Bigger and better
2019’s largest US high-yield bond – a US$4.875bn two-parter that helped broadcaster Sinclair fund its US$8.2bn acquisition of sports broadcasting rights from Walt Disney – created a whole new credit for investors on the hunt for higher-quality assets amid concerns about an economic downturn.
The bond offering was part of a financing package that also comprised US$1.385bn of cash, a US$3.3bn term loan, a US$650m revolver, as well as US$1.025bn of preferred stock. JP Morgan was left lead on the bond deal.
All this was put towards the purchase of an array of local broadcasting rights to 42 professional sports teams, including 14 Major League Baseball teams, 16 National Basketball Association teams and 12 National Hockey League teams.
With the acquisition, Sinclair became a major provider of sports programming in a well-timed deal that took advantage Disney’s need to sell the sports rights as part of its own US$71bn purchase of 21st Century Fox assets.
“This made a sweet spot acquisition with limited competition for Sinclair, which allowed them to get the assets at a beneficial valuation,” said one bond investor.
While Sinclair was no stranger to the bond market, bankers had to sell what was essentially a new story through the issuer, Diamond Sports Group, a subsidiary created to hold the acquired assets that would have net leverage of close to five times and a capitalisation of US$10.1bn.
Investors liked what they saw, and were even willing to turn a blind eye to what were seen as aggressive covenant structures typically attached to sponsor-backed deals, most notably language that allowed for the extraction of dividends regardless of the company’s financial health.
The size of the deal not only appealed for its liquidity value but also because it came from a sector that is not overly cyclical, therefore finding favour among a buyside that had largely spurned lower-quality names for safer credits ahead of an excepted downturn in the economy.
It is “in the wheel house of what most investors want right now and that outweighed people’s concerns about covenants”, said another investor.
Following a pattern seen in other large fundings in 2019, the secured bonds garnered heavier demand, with the seven-year non-call three (Ba2/BB) upsized to US$3.05bn from US$2.55bn and the unsecured eight-year non-call three (B2/B) downsized to US$1.825bn from US$2.325bn.
Both tranches, however, saw strong price progression with the unsecured bond landing at a yield of 6.625%, well inside talk of 7.25%–7.50% and the secured bond coming at a yield of 5.375%, also tight to talk of 6.00%–6.25%.
In turn, investors have been paid with strong performance in the bonds, which were priced at par. The secured bonds were trading as high as 104.125 on November 11, while the unsecured were changing hands at 102.25.