The $7.05 billion acquisition of QwestDex, the directories business of Qwest Communications International, by The Carlyle Group and Welsh, Carson, Anderson & Stowe is set to alter the landscape of the leveraged loan market this fall. The two private equity firms are set to borrow approximately $3.1 billion of senior secured bank debt and are tapping the bond market for an additional $2.5 billion, one banker said. Combine that with other large financings for Burger King and Del Monte Foods, and investors could be deluged with bank debt. Spokespeople for the private equity firms did not return calls.
The inferred leverage multiple for the largest buyout since 1989 is around six times on a debt-to-EBITDA basis, which has raised a number of eyebrows, according to bankers. "People love the steady cash flow, but six times does not happen," one banker emphasized. Another questioned whether the market had the depth to absorb the deal. "Pro-rata is always a challenge, but this will really test the "B" market," he said.
But others had faith in the directories business to pull the financing off. "[The leverage] is not particularly out of the ordinary and, all things being equal, this should gain a solid BB- rating," saidRichard Hassard, head of credit products for the U.S. and Europe atCIBC World Markets.
The loan will be syndicated in two parts, which also should assist syndication. The first stage backs the sale of QwestDex's operations in Colorado, Iowa, Minnesota, Nebraska, New Mexico and South Dakota for $2.75 billion. J.P. Morgan, Bank of America, Deutsche Bank, Lehman Brothers and Wachovia Securities are preparing an approximately $1.4 billion credit, which includes an $800 million "B" term loan. The banks also will issue $950 million of bonds.
The second phase will back the $4.3 billion acquisition of operations in Arizona, Idaho, Montana, Utah, Washington and Wyoming that is set to close in 2003. This will be financed by the same banks with an approximately $1.7 billion bank deal and $1.5 billion of bonds. Officials at the banks either declined comment or did not return calls.