North America High-Yield Bond
Mission accomplished: HD Supply, the victim of a hung LBO from 2007, defied the odds in tapping the US high-yield market in 2012 to solve a serious near-term debt problem. A US$1.625bn two-part issue priced in April completely reshaped the company and is IFR’s North America High-Yield Bond of the Year.
To see the full digital edition of the IFR Review of the Year, please click here.
In August 2007, HD Supply, a wholesale distributor of building and home improvement products, was acquired by Bain Capital, Clayton, Dubilier & Rice and The Carlyle Group from Home Depot.
But as the financial crisis unfolded, the deal unravelled. Home Depot agreed to a reduced purchase price of US$8.5bn from US$10.3bn, but underwriters on the debt were still unable to find buyers. Eventually, a handful of hedge funds agreed to hold the majority of the high-yield bonds, consisting of US$2.5bn senior unsecured notes due 2014 (rated B3/CCC+) and US$1.8bn subordinated PIK notes due 2015 (Caa1/CCC+) – with the sponsors being left with the remainder. Home Depot put a guarantee on the senior secured loan.
Fast forward to 2012. The company faced roughly US$9bn in near-term debt maturities coming due within 36 months, leverage north of 10.5x, ongoing cyclical concerns related to the housing market and very little following in the US high-yield market.
HD Supply urgently needed to return to the broader market to refinance its LBO debt, still held by just a handful of accounts.
And that’s what it did. On April 5, before the housing sector started to show real signs of recovery, HD Supply successfully re-emerged in the market, pricing an expertly crafted US$950m senior secured first-lien notes offering due 2019 and a US$675m senior secured second-lien note offering due 2020.
In addition, the company secured a new US$1.5bn ABL revolver due 2017 and priced a US$1bn first-lien term loan due 2017.
The B2/B+ rated senior secured first-lien bonds priced at 8.125% at par, while the Caa1/CCC+ rated senior secured second-lien piece was sold at 11% at par.
Bank of America Merrill Lynch acted as lead-left bookrunner on the first-lien notes and the first-lien term loan, while Goldman Sachs left led the second-lien notes. Barclays, JP Morgan, Credit Suisse, Deutsche Bank, Wells Fargo and UBS were also on the right of the deals.
The successful refinancing in April set the stage for two follow-up transactions. In July, HD Supply priced a US$300m add-on to the 8.125% senior secured first-lien notes and, in October, US$1bn of 11.50% senior unsecured notes due 2020 that were used to repay a large chunk of the senior subordinated debt that was coming due in 2015.
BofA Merrill was left-lead on both of these transactions, along with Goldman Sachs, Barclays, JP Morgan, Credit Suisse, Deutsche Bank, Wells Fargo and UBS on the right.
Of particular note, the US$1bn senior unsecured offering, rated Caa2/CCC+, included a unique restricted payment feature to allow the company to refinance the remaining portion of its senior subordinated notes with more senior unsecured debt subject to total leverage being at or below 7.25x. In this way, the company maintained flexibility while remaining accountable for performance.
Altogether, the refinancings shifted the weighted average life of the balance sheet, which had been under three years, to more than six years.
“That’s a monumental shift on a cyclical company that was nearly 11 times levered,” said Kevin Sterling, head of high-yield capital markets at Goldman Sachs.
“It was a win-win,” said Stephan Jaeger, head of high-yield capital markets in the Americas at BofA Merrill. “Investors have made money and from the company’s and ownership team’s perspective it was a mission accomplished. And it has established HD Supply as a bellwether in the capital market, whereas it waspreviously a hung LBO with very little following.”