US High-Yield Bond: PetSmart's US$1.9bn buyout bond
PetSmart defied sceptics on all fronts in 2015 as it sailed through market wobbles and regulatory curbs on leveraged lending to price the largest LBO bond of the year.
Two days after the pet supplies retailer announced it would be bought by a private-equity consortium led by BC Partners for US$8.7bn in December, the spread on one of the main US high-yield indexes reached a two-year high of 7.28% amid a rout in oil prices.
A month earlier, US regulators had taken a hard stance on leveraged lending, telling bankers at a meeting in New York that 10 out of 18 buyouts they had reviewed over the summer were viewed as problematic.
Faced with uncertainties as to whether the deal could pass the scrutiny of regulators and volatility in the market, several banks backed off from the financing.
Leverage of around seven times for the deal – above the six times threshold that US regulators view as problematic if not coupled with the ability to quickly pay down debt – was one of the main concerns for potential underwriters.
Yet lenders who later signed commitments for the US$6.95bn bond and loan financing eventually earned a passing grade on the trade.
PetSmart, which had come under shareholder pressure to sell itself, also walked away with a successful and well executed transaction.
The US$1.9bn eight-year non-call three note issue that was part of the financing was the largest bond backing an LBO in 2015.
Shrugging off a three-notch downgrade of the credit by Standard & Poor’s right before the deal was announced on February 12, investors piled in with some US$10bn of orders for the trade.
The strong demand allowed lead-left Barclays to price the B3/B– rated notes at par to yield 7.125%, inside talk of 7.25% and well inside whispers of mid to high-sevens.
“It was one of the tightest LBO executions in quite some time,” said Peter Toal, head of leverage finance syndicate at Barclays. “BC Partners … trusted us with this transaction.”
In the retail space, PetSmart’s final 7.125% yield was the tightest ever achieved to finance an LBO, according to Barclays, beating the 7.75% yield printed by David’s Bridal in 2012 and Neiman Marcus’s offering in 2013, which was priced at 8%.
The bond, issued via the Argos Merger Sub entity, traded up 1.25 points on the break to 101.25 and has traded well above par for most of the year, even as spreads across the asset class widened dramatically in August and September.