Remember a time when leveraged loan investors were flush with money? Before underwriters would be obliged to use all the flex language at their disposal to scrape LBO loan syndications across the line?
Summer has been painfully long for everyone, but the leveraged loan market experienced a particularly hard bump when landing back on earth.
Until early summer, the leveraged finance market was enjoying a remarkable year, seemingly immune to the bouts of turbulence seen in other asset classes. Syndications were heavily oversubscribed as underwriters became more and more bullish.
The LBO of UK payment processing business WorldPay was one of a slew of deals that triggered that momentum. Syndication of its £1.27bn of senior and mezzanine loans raised for Advent International and Bain Capitals buy-out of the business from RBS in September 2010 was oversubscribed and allowed underwriters to reverse flex the margins and tighten the original issue discount (OID).
Later, WorldPay became a beneficiary of the bullishness, returning to the market in May 2011 in a bid to reduce its loan margins. The lenders consented, with a potentially difficult yank-the-bank consent level of 85% easily attained.
New money challenge
The original LBO was celebrated at the time by market participants on and away from the deal as a yardstick of what the reformed market was capable of.
"WorldPay was a transaction that gave the market confidence that large deals could be executed and successfully placed in the market," says Jeffrey Paduch, director at Advent International.
Unlike deals for Sunrise and Picard, which also contributed to the markets bumper September, WorldPay had no existing syndicate it could ask to roll over, making it unusual for a post-2008 leveraged finance market dominated by secondary and tertiary pass-the-parcel buy-outs between private equity houses.
"The health and depth of the leveraged loan market depends on new issuers, not just recycling repeat issuers," says Paduch. "New issues require investors to dig in and learn a new story. That so many investors did the work alongside us illustrated an underlying appetite for corporate credit that created some momentum until 2011."
Underwriters Barclays Capital, Goldman Sachs, Morgan Stanley, Royal Bank of Scotland and UBS went to market with a £235m term loan A, a £585m term loan B, a £75m capex facility and a £75m revolver.
The term loan A, capex and revolver had tenors of six years and offered 450bp margins. The seven year term loan B was split between a £335m B1 piece offering 525bp, while the £250m-equivalent B2, denominated in dollars, was to pay 500bp. There was also a Libor floor of 1.75% on the term loan B.
There was also a £300m mezzanine piece, paying 6% cash and 6% PIK with a Libor floor of 2%, which took leverage from 3.7 times senior to 5.7 times overall.
Aware of the difficulty of bringing a new name to the leveraged market, the sponsors took a hands-on approach to syndication, ensuring the strategy and structure suited the scale of the deal.
Advent and Bain chose their five underwriters not only for their distribution skills but also because they were willing to commit to a big take and hold. And in the early stages of the process they held discussions with various potential pools of liquidity to gauge demand.
But perhaps most importantly for a new name, the company, sponsors and underwriters dedicated most of their time to educating investors on the specifics of the deal.
"We carried out detailed and thorough diligence, including a financial carve-out plan," says Luca Bassi, principal at Bain Capital. "That, combined with our experience as sponsors in carve-out transactions, enabled investors to get comfortable with the story."
Judging by the results, it was a successful strategy. Institutional investors flocked to the deal, as the deal was timed to coincide with substantial inflows into loan funds. The term loan A was decreased by £75m, and a new euro portion was added.
Then came the move that really showed the leveraged loan market was feeling good about itself the reverse-flex. Tranches had margins cut by 25bp-50bp, while the OID on the term loan B was tightened from 98 to 99.
By May this year, fund demand had reached new levels, and the margins could be tightened even further.
"The facilities were trading very well in the secondary market, and we received various approaches from investors indicating strong appetite for taking up more paper," says Paduch.
Once again, the sponsor did not push the envelope with the repricing, shaving 50bp off all tranches and taking the Libor floor down from 1.75% to 1.25%.
"The repricing was undertaken alongside the placement of the add-on facility for the Envoy acquisition a transaction that improved our credit profile, and against a backdrop of better than expected financial performance against budget," says Paduch.
At the same time, WorldPay raised a further £60m from its syndicate for the acquisitions of Cardsave, a UK independent sales organisation. It had early raised a similar amount for Envoy, an alternative payments company.
"In both cases we saw an opportunity to maintain the financial flexibility and place an additional facility as opposed to drawing on the capex and restructuring facility," says Stephen Hart, CFO of WorldPay. "We expect to use the capex facility to fund the investment in the businesss IT platform, as well as supporting the business with an additional equity contribution."
While the leveraged loan market may be struggling to find demand due to dwindling repayments, deals like WorldPay are a sign that when cash is there investors are willing to look at new LBOs. This appetite is crucial if the market is to raise the new buyside money that it needs for a full recovery.