Banks are starting to prepare some of the larger collateralized loan managers for what is expected to be about $16 billion in debt to back the leveraged buyout of health care operator HCA. With a $33 billion total ticket price, including the assumption of $11.7 billion of debt, the financing for the largest leveraged buyout ever will need to be structured to attract banks, investors, hedge funds and just about everyone else that plays in the loan market.
"I think that if they do make it, they are just going to get over the finish line," said one portfolio manager. He said the banks have already started telling accounts that they better be ready to take a large chunk. "I said, 'Put a nice price on it and we're willing to participate if it's structured right,'" he said.
Lead banks Bank of America, Wachovia, Citigroup, JPMorgan and Merrill Lynch will need to structure a large bridge loan while the private equity groups determine which assets they want to sell, said the portfolio manager. Investors anticipate a first and second-lien structure in order to entice hedge funds to play. Commercial banks will need at least a BB rating to participate and there will also need to be a large bond structure to sit under the loans.
Another investor said it will be welcome paper because it is a sector that has historically done well.
As a result of the news, HCA's bonds have tumbled; its 7.5% '33 bonds have fallen to 79 from 90 where they were trading July 19. Its 5 3/4% '14 notes fell to 78 5/8 from 88 where they were trading July 19. During that time, HCA's five-year credit default swaps widened 300 basis points to 450, according to Markit. The company announced last Monday that it plans to retire several notes as part of the transaction. Two bonds that it plans to tender 5 1/4% '08 notes and 5 1/2% '09 notes climbed on the announcement.
Kyle Smith, analyst of high-yield research at Jefferies & Co., said the bonds have dropped because the covenants do not contain change of control puts or stop the company from placing a large amount of debt ahead of them in the capital structure. The $16 billion of new debt will rank ahead of these bonds. "With so much new debt ranking ahead of the existing senior notes, the bondholders are going to go from the front of the line to the back," said Smith.
Because of this fact, the portfolio manager said some existing bondholders may be reluctant to buy new bonds for this transaction. Smith said any bond investors will probably demand a higher coupon than the existing bonds have because of the high leverage at the company after the transaction is completed.
Nashville, Tenn.-based HCA is being acquired by Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity and HCA Founder Dr. Thomas F. Frist, Jr. The investor group is going to chip in $5.5 billion.
