Investors are looking closely at two new leveraged buyout deals, including a UBS Warburg-led deal for Herbalife and a UBS Warburg and Bank of America-led deal for The Columbia House Company. As eager as buysiders are to get paper, they are taking a close look at these credits as price remains a concern on the first and collateral coverage a concern on the latter. An investor considering the Herbalife deal said he thinks the deal should get a 100 basis point hike to make up for risks associated with the credit. "I'd like a 100 [basis points] increase but realistically I'll settle for 25 or 50," said the buysider regarding pricing. He noted positively that roughly $175 million in equity has been pumped into the structure. "Pricing is going to have to increase to get this one done. The assets are a draw back," he said.
The investor added that a lack of FDA approval on some Herbalife products is a liability worry for investors. In addition, he noted that the vitamin and healthy food provider also has a tiered sales structure whereby commission is collected by those who recruit others to sell the company products. The purchase of Herbalife is backed by private equity firms Whitney & Co. and Golden Gate Capital. Officials at the banks declined to comment.
Pricing on the $165 million term loan "B" for Herbalife is set at LIBOR plus 4%. A plus for the deal is the expected cash flows the company generates and a banker noted this as a deal positive in today's market. The deal also includes a $25 million revolver priced at LIBOR plus 31/ 2% and $220 million in bonds. Senior leverage is approximately 1.4/1.5 times and total leverage will be closer to 3.5 times.
The Columbia House story is a tough one to tell and the banks are reportedly marketing it very carefully to investors. One buysider who's seen the deal was asking where the bonds are? "The bond market's been open to everyone single-B and above," he noted. The all senior deal seems risky to investors as the question of whether or not there is strong enough collateral coverage remains. This credit also has strong cash flow and bankers said bonds aren't part of the structure because the cash flow should result in repayment of the bank debt outpacing theoretical bond maturities. The firms are shopping the $175 million credit for Blackstone Group's purchase of the company from AOL Time Warner and Sony.