By Natalie Harrison and Jonathan Schwarzberg
NEW YORK (IFR) - The US$13.5bn buyout financing for Refinitiv, the financial data and technology division of Thomson Reuters, has had a strong response from the US loan and bond markets, resulting in an oversubscription and potentially lower pricing.
The debt package is divided into US$8bn of loans and US$5.5bn of high-yield bonds. The loans are oversubscribed and are expected to price at the tight end of guidance, with the deadline for commitments accelerated to Friday rather than the following Monday.
Books on the US dollar high-yield bonds are also oversubscribed and expected to price at lower yields than first anticipated. The bonds are scheduled to price on Tuesday, but the expectation is that pricing will be pulled forward.
“We’re thrilled with how it’s going. It really sets the tone for the remainder of the year,” a senior banker said.
The seven-year Term Loan B, split between a US$5.5bn facility and a US$2.5bn-equivalent euro-denominated facility, is expected to price at around 400bp over Libor on the dollars - the tight end of guidance of 400bp-425bp. The euro loan was guided at 425bp over Euribor.
"There had been a bit of a pile-up of LBOs, and in the summer there was some nervousness about how they would go. But the market has come out to play. There has been some pushback on covenants as investors want better protections, but pricing is coming tighter," the senior banker said.
The loan is scheduled to price on Friday.
The US$5.5bn-equivalent high-yield bond financing includes two US dollar tranches: a US$2bn 7.5-year non-call three senior secured first-lien bond, and a US$1.8bn eight-year non-call three senior unsecured bond.
Initial price thoughts were low 7% area on the secured and low 9% area on the unsecured bond respectively.
But two sellside sources said those levels have been lowered to high 6% area and 8.5% area, respectively. One buyside source with a line into bankers on the deal said the secured bond was being talked at the mid-to-high 6% area.
The bond deal also includes two euro-denominated tranches with the same maturities and seniority. They were announced at US$1bn-equivalent for the 7.5NC3, and US$700m-equivalent for the 8NC3. Initial price thoughts on the euro tranches were announced at 5% area and 7% area respectively, and they are now being guided at low 5% and low 7%, the sellside sources said.
"It's possible that the bond could price Monday. My educated guess is that they will close the loan books and then talk to the company and decide on the size of different tranches across loans and bonds and different currencies," the buyside source said.
"Books are heard to be between three to five times covered depending on the tranche. I could see the secured coming with a six handle."
US DEMAND
Demand for the junior capital has been deeper in the US than in Europe.
“I wouldn’t focus on euros versus dollars and the split. You try to access all the markets for a deal of this size and then you shift the sizes and mix of loans and bonds on the fly if you need to. They’ve given themselves maximum flexibility,” a private equity source from a rival firm said.
“The deal is oversubscribed. Now it’s about how they price it, and how they optimize the balance of having more flexibility and paying slightly more, or changing some covenants and paying slightly less.”
Bond roadshow meetings in London took place on Thursday and Friday, but meetings in Amsterdam and Paris were canceled.
Investors with cash to deploy and who need to buy indexed deals are buying in bulk, but smaller investors who are more focused on yield are less interested.
“There are so many little jewels within the firm,” the senior banker said. "Even if one part of the firm falters it’s not correlated necessarily with another part of the firm. It’s a really good credit story."
COVENANT CONCERNS
Investors are comfortable with Refinitiv’s ability to generate cashflow and the stability of the business, but voiced concerns about the loan and bond covenant package.
Most of the focus has homed in on asset sale provisions, restricted payment baskets and additional indebtedness in addition to aggressive Ebitda adjustments.
“It’s not about price. Investors just want a better covenant package,” a second senior banker said. “What you’re seeing is just a more balanced market where investors do have the ability to influence some of the terms.”
Some investors told IFR that covenants on the bond - deemed aggressive by some analysts - would be changed. But the buyside source saw this as unlikely.
"I can't see that on demand of this magnitude, but it is possible. Maybe other accounts have more sway than us."
Credit research firm Covenant Review said in a report on September 7 that the bond had some of the weakest investor protections seen since the financial crisis and gave Blackstone (NYSE:BX) unprecedented flexibility to move assets around.
"The notes are being marketed with extremely defective sponsor-style covenants riddled with flaws and loopholes that reflect the worst excesses of covenant erosion over the last two years," Covenant Review said.
Another key consideration for investors has been US$650m in cost savings on US$2.5bn of pro-forma Ebitda over three years, which is about 35% of adjustments.
"That’s a big number. We never write that amount of adjustments on a deal. It’s a very big percentage, but the way the market has received the deal tells me they are believable and identifiable,” the private equity source said.
Those US$650m of cost savings put leverage at 4.25 times secured and 5.25 times unsecured. Leverage is closer to six to seven times based on reported earnings of US$1.9bn, some investors calculate.
But Lale Topcuoglu, head of credit at fund manager JOHCM, said that Blackstone's reputation has helped investors get comfortable with the financing.
"The story was really good. The challenge for us is the covenants and the leverage. There really is no incentive to delever over time," Topcuoglu said.
JP Morgan is leading the high-yield bond, while Bank of America Merrill Lynch (NYSE:BAC) is leading the loan financing.
The financing backs private equity firm Blackstone's purchase of a 55% stake in Thomson Reuters' financial data and technology division (which includes IFR), which will be renamed Refinitiv when the acquisition closes.
The deal - the largest buyout financing since the crisis - is expected to close on October 1.