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Thursday, 14 December 2017

Private Equity Prowess

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With its portfolio companies facing various important financing needs, Kohlberg Kravis & Roberts was among the most active borrowers in the leveraged finance markets. Such successful transactions for Del Monte, First Data Corp, Energy Future Holdings and ATU Auto-Teile Unger Handels highlight KKR’s solid presence and skill in the market. Joy Ferguson reports.

To view the digital version of this report, please click here.

In a year of considerable financial uncertainty, private equity companies have been more interested in ensuring the health of their existing portfolio companies than pursuing new conquests. KKR, one of the most active private equity companies in the last 12 months, was no exception.

In March, for example, First Data Corp announced plans to extend at least US$3bn of term loans and a US$1.8bn revolver. As part of its extension plan, the company priced US$750m 8.25-year non-call 4.25 senior secured first-lien notes via Citigroup, Deutsche Bank, Credit Suisse and HSBC. The B1/B+ rated bond deal was issued at the tight end of talk, at 7.375% at par. KKR agreed in 2007 to buy the transaction processor for US$29bn.

First Data also hit the high-yield market in August of 2010, raising US$510m in 10-year non-call five senior secured first lien notes. The issue came with an 8.875% coupon, and priced at 98.387 to yield 9.125% via Citigroup, Credit Suisse, BofA Merrill, Deutsche Bank, Goldman Sachs and HSBC. Proceeds repaid senior secured term loans.

In October, KKR’s ATU Auto-Teile Unger Handels, the European auto merchandise and repair retail chain, had sold €450m in a two part senior secured fixed and floating rate issue to refinance senior loans. The €375 3.5-year bullet fixed notes priced at 11% at 98.539 to yield 11.501%, in line with talk, while the €75m 3.5-year non-call two FRN was priced at 6mE+975bp at 99. Goldman Sachs and Morgan Stanley were joint books on the issue. 

Also last October, Accellent tapped the market for US$315m in seven-year non-call three senior subordinated notes, which priced at 10% at 100 through Goldman Sachs, Credit Suisse, Wells Fargo and UBS. KKR purchased Accellent is late 2005 for US$1.27bn.

But these deals, which constitute the bulk of the borrower’s activity recognised in the Top 250 list, is the tip of the iceberg. It is difficult to compare the borrowing of private equity companies to other issuers, and in previous years they have been excluded altogether. This year they have been counted, but only when the deal was theirs alone. Deals KKR or other private equity companies did in partnership are not counted, meaning a considerable proportion of their activity is excluded.

In February of this year, for example, KKR, along with Vestar Capital Partners and Centreview Partners, purchased Del Monte Foods for US$5.9bn. The transaction was a key achievement, and demonstrated great execution based upon KKR’s direct relationships with its banks and key investors.

“Because KKR is frequent user of the capital markets, we are focused on having our transactions placed with high quality, long-term holders in order to ensure a good execution and aftermarket trading performance,” said Jeff Rowbottom, director and co-head of KKR Capital Markets Americas.  The KKR Capital Markets team has grown to twenty-nine, divided to specialise by product and geography, with offices in New York, London, Hong Kong and Mumbai. 

Considered a turning point in acquisition finance, the Del Monte deal included a US$4.85bn debt package, which was the largest debt raise for a new LBO post credit crisis. The financing consisted of a sizable US$1.4bn senior notes offering, a US$2.7bn senior secured term loan and a US$750m senior secured revolver.

The term loan was considered the largest covenant-lite term loan post credit crisis while the bond offering was among the tightest priced new LBO bonds, at 7.625%, in over a decade. KKR and fellow sponsors contributed US$1.7bn in equity as part of the transaction. 

Energy Future Holdings, like First Data Corp, represented important recapitalisation deals that helped extend huge amounts of debt. Like First Data, KKR purchased the business in 2007. Unlike First Data, the deal was done alongside TPG Group.

The Energy Future Holdings deal came in April and included the extension of more than 80% of its roughly US$22bn in bank debt due 2013 and 2014. Concurrently, the company priced a large US$1.75bn senior secured bond offering that repaid US$1.604bn of loans.  The issue sold at 11.50% at a discount of 99.295 to yield 11.625%.

Energy Future Holdings’ US$45bn buyout is the largest in history. The latest refinancing was critical in effectively pushing off a massive amount of maturities.

November brought a US$1.6bn offering from SunGard Data Systems. KKR, along with a consortium of buyout firms, purchased SunGard for US$11.4bn in 2005.  The company took advantage of a red hot market last November to fund the tender offer for its 9.125% senior notes due 2013.

On the back of strong demand, the Caa1/B– rated deal was increased from US$500m to US$1bn and then to the final US$1.6bn size, allowing SunGard to take out the entire existing 9.125% issue. The two-part offer allowed the company to extend maturities by five years and lower interest expense by over 1.5% for as much as 20% of its debt.

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