Americas Leveraged Finance House
A consistent approach: The year 2008 marked a new era for US leveraged finance. Severe market dislocation resulted in significant declines in new issuance and banks instead were forced to focus on eliminating the massive overhang from the bygone LBO boom. Benefiting from a more conservative approach, Bank of America forged ahead and gained market share in a very difficult market, making it IFR’s Americas Leveraged Finance House of the Year.
With most issuers relegated to the sidelines in 2008 as risk premiums skyrocketed, those companies that did seek leveraged financing were increasingly discerning, selecting only commitments from the healthiest banks. Previously ridiculed for its conservative underwriting policies, Bank of America flourished in an environment where investors gravitated toward higher-rated, lower-levered capital structures.
Indeed, its approach to leveraged finance led it to become one of the prominent providers of capital in loans and bonds in 2008. At the end of the third quarter in 2007, BofA’s backlog of unfunded underwriting commitments stood at US$32.4bn, among the lowest in the industry. By the third quarter 2008, it had whittled the exposure to just US$6.6bn and, unlike some competitors, by selling positions directly into the market at slight discounts.
The more manageable overhang can be traced to a strategic pullback in 2007, as a disciplined underwriting strategy caused BofA to pass up on or be excluded from some of the larger, later-stage transactions. This decision resulted in a decline in market share in 2007, but the less aggressive stance allowed the bank to be more agile in 2008.
BofA reached the top of the US leveraged loans league tables and climbed to the second position in US high-yield bond issuance for the 2008 awards year to mid November 2008. “We continued making commitments into the downturn,” said Jimmy Rose, BofA’s head of leveraged acquisition finance. “We were in business over the entire 12-month period.”
“Coming into 2008 with the same strategy around disciplined underwriting guidelines left us with a lot of opportunity as the [traditional] corporate landscape re-emerged,” added John Cokinos, BofA’s head of high-yield capital markets and syndicate. The bank was one of the few institutions providing financing commitments, particularly in the M&A space. “These commitments tended to be more for Double-B credits; the structures became more conservative; and the leverage came down. It was exactly also what the market was looking for,” said Cokinos.
Forging ahead, aided by a strong roster of clients and solid relationships with an array of investors, the bank placed a number of transactions that were diversified in size, rating category, geography and industrial groups. BofA’s relationships with high-quality companies, in particular, proved to be a tremendous asset in 2008 as a flight to quality took hold and the Double B corporate bond space re-emerged as a focus of new issuance.
As conditions proved vastly more challenging, even for high-rated issuers, BofA’s flexibility and agility proved necessary traits. “Even in a difficult market, Bank of America was able to come to market with a number of high-quality, challenging transactions, and they were able to execute on all fronts,” said one investor.
Throughout the year, the bank demonstrated its ability to leverage its various debt platforms to deliver successful financial solutions. In February, for example, BofA acted as lead-left arranger and bookrunner on a US$753m financing package for Axcan Pharma. The package, which was used to fund a US$1.3bn acquisition by TPG Capital, included a US$290m senior secured credit facility, US$225m of senior secured notes and a US$235m senior unsecured bridge facility.
As would be the case for much of the year, market conditions were unfavourable at the time, particularly for leveraged buyouts. Both the leveraged loan and high-yield markets were showing signs of continued deterioration at the beginning of 2008. BofA responded to the poor conditions by shifting a portion of the financing from the term loan B to the term loan A and senior note offering in order to take advantage of the stronger pro rata loan and high-yield markets.
The seven-year non-call three senior note offering, the first non energy-related high-yield deal of 2008, was viewed favourably by investors. The senior notes priced at a discount to yield 9.50%, and rose slightly in the aftermarket. The remaining US$235m senior unsecured notes were funded as a bridge loan until April, when they were met with better demand and priced to yield 13%.
In May, despite negative sentiment surrounding the retail and housing sectors, Ace Hardware came to the market with a US$300m asset-based facility and US$300m eight-year non-call four senior secured offering via BofA to refinance existing debt and fund working capital.
The Ace Hardware high-yield deal was a challenge. BofA responded to lukewarm demand by anchoring the high-yield offering with several large buy-and-hold investors that pushed pricing wide of talk. Meanwhile, the asset-based facility was nearly two-times oversubscribed and garnered strong demand from existing lenders, along with a number of new banks.
The transactions marked the company’s first issuance in both the asset-based and high-yield markets and provided Ace Hardware with significant covenant flexibility against a softening economic backdrop.
Indeed, BofA’s expertise in the ABL market helped facilitate a number of other difficult transactions, including Circuit City’s US$1.3bn asset-based facility, Nortek’s US$350m asset-based facility and United Rentals’ US$1.25bn asset-based facility.
As demand moved away from LBOs in 2008, BofA quickly shifted to corporate issuers such as Videotron, a cable systems operator, and independent E&P SandRidge Energy. Similarly, high-quality basic industrial issuers like Texas Industries and Steel Dynamics looked to BofA to take advantage of fleeting windows of opportunity that characterised the high-yield market.
The bank also showed prowess in its debt advisory services platform, taking on a number of consent solicitations as well as advisory roles on exchange and tender offers. Liability management began to take on a new form in 2008, as companies that were shut out of the new issue market looked to exchanges and tenders as a means to de-lever or address liquidity concerns. BofA continued to do restructuring throughout the year, with ResCap and Texas Industrial among its clients.
Flexibility
Meanwhile, leveraged loan deals from Kinetic Concepts and Invitrogen illustrated BofA’s adeptness in targeting and executing large transactions in the pro rata market. Kinetic Concepts came to the market in May with a US$1.9bn transaction to fund its US$1.7bn acquisition of LifeCell Corp.
The financing commitment included US$1.3bn senior secured credit facilities and US$690m in convertible notes. BofA served as left-lead arranger on the loan deal and joint books on the notes.
Against the backdrop of challenging credit markets, the bank moved rapidly to structure the deal, perform due diligence and obtain formal commitment approval for 50% of the financing commitment. Extremely strong demand for the bank loan allowed BofA to shift US$200m of term loan B debt into the term loan A, effectively lowering the company’s overall costs of capital and enhancing execution.
Invitrogen followed in June with a US$2.65bn senior secured loan package. The financing backed the company’s US$6.7bn merger with Applied Biosystems, one of the largest health-care M&A financings of 2008. To win the role of left-lead arranger, BofA bankers got creative.
“We stepped outside of the box and said we can do this whole deal on a senior secured basis,” said Pamela Levy, managing director of syndicated loan capital markets at BofA. The recommendation was based on the company’s pro forma leverage profile, credit statistics and cash flow generation. Senior secured not only offered the lowest-cost financing solution but it also gave the company flexibility to pre-pay outstanding debt.
The top-heavy funding solution resulted in a US$250m cash-flow revolver, a US$1.4bn term loan A, and a US$1bn term loan B. The pro-rata facilities garnered broad interest from a diverse group of banks including large, regional and investment banks as well broad participation of European and Asian lenders. On the institutional side, 120 investors committed to the term loan B despite extremely volatile market conditions. Based on the strong demand, BofA transferred US$100m from the term loan A into the term loan B.
The US$1.65bn cash-flow revolver and TLA priced at original talk of L+250bp, while the US$1bn term loan B also came at the original terms of L+300bp at 98 OID with a 3% Libor floor. The term loan B broke for trading at 99.5, 1.5-points above the OID.
BofA ended 2008 with one of the most notable high-yield deals of the year. On October 30, after more than a month of no high-yield issuance, MGM Mirage priced a US$750m five-year offering of senior secured notes via BofA as lead arranger.
Conditions in the high-yield were once again frigid, and both the company and the sector were under pressure at the time. By taking advantage of a very small window, BofA priced the deal and effectively supported it in the aftermarket. The offering took care of the casino operator’s near-term liquidity concerns and provided some positive momentum in the gaming sector. The deal also won IFR’s Americas High Yield Bond of the Year (see separate article).
Joy Ferguson.