US High-Yield Bond House
Full steam ahead: The US high-yield market in 2010 was marked by record breaking issuance. Borrowers flooded in to address their refinancing needs, with M&A and leveraged buyout activity returning in force. For dominating in every area of issuance and delivering solid, well-executed and creative deals, Bank of America Merrill Lynch is IFR’s US High-Yield Bond House of the Year.
At US$251bn, global US dollar-denominated issuance in the high-yield market for the awards period was unprecedented. The market suffered two slowdowns, in February and then from late May to July, thanks to concerns about European sovereigns. Outside of those periods, though, high-yield was on a rampage.
Huge amounts of cash entered the market as investors searched for yield. Issuers, in turn, were attracted by what were for them low yields, and came out to address pressing – and not-so pressing – maturity issues. Underlying all this was the feeling that the market could shut down again at a moment’s notice.
The high-yield market was open for a number of very creative transactions and sizeable LBO and corporate M&A deals. Apart from leverage, the market was starting to look to many like it was 2006 all over again, as PIK toggles, covenant-lite transactions and dividend deals resurfaced.
An open market also meant that a number of LBO credits, formerly shut out or relegated to distressed exchange offers, began addressing their massively over-leveraged balance sheets with new bond deals.
It was in this fast-paced environment that Bank of America Merrill Lynch thrived. The high-yield team’s consistent show of excellence in a wide range of transactions from the relatively simple to the difficult and creative proved that issuers and sponsors were identifying BofA Merrill as the partner they needed. Equally, investors could expect solid execution.
“When you look at the lead left deals, BofA Merrill is far and away the leader in the market, which is remarkable given the mortgage-related turmoil it has gone through as well as the Merrill Lynch issues,” said one investor. “From investors’ standpoint, their deals are generally well-structured, good companies, with reasonable underwriting standards. They support their deals after they break, unlike many of their competitors. And they continue to invest in people and have good research, one of the few remaining shops that publishes research.”
The successful integration of BofA and Merrill Lynch played a big part in its success in 2010. “A lot of us were sceptical that BofA could integrate Merrill Lynch and turn themselves into a power house, but in the world of high-yield, they nailed it,” said a second investor.
“BofA Merrill dominated in every way,” said a third. “They had a really broad cross-section of quality deals mixed in with LBO transactions and some small club-type transactions.”
“We hit our stride this year across all avenues, including repeat and new business, sponsor and esoteric,” said John Cokinos, the firm’s head of high-yield capital markets.
To be sure, BofA Merrill’s ability to deliver capital for all types of clients and through various market conditions transformed it into a top choice for issuers. The bank is easily ranked top in lead left transactions for the year, garnering new clients while maintaining existing ones that would help grow market share. It also deepened sponsor relationships to take the lead on many large LBO transactions.
“I think BofA Merrill looked at their book of business and said there’s no excuse not to be number one or number two,” said a private equity partner. “They went for it and they chose the timing right and managed the risk right.”
One of BofA Merrill’s most notable transactions was its US$2.75bn bond offering for LyondellBasell, part of its Chapter 11 exit – one of the largest exit-financing packages ever.
In late March, BofA Merrill advised its long-time client to take advantage of strengthening market conditions. It planned a financing whereby the senior notes and term loan would remain in escrow while the company was still in Chapter 11.
This would allow the company to access the favourable market conditions and avoid the risk that markets would seize before the plan or reorganisation was confirmed. The escrow agreement mechanics allowed LyondellBasell to remain in bankruptcy if needed for an additional four months after the financing closed.
As a result of BofA Merrill’s guidance, on March 24 roughly US$2.75bn of 9% senior secured notes due 2017 were priced in a cross-border high-yield transaction, which included US$2.25bn and €375m of 8% non-call three senior secured notes that came at par. This was the tight end of talk on the dollar tranche and inside the tight end of talk on the euro piece.
The execution overcame several challenges: the plan of reorganisation was not yet confirmed; the DIP roll-up tranches had not been settled or voted on; the rights offering was not yet syndicated; and there was noise overhang around litigation.
BofA Merrill acted as lead left on the bond and global transaction co-ordinator for the total refinancing, which also included a US$500m secured term loan, a US$1.75bn asset-based loan and a €450m European securitisation facility.
BofA Merrill also headed up some notable LBOs as that market reopened. The team was left lead for NBTY, Tomkins, Evertec, Multiplan, inVentiv Health, Vertafore, Interactive Data and DynCorp.
In September, Tomkins came to the market to fund its roughly £2.89bn acquisition by Onex and Canadian Pension Plan Investment Board. Rated B1/B+, the notes were priced as US$1.15bn second-lien senior secured bonds with an eight-year tenor, callable after four years. BofA Merrill was lead left, with Citigroup, Barclays, RBS and UBS serving as joint leads. The bonds were priced at the tight end of the 9.00%–9.25% guidance.
The deal, which included a US$2.3bn senior credit facility, was one of the largest LBOs by transaction value globally since 2007.
BofA Merrill also financed Apollo Management’s acquisition of a 51% interest in Evertec through the establishment of a joint venture, pricing US$220m in 11% senior notes due 2018 in September at the midpoint of talk at 11% at par. The bank led each tranche for the debt financing for Evertec, a first time issuer in the leveraged loan and high-yield bond markets. BofA Merrill completed 15 transactions for Apollo and its affiliates in 2010.
Vitamin maker NBTY chose BofA Merrill to left lead its US$650m eight-year non-call four senior notes offering, financing the company’s acquisition by Carlyle for US$3.8bn. The B3/B deal was a favourite among investors, with BofA Merrill, Barclays and Credit Suisse pricing the issue in September at 9% at par, from guidance of 9%–9.25%.
BofA Merrill also left led BWAY Holding’s US$150m PIK toggle offering to pay a dividend to its sponsor, Madison Dearborn.
The use of proceeds wasn’t particularly investor-friendly. S&P lowered the company’s ratings to B from B+ following the announcement of the deal – the result of the additional risk to BWAY’s already very aggressive financial policies and highly leveraged profile. It also assigned a low CCC+ rating to the notes. Following the dividend deal, debt-to-Ebitda was roughly 6.1 times.
Despite all this, investors were very comfortable participating in the offering, which was well executed on the part of BofA Merrill and Deutsche Bank. The short-dated five-year non-call two senior unsecured notes offered an attractive coupon of 10.125% at a discount of 97, for a yield of 10.917% at pricing in late October.
It was upsized from US$125m with coupon options for the notes including all cash, a 50/50 split between cash and PIK, and all PIK (which would lead to a 75bp step-up).
BofA Merrill also was dominant in 10-year non-call four deals, including MGM Mirage, which priced a US$845m offering that was the first 10-year non-call four deal completed since 2006, CB Richard Ellis, DaVita and first time issuer FIS.
New clients included FTI Consulting, PolyOne, Esterline, Insight and Limited Brands. BofA Merrill was also instrumental in complex capital raises for International Lease Finance Corp, Consol Energy, American Seafoods Group and Express.
Consol Energy picked BofA Merrill to left lead its large US$4.34bn capital raise, pricing a B1/BB rated US$2.75bn bond offering with PNC and RBS joint books. BofA Merrill also led a US$1.63bn common share offering.
The combined proceeds were used to finance the US$3.475bn purchase of Dominion Resources’ Appalachian natural gas properties. The financing was one of the largest committed capital raises of 2010.
Tranches on the bond were split between seven-year non-call four and 10-year non-call five senior unsecured notes. The US$1.5bn seven-year tranche was priced at 8% at par, at the tight end of its 8.125% area price talk. The US$1.25bn in 10-year notes came the expected 25bp behind, at 8.25% at par. The notes did very well in the secondary market, rising to 102.
BofA Merrill successfully co-ordinated all the different parts of the transaction and got to the market very quickly, with the bond deal well-oversubscribed.
Joy Ferguson
