Taking the pain: Citrix LBO bond sells at 21% discount
A group of underwriters led by Goldman Sachs on Tuesday finally priced the long-awaited US$3.8bn offering of second-lien bonds backing last year’s buyout of Citrix Systems.
The second-lien bridge which the bonds refinanced was part of the tens of billions of dollars of debt commitments for acquisitions – including Elon Musk's purchase of Twitter – that banks had to fund last year after a huge sell-off of high-yield bonds effectively shut the new issue market.
Dealmakers at the 33 firms in the deal’s syndicate will be happy to put the bond sale, and its hundreds of millions of dollars of related losses, behind them. But for Wall Street, the hangover from an aggressive slate of 2022 leveraged buyouts is not over.
Even though bankers for Citrix parent Cloud Software Group waited for months after the LBO's September close for a window to offload the debt, the trade came at a 21% discount to par. That steep price cut does not bode well for prospective bond offerings related to 2022 LBOs of Tenneco, Brightspeed or Twitter – or banks' prospects of avoiding significant losses.
"Banks will have to take the pain and move on,” said a banker at one of Tuesday's deal's joint bookrunners.
The pain
Cloud Software Group printed the 9% 6.5-year non-call 2.5 senior secured second-lien notes at 79 to yield 14.047%, the midpoint of price talk. The spread over Treasuries was 1,063bp.
Before the Citrix buyout closed in September, a Credit Suisse-led bank group was able to price a US$4bn secured bond that was also part of the LBO financing package. Yet in a clear sign of how dislocated the high-yield market had become last year, the 6.5% coupon bond struggled to gain traction and eventually priced at a significant discount – 83.561 – to yield 10%.
Joint bookrunners last week paid an “initial issue price” of 98 for the bonds they went on to try to sell, according to a final pricing term sheet. The difference between the 79 clearing price and the issue price implies as much as US$729m of losses, according to IFR calculations. The implied loss on the US$4bn of secured bonds which priced in September was US$587.6m, based on similar calculations.
Any actual losses could be significantly mitigated by – among other things – the total amount of the bonds underwriters themselves opted to buy or hold as well as by any other fees earned.
Meanwhile, the underwriters had some help getting the bonds off their balance sheets. The final term sheet also showed that Elliott Investment Management, one of the LBO sponsors, is expected to buy US$550m of aggregate principal amount of the second-lien notes at the clearing price (that is, 79 cents on the dollar).
Elliott bought US$975m of the US$4bn bond offering in September as well.
Clear path
The deal might have hit the market earlier had not the failure of several US lenders including Silicon Valley Bank shook the global debt markets and made new high-yield issuance all but impossible for a good part of last month, a banker working on the deal said.
“We’ve been working on it for months, and the demand is there, but it is a matter of finding a clear path after the fragility we saw in the banking system recently,” said the second banker prior to the deal launching.
The deal for Cloud Software – this year's biggest high-yield bond – became doable when the banking turmoil eased and spreads tightened significantly. On Monday, when the offering was announced, the average high-yield spread was 64bp lower than this year's widest margin of 522bp on March 24, according to ICE BofA data.
Nonetheless, while some investors saw value in the credit at a 79 OID and a 14% yield, one high-yield portfolio manager said the price would have to decrease further before the bond falls within his target risk-reward ratio.
“At some point, we do want to take a bite out of the apple but we might as well buy it lower as we don’t think the risk-reward is great at the moment," he said.