US High-Yield Bond
Packing a punch: Reynolds Group’s US$2.5bn bond transaction to fund the acquisition of Graham Packaging faced strong headwinds due both to market volatility and the complexities surrounding the deal. Because it defied those challenges, pricing well in a difficult market, it is IFR’s US High-Yield Bond of the Year.
On June 17 2011, Reynolds signed a merger agreement to acquire Graham Packaging for US$4.5bn. The deal trumped Silgan’s previous offer and became one of the largest LBO, public to private transactions of 2011. On July 26 Credit Suisse priced and allocated a US$2bn leveraged loan, a US$1.5bn tranche of secured notes and an increased US$1bn tranche of unsecured notes to finance the acquisition. Credit Suisse was joined by HSBC on the deal.
The deal was brought at a difficult time in the market, with eurozone and US debt ceiling concerns causing significant volatility. In addition, the complexities surrounding the bond deal were numerous. For one, Reynolds had only recently acquired Pactiv in late 2010, which included a US$3bn bond, and the Graham acquisition had some investors concerned about added leverage. This sent Reynolds’ existing bonds lower.
Reynolds also decided to leave Graham’s existing bonds outstanding in order to avoid having to price an even larger bond in a difficult market, which Graham’s bondholders had not expected. Those bonds had traded up to about 112 on the expectation of a higher quality Silgan acquisition and some of the Graham bondholders expected to be paid at 110, rejecting an earlier tender offer that would have paid them slightly above 101. Lawsuits were threatened, but none came to fruition. (The bonds ultimately ended up putting at 101 as the market continued to turn down.)
Reynolds’ new bonds were also not guaranteed by Graham. The leads created a unique capital structure that permitted Graham Packaging to be a non-guarantor, which provided significant cost savings in transaction costs for Reynolds. To offset this for investors, an intercompany loan was structured to allow additional credit support and cashflow from Graham to Reynolds.
Despite all the noise surrounding the acquisition and the complexities of the deal, it was multiple times oversubscribed. The leads priced it at the midpoint of talk instead of at the tight end – which would have been possible – to ensure that the bonds would trade well.
The US$1.5bn eight-year non-call four senior secured tranche (Ba3/BB–) priced with a 7.875% coupon at 99.268 to yield 8% while an US$1bn eight-year non-call four senior unsecured tranche (Caa1/B–) was issued with a 9.875% coupon at 99.318 to yield 10%. Taking advantage of demand in the unsecured notes, the leads doubled the size to US$1bn from US$500m to pre-fund any potential change of control puts by Graham bondholders.
Investors were ultimately comfortable with the fact that both Reynolds and its acquisition have had strong cashflow and solid numbers in the past, and demand was indeed strong at the pricing level. The notes climbed more than two points in the aftermarket to 102.75 before settling at 102.00–102.25 that week.
“Credit Suisse brought the deal at a tough time in the market. They placed it well and it held up really well,” said one investor. “It was a very tough story to understand for a company that has a huge amount of debt outstanding and is very low quality, and they pulled it off. Trying to place a big, very complex credit at a tough time in the market is pretty commendable.”
The deal was also considered very constructive for the market at the time of pricing. Given its size and strong bid in the secondary market, it signalled that the market, which had experienced a buyers’ strike during much of June and July on the back of eurozone and US debt ceiling concerns, was open for deals of size.
To see the full digital edition of the IFR Americas Review of the Year, please click here.
