North America High-Yield Bond: ADT's US$3.14bn seven-year bond
February 2016 was just about the worst time to underwrite LBO debt since the financial crisis.
Yields on Triple C corporate bonds had blown out to more than 20% since the start of the year, while the average spread on US junk bonds surged above 800bp.
Oil was getting routed, investor appetite had all but dried up and banks were accumulating billions of dollars of unsold debt on their balance sheets.
Even so, four banks and one Canadian pension fund agreed to underwrite a US$4.7bn bond-and-loan package for Apollo Global Management to buy out home security company ADT.
The bond – a US$3.14bn second-lien offering – was the riskiest part of the deal.
“A lot of our peers didn’t want to show up at that time,” said Alexandra Barth, co-head of US high-yield capital markets at Deutsche Bank, the bond’s lead underwriter.
It was the largest LBO bond since the financial crisis and the third-largest of all time.
Apollo had initially looked for commitments to a much larger US$10bn–$11bn debt package at the end of 2015, with the intention of taking out most of ADT’s existing bonds.
But against the challenging market backdrop, it became clear that no group of banks would be able (or willing) to absorb that much paper.
To get around that, a complex liability management operation was launched that included granting first-lien security to US$3.75bn of existing ADT bonds, as well as a tender and an exchange offer for other ADT notes.
That eventually allowed Apollo to keep most of the company’s existing debt in place – and drastically reduced the amount of new debt needed from the public markets.
“That was the linchpin of how this deal was able to be done,” Sandeep Desai, co-head of US leveraged loan capital markets at Deutsche, said of the liability management.
By the time the bond was finally brought to market in late April, market sentiment had improved dramatically.
That led investors to place some US$6bn of orders for the bond, making the backstop from Apollo and Canadian pension fund PSP – they had signed up for US$750m and US$1bn, respectively – unnecessary.
The other banks on the deal – Barclays, Citigroup and Royal Bank of Canada – did not have to take any of it onto their balance sheets.
Pricing was brought in from initial whispers of mid-to-high 9% to the final 9.25% – at the tight end of 9.25%–9.50% price talk.
Moreover, the bonds jumped by several points in secondary trading as the high-yield market recovered later in the year – a winning transaction all round.