A clever animal
When retailer PetSmart went to market in February with a US$4.3bn term loan to back its buyout by BC Partners, the outcome was uncertain at best, but the deal ended up being a success for the issuer and the lenders who put their confidence in the credit.
The loan market was in a period of turmoil as oil prices plummeted in the second half of 2014, causing investors to tighten their purse strings. The size of the deal – which would end up being the largest leveraged buyout loan of 2015 – added to the potential difficulty of getting the loan done.
“At different times we’ve had the view that US$4.3bn is a walk in the park, and at other times we’ve said it’s virtually impossible,” said William Hughes, head of North America syndicate at Citigroup.
There was also unease over the amount of debt involved, which put adjusted leverage at the company near seven times, as regulators have cited loans with debt compared with Ebitda of more than six times as a concern in their leveraged lending guidelines. Additionally, PetSmart was part of a retail sector that had not performed well during the previous year.
That led several banks, including Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and Wells Fargo, to pass on the deal.
“Some people couldn’t get there on a regulatory basis, but there were others who couldn’t get there on the credit,” said John McAuley, co-head of US leveraged finance at Citigroup.
Barclays, Deutsche Bank, Nomura, Jefferies, Royal Bank of Canada and Macquarie joined Citigroup in underwriting the buyout, which also included US$1.9bn of bonds.
Their confidence in the credit was rewarded when regulators reviewed the loan to see if it met the leveraged lending guidance rules, which include the ability to pay down half the debt within five to seven years, and passed the deal.
“We had done enough credit work to put together a case and ultimately they saw it the same way we did – that it was actually within the guidelines,” Hughes said.
By working with virtually all the investors who had ties to BC Partners, over US$100m of commitments was raised in an early round and PetSmart’s deal ended up more than three times subscribed.
The loan was priced at just 400bp over Libor with a 1% floor and traded up after allocating. In May, the company returned to the market and repriced the loan 75bp tighter than the original coupon.
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