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Thursday, 23 November 2017

North America Leveraged Loan

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Pumping iron: For redefining the size of the US institutional loan market by nimbly tapping various liquidity pools to place the biggest new-money institutional loan since 2007 at a critical time for the company, Fortescue Metals’ US$5bn term loan is IFR’s North America Leveraged Loan of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Fortescue Metal’s covenant-lite loan was a game-changer in terms of size and structure – the deal was twice as big as the next largest loan – and set a new benchmark for just how much senior secured paper the market could absorb.

The size of Fortescue’s loan would have made it a tough sell, even in the best of times, but the world’s fourth-largest iron ore producer was staring down the double-barrel of plunging iron ore prices and a potential covenant breach.

The US term loan was only a month after the unsuccessful syndication of a US$1.5bn unsecured term loan which had struggled to syndicate in Asia and a 10-point slide in Fortescue’s long-dated bonds on liquidity concerns.

“Just about the entire world was saying it couldn’t get done,” said Jim Finch, co-head of US loan capital markets for Credit Suisse, which acted as lead-left on the transaction, with JP Morgan on the right.

“The concern was that if you look at the loan-only universe there was not enough capacity to buy that much secured term loan, but we said that you could get all of this done in the loan market.”

On September 17, the company announced US$4.5bn of committed financing to take out its existing bank debt, increase liquidity and extend maturities. Fortescue’s battered stock rallied about 30% on the news, adding about US$3bn to the company’s market capitalisation.

“Once we signed that commitment everyone started to calm down, take a breath, and then we went through an orderly launch into the market,” Finch said. “Exactly what we said would happen did happen.”

The five-year term loan was launched at US$4.5bn with initial price talk of 475bp over Libor with a 1.25% Libor floor and an OID of 99. Demand was so great that the deal was increased by US$500m to US$5bn and pricing was cut to 425bp over Libor with a 1% floor.

Credit Suisse targeted crossover investors as well as traditional loan investors to get the jumbo loan over the finish line. In the end, about 40% of the order book came in the form of bond investors.

“If you look at Fortescue, you had a situation where the entire bond complex had traded down pretty dramatically, but we knew that if you came in and primed those bonds you’d see a lot of natural demand from those bondholders as they tried to preserve those positions,” Finch said.

CLOs also joined the credit in droves. Many new CLOs were issued in the US in 2012, but the huge size of the loan meant that the company also needed to tap demand from vintage CLOs that were nearing the end of their reinvestment periods.

In part to avoid running afoul of the resulting maturity constraints, Fortescue had a five-year maturity instead of a more typical six or seven-year tenor.

Fortescue’s ratings of Ba3/BB– also made it an attractive investment for yield-hungry banks.

The book closed at a staggering US$10bn with large commitments across the board from insurance companies, commercial banks, CLOs, high-yield bond investors and even equity investors.

“The main reason we were able to do this is the way we’re structured and the visibility we have into these different markets and the knowledge that we would be able to convert those bond investors into buying those loans,” said Credit Suisse’s Finch.

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