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Thursday, 23 November 2017

US Leveraged Loan House

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  • Shining a light

Shining a light: For market savvy that allowed it to lead some of the largest and most aggressive US leveraged loans, insight that brought creative solutions to tough credits and a stellar distribution platform, Credit Suisse is IFR’s US Leveraged Loan House of the Year.

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

The US institutional term loan market was one of the highlights of a lacklustre 2012 in the global loan market and Credit Suisse shone as a favourite of issuers, equity sponsors and leveraged loan investors alike.

It is no secret that the bank structures aggressive deals that sometimes push the envelope on leverage, covenants or pricing but loan investors consistently rank Credit Suisse highly for market insight, the quality of its sales force and for the creativity of its loan structures.

“Credit Suisse. Hands down number one. Not even close,” was one portfolio manager’s knee-jerk response when asked which bank most deserved the top title.

Credit Suisse seems to thrive in good times and in bad. The bank is able to get deals over the finish line during the tough times and take full advantage of the good times to jump to the top of the league tables when it comes to more aggressive loan structures.

As it happened, 2012 was a very good year for both Credit Suisse and the US institutional loan market as an influx of cash from investors fleeing wider market volatility prompted a wave of opportunistic repricings. 

Through the third quarter, Credit Suisse topped the US loan league tables in institutional bookrunner volume, second-lien bookrunner volume, lead-left bookrunner volume, and covenant-lite bookrunner volume.

In that time, it also ranked first in the sponsor-backed institutional bookrunner table and ran a close second to Bank of America Merrill Lynch in the dividend recapitalisation bookrunner category.

“What we’re seeing now is generally the types of deals that fit right into our sweet spots, by that I mean aggressive structures such as dividend recaps, second liens, covenant-lites,” said David Miller, global head of leveraged finance capital markets.

Notable dividend recaps include sizeable Term Loan B facilities for consulting firm Booz Allen Hamilton, power generation and transmission group LS Power and Hyland Software.

Covenant-lite were arranged for Fortescue Metals Group, telecoms and internet service provider Level 3 and exhaust manufacturer Samson and second-lien loans included software firm Attachmate. 

“When you think about Credit Suisse, those are the types of structures that we thrive in and that we find investors look toward us to do for them.”

Winning deal

Credit Suisse led its rivals in deal size by bringing the largest institutional term loan to the market – and the second-largest covenant-lite loan ever – to the market for Fortescue Metals, IFR’s US Leveraged Loan of the Year.

Most market players said that it could not be done.

Credit Suisse not only successfully syndicated a US$5bn institutional loan for the company but flexed down pricing during syndication.

“Fortescue was an absolute huge victory,” said Miller.

“Our competitors told the company that they could not get the term loan done in the market, that it was just too big. We had conviction that you could.”

Originally launched as a US$4.5bn covenant-lite loan, syndication was launched in September after a US$1.5bn unsecured term loan failed to sell in Asia, when the world’s fourth-largest iron ore producer was facing a sharp decline in iron ore prices. 

“We had visibility into the market that no one else had because of how we are organised,” said Jim Finch, head of US loan capital markets. “It’s like going to a doctor to have an operation. That bedside manner goes a long way.”

The five-year term loan was launched with initial price talk of 475bp over Libor with a 1.25% Libor floor and an OID of 99. Demand proved strong enough to increase the deal by US$500m to US$5bn and pricing was cut to 425bp over Libor with a 1% floor.  In the end, the deal raised about US$11bn.

New ideas

Credit Suisse also carved out a niche for itself in 2012 structuring a handful of “pre-caps”, a portable capital structure that allows a company to keep its loan in place even if sold, by letting new buyers step into the loan without triggering change-of-control provisions.

In all, Credit Suisse led five pre-caps in 2012, after leading the first, and only other, pre-cap way back in 2005.

“The great thing is that it’s actually an asset of the company if they are going to sell because a new buyer won’t have to pay fees on a new financing,” said Jeff Cohen, Co-head of US loan capital markets .

“If the market erodes in, say, six months and they’re selling the company they wouldn’t need to go out and replicate that capital structure. If the market’s much better, then they could just reprice it like any other term loan.”

One such pre-cap was a US$1.06bn loan Credit Suisse led for Atlantic Broadband in March which was used to refinance existing debt and make a US$345m distribution to sponsors ABRY Partners and Oak Hill Capital.

Structured with a US$660m Term Loan B and a US$350m second-lien loan, the financing increased the company’s leverage to around seven times and garnered the company a B2 corporate family rating.

In addition, the credit agreement included an innovative change-of-control waiver provision as long as conditions, including a cap on leverage and covenant compliance, were met. It also allowed the issuer to releverage up to 6.8 times after a sale as long as the issuer had deleverage to below six times before the acquisition was made.

Despite the high leverage, large dividend and unusual structure, the loans were oversubscribed and ultimately flexed down. Final pricing on the Term Loan B came in at 400 over Libor with a 99.5 OID.

Just a few months later, Atlantic Broadband was bought at auction by Canadian cable company Cogeco Cable for US$1.36bn, which used the US$660m Term Loan B to fund part of the purchase.

“ABRY believed that the price they achieved was substantially higher because [Cogeco] realised that the models being used by competing sponsors didn’t have the typical flex built in,” Cohen said.

“They knew that the worst-case pricing that a sponsor would end up with was 400bp over Libor and that’s a huge difference from what most strategic buyers have to think about when they’re competing against sponsors.”

Sales prowess

Credit Suisse’s sales and trading platforms also continue to win accolades from the buyside. Its team of nine leveraged loan sales people remains the same as it did when Credit Suisse first merged with DLJ 12 years ago. In a 2012 Greenwich Associates Investor Survey, its sales force was ranked number one.

In the same survey, the bank’s trading platform was ranked number one in consistent pricing in volatile markets, number two in trading market share with Tier 1 accounts and number two in investment strategies and ideas.

“When clients feel like they really need to tell the story and really push the structure and get investors to have conviction in the name they tend to select us,” Miller said. “And we think that’s been borne out this year.”

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