

“This is the new marketplace we are in,” said Mike Terwilliger, a money manager at the asset-management firm Resource America Inc. “Large investment firms who can keep capital on their balance sheet are able to gain a toehold in the syndication process. This model ends up being a real potential winner.”

What gave KKR the upper hand with AM General was its decision to buy the biggest chunk of the borrowing through its private credit fund, leaving it to find buyers for a smaller portion of the deal. AM General ended up paying essentially the same as it would have under Citigroup’s deal.

KKR sold the loans through its capital markets team. The unit started out by taking on small roles in offerings by firms owned by the parent company, and now plays bigger roles in external deals. The group has led more than 40 deals in the U.S. and Europe since the start of 2012. It has also syndicated chunks of more than 10 transactions for companies not owned by its private-equity parent in the past few years using its credit arm as an anchor investor.

Being able to both lend and distribute means non-banks can make money twice from deals. It especially comes in handy for transactions that the broader investor market is reluctant to embrace, such as the MacAndrews & Forbes-owned AM General.

Representatives for Citigroup, KKR and MacAndrews & Forbes declined to comment.

Election Rush

AM General was one of many that rushed to tap investors in the weeks before Nov. 8 to avoid getting caught up in any post-election market tailspin. In October, Citigroup started marketing a $300 million term loan that would pay at least 9.5 percentage points of interest and would be offered at 98 cents on the dollar. That’s almost twice the average yield on leveraged loans. Selling at below par was an early indication that the deal might be tough to sell.

The company needed the deal to address existing loans on its balance sheet, previously arranged by Citigroup, that were coming due in March 2018.

By mid-November, even as markets were basking in Donald Trump’s victory and leveraged loans were on track to turn in their best year since 2011, investors shunned the AM General deal. The company’s heavy reliance on a single product and dependence on government spending was a major concern, according to one investor who passed on the deal.

AM General’s revenue roughly halved in the years after 2012 once the U.S. Army stopped buying its vehicles for its own use, said Bruce Herskovics, an analyst at Moody’s Investors Service. The U.S. Army has since asked rival Oshkosh Corp. to supply a truck to replace the Humvee through 2040. But AM General has a brighter outlook now in part because it is selling more vehicles to foreign armed forces, he said.

Plan B

When investors balked at buying AM General’s loans, the company activated Plan B and handed the mandate over to KKR. The firm had already explored a potential deal with the South Bend, Indiana-based company earlier in the year, said a person with knowledge of the matter who asked not to be identified as the matter is private.

The new plan involved breaking up the deal into two portions -- a $205 million first-lien and a $70 million junior loan. The first-lien loan was priced at better terms than where Citigroup had marketed the deal. The second lien, which was eventually sold to about 10 different investors, was more expensive.

“Being able to play with their own money and actually buy into the deals is a significant advantage these companies have over banks,” said Karen Shaw Petrou, co-founder of Washington-based Federal Financial Analytics.

That deal was priced on Dec. 28 and helped the company win a ratings boost from Moody’s Investors Service, which lifted it to B3 from Caa1, a level that indicated very high credit risk and poor standing.

AM General was one of the largest U.S. transactions led solely by KKR’s capital-markets division for a company not owned by its private equity business and using its credit arm as an anchor.

“At the beginning of last year when the leveraged loan market really collapsed, these non-bank lenders picked up the slack in a big way,” said Jeff Nassof, director at Freeman Consulting Services, a firm that caters to investment banks. “The market has recovered but in the long term there’s a steady trend away from the big banks.”

Before it's here, it's on the Bloomberg Terminal.