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Middle Market: 1Q14 updates to LCD’s Mezzanine Tracker now available

spcapThe middle market Mezzanine Tracker is now updated through the first quarter of 2014. In addition to U.S. mezzanine and unitranche investments, the spreadsheet includes non-syndicated second-liens for 2013 and later.

As before, the information is gleaned from market sources and SEC filings. The majority of deals are sponsored transactions.

Find the file on the web at lcdcomps.com > Research > US Data > Current Data > Mezzanine Tracker.

Subscribers can find a list of all second-lien loans, including syndicated tranches, in LCD’s separate Second Lien Pipeline and quarterly reports found within the Research > US Data tab.

Questions? Feedback? Let us know! Contact Kelly Thompson at kelly.thompson@spcapitaliq.com or at (312) 233-7054.

Find Kelly on Twitter @MMktDoyenne for middle-market financing news. Check out LCD on Twitter @lcdnews.

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Europe: Leveraged loans compete with high yield bonds for LBO deals

The European credit markets are set to undergo a shift this year, as private equity sponsors sway back towards the loan product to finance buyouts, sources say. The nuances of the loan product and the perception of a highly liquid loan investor base – coupled with the arrival of cov-lite cross-border loans – means the European loan market will be able to compete with its bond counterpart once again.

High-yield issuance has surged in recent years, allowing it to move out the loan market’s shadow, helped by the bond-for-loan refinancing juggernaut as sponsors tapped into the liquid, cheap, and cov-lite financing option offered by bonds.

In 2006 and 2007, bonds accounted for just 16% and 17% of the leveraged finance deal count, respectively. That compares to an average of 50% since 2010. Moreover, last year’s bank-to-bond deal count was 62 – nearly twice the next-largest full-year supply of 36, tracked in 2010. In 2010 through 2013, there have been 150 bank-to-bond transactions for a volume of €51 billion, in a sweeping transition of money from one asset class to another unprecedented in the European leveraged market.

Now, not only has the flood of loan-to-bond refinancings slowed, but market players expect loans to move back into favour versus high-yield when it comes to new buyout situations.

In 2013 loan-only financing was used to back just under 60% (by count) of all M&A financings tracked by LCD across the loan and bond markets, while the popular bond-plus-RCF structure took a 14% share. These annual readings are, respectively, the lowest and highest of the past four years.

So far in 2014 through to March 12, although the pattern of deal flow is still taking shape, loan-only M&A financing has grabbed a 77% share of all deals, while the bond-plus-RCF option is yet to appear.

For jumbo M&A situations such as Numericable, arrangers will want to tap both markets, but away from these the appeal of the loan product is evident again. “The huge driver of supply from 2010-13 has been bank-to-bond, but people are now more constructive on the loan market,” says a banker.

For prospective issuers the loan product offers cheaper financing. The 90-day rolling average yield to maturity at issue on secured bonds is 6.35%, versus 4.5% for TLBs as of March 7. Both are at historically tight levels, and while the spread between the two has narrowed over the last three months, the second half of last year saw the spread at 2.75% (it has been higher once, at 3.12% in the first quarter of 2012), which began to entice issuers to look more closely at loans again.

A key development has been a deeper bid for the loan product. The 2007 loan bonanza was fuelled by CLOs but these subsequently fell away, while banks have been reluctant to lend due to tighter regulation. However, the emergence of more managed accounts and a general pick-up in traditional institutional money have ensured there is no longer a dependence on CLOs for the leveraged loan product.

Even so, the re-emergence of the CLO product adds further comfort that the loan bid is deep and strong. The European CLO market is expected to see at least €10 billion of new issuance this year, versus €7.4 billion last year, and essentially zero during the previous post-crisis years.

“There has been a move away from the dependence on CLOs we saw in 2007,” a banker says. “There is now more traditional institutional money raised, and a new breed of CLO.”

The investor base is hungry for supply, and the €2 billion loan from Ziggo last month highlighted how deep the European market has become – albeit it for a double-B credit. “Ziggo has given sponsors a different perspective on what can get done in loans,” says a banker.

Meanwhile, banks are starting to feel underlent, and are therefore looking to add assets, according to sources. The bond-for-loan trade has resulted in a much larger run-off in bank balance sheets than expected or needed, and interest income is down, sources add. Furthermore, weak corporate M&A volumes mean there are limited opportunities for banks to provide term debt that might carry a premium.

The documentation story

Sponsors have often preferred high-yield over loans in recent years due to bonds being a more flexible asset class with fewer covenants and, in more recent years, a willingness to provide portability.

However, the acceptance of cov-lite on cross-border loans – and its anticipated arrival on at least some domestic European loans – is changing this perspective. With better options for exits available to sponsors, the open repayment aspect of loan financing also looks appealing, sources say, despite the advent of portability language in bond documentation.

“Currently the big trade-off if you go for loans, is covenants,” a sponsor says. “The big advantage of U.S. loans is they are predominantly cov-lite. In Europe, FRNs are comparable to U.S. cov-lite loans, and we can also get portability on bonds. We would, though, look at high-yield very differently in the face of cov-lite loans as you can have the same covenants, but get a pre-payable capital structure at par.”

Another emerging risk to high-yield is the reappearance and acceptance of the first- and second-lien buyout structure. Originators say this format is being heavily pitched in Europe, and add that the second-lien paper is in demand from funds looking for a return boost. This should also allow sponsors to lift leverage, which still remains conservative versus levels seen during the 2007 LBO boom.

Faced with these potential headwinds – which were a recurring theme at last week’s high-yield conference hosted by Euromoney Seminars – bond investors were asked what more they would be willing to give sponsors to keep high-yield attractive. The answer was that high-yield has already gone as far as it should on terms.

Investors cite several key features that have evolved to make the asset class attractive to sponsors, such as the advent of non-call one FRNs, and portability. In addition, they mention restricted payments leverage tests that allow sponsors to take money out of the company at will, as well as making debt incurrence easier.

So flexible has high-yield become that there is talk of sponsors demanding similar terms and features for loans. “Sponsors want loans again. They’re quite cheap, they’re flexible in terms of repayment, and they’re floating. But they’d also like no covenants, plus all the other flexibility that goes with a high-yield bond,” says an arranger. – Luke Millar/Ruth McGavin

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Ares Capital hires two to expand senior debt business for energy sector

ares logoAres Capital Management added two people to expand senior and subordinated debt financing to the oil-and-gas industry.

Owen D. Hill and Jonathan M. Shepko will be based in Dallas, and join as managing directors. They will expand the Ares energy team’s focus from project finance and power-generating assets to include senior and subordinated debt financing opportunities to the upstream, midstream, and energy-service sectors.

Hill and Shepko co-founded CLG Energy Finance, the division of Beal Bank focused on lending to the energy industry. From 2009-2013, their team originated more than $1 billion in financing to the oil-and-gas industry, mainly as senior secured term loans.

The move “is a direct result of the growing market for domestic energy solutions and the changing appetite and risk tolerance of traditional banks for providing debt financing in the industry,” Ares Capital said in a statement today.

Ares Capital Management is the investment adviser to specialty finance company Ares Capital. Ares Capital, a business-development company, focuses on secured loans and mezzanine debt to U.S. middle-market companies and private equity sponsors. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

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Credit Suisse to provide financing for Thoma Bravo’s TravelClick buy

travelclick logoCredit Suisse is providing financing for Thoma Bravo’s $930 million purchase of TravelClick from middle-market private equity firm Genstar Capital Management, sources said.

The sale is expected to close in the second quarter. Evercore served as financial advisor to Genstar and TravelClick.

TravelClick, based in New York City, provides reservations technology systems and marketing services for hotels.

Genstar and Bain Capital Ventures acquired TravelClick in 2007. Since the acquisition, TravelClick’s revenue and EBITDA have more than doubled, according to a joint press release from Genstar and Bain.

In March 2011, BMO Capital Markets arranged a $160 million term loan (L+500, 1.5% LIBOR floor) and a $20 million revolver to refinance junior and senior debt at TravelClick.

Last year, BMO arranged a $90 million second-lien term loan due 2018 for TravelClick to pay a dividend. At the same time, $192 million of TravelClick’s first-lien debt was repriced to L+450, with a 1.25% LIBOR floor.

To finance the 2007 buyout, San Francisco-based Genstar lined up a $105 million senior secured loan via Jefferies and $40 million of mezzanine debt via Blackstone Group. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more

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Pawn shop concern Borro nets $112M investment from Victory Park Capital

borrow logoMiddle market lender Victory Park Capital closed $112 million in financing for Borro, a collateral lender that offers loans within 24 hours secured against luxury cars and jewelry.

Chicago-based Victory Park Capital invests in niche credit and private-equity opportunities in the middle market, with a focus on distressed and improving companies. Investments have included Fort Lauderdale, Florida-based Silver Airways, independent oil-and-gas company Buccaneer Energy, small business lender Kabbage, smoothie maker Jamba Juice, and consumer lender Think Finance.

Personal asset lender Borro provides personal loans, bridge financing, and short-term loans to individuals who use watches, jewelry, loose diamonds, gold coins, luxury and classic cars, yachts, fine art, antiques and high-end handbags as collateral for loans. The average loan size is $12,000. Investors in Borro include Menlo Park-based Canaan Partners. – Abby Latour

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Leonard Green’s Aspen Dental drops plan to refinance leveraged loan

aspen dentalAspen Dental won’t proceed with its refinancing, investors were told today. The issuer, which is controlled by Leonard Green had sought to remove maintenance covenants from its term loan and reduce pricing by 125 bps, to L+475, with a 1% LIBOR floor via GE Capital Markets, UBS, and Jefferies.

Some investors were concerned about the proposed covenant-lite structure in the light of weaker-than-expected 2012 performance tied to a disruption in third-party financing for some of Aspen’s customers, sources said. While the sponsor in recent days agreed to add a covenant, the prospect of both the maintenance covenant and potentially a lower pricing reduction than originally planned proved unappealing. Instead, B/B2 Aspen is expected to reapproach investors later, when the company can demonstrate that the rebound in the business seen in the most recent quarter has been sustained, sources explained.

The new deal would have included a slight upsizing, and refreshed maturities. The $330 million, six-year B term loan was offered at 99.5 and would have included include six months of 101 soft call protection.

The accompanying $40 million, five-year revolver was talked at L+475, and was offered with 100 bps upfront. The RC included a 50-bps unused fee. The RC would have included a springing leverage covenant when it is drawn or if greater than $15 million of standby letters of credit are outstanding, sources noted. – Chris Donnelly

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Bain sweetens pricing on loan backing Bob’s Discount Furniture LBO

bobs discount funitureRBC Capital Markets and UBS have finalized pricing on the LBO financing for Bob’s Discount Furniture after increasing the spread on the first-lien term loan and cutting the offer price on the second-lien, according to sources.

The spread for the $180 million, seven-year first-lien term loan was increased to L+425, from original talk of L+400, while the 1% LIBOR floor and 99 offer price remain unchanged, according to sources. At the revised level, the yield-to-maturity increases to 5.54%, from 5.28%. The loan includes 101 soft call protection for 6 months.

Pricing for the $80 million, eight-year second-lien term loan is unchanged, at L+800, with a 1% LIBOR floor, but the OID was cut to 98, from 99. With that, the yield-to-maturity is 9.7%, versus 9.5% as initially outlined. The second-lien will be callable at 102 and 101 in years one and two.

The financing will also include a $40 million asset-based revolver.

Corporate ratings are B/B3. The first-lien is rated B/B2, with a 3 recovery rating. The second-lien is rated CCC+/Caa1, with a 6 recovery rating.

The financing supports the buyout of Bob’s by Bain Capital, which was announced in December. Bain is taking a majority stake in the retailer from Apax Partners, KarpReilly and other shareholders. Company management will continue to own a significant stake.

Bob’s Discount Furniture, based in Manchester, Conn., operates as a furniture retailer, with 47 stores located throughout the Northeast and Mid-Atlantic regions. – Jon Hemingway

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Apollo readies $725M leveraged loan backing Chuck E. Cheese LBO

chuck e cheeseDeutsche Bank, Credit Suisse, Morgan Stanley, and UBS have scheduled a bank meeting for 2:00 p.m. EST on Tuesday, Feb. 4 to launch a $725 million, seven-year covenant-lite term loan backing Apollo Global Management’s $1.3 billion acquisition of CEC Entertainment, according to sources.

Price talk is not yet available. Financing for the LBO also includes a $150 million, five-year revolving credit facility and $305 million of unsecured notes. Credit Suisse will be left lead on the adjoining bond deal.

CEC, which operates pizza and family entertainment chain Chuck E. Cheese’s, announced earlier this month that Apollo agreed to purchase the company, for $54 per share, or $1.3 billion, including the assumption of debt.

The sale was the result of a strategic review aimed at boosting revenue and profit. Revenue dipped slightly in the fiscal third quarter ended Sept. 29, 2013, to $195.9 million, from $196.6 million in the comparable 2012 quarter, while operating income fell to $13.2 million from $14.5 million. – Kerry Kantin/Abby Latour

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Quest Diagnostics to buy Solstas in $570M deal

solstas lab partners logoQuest Diagnostics is buying Solstas Lab Partners Group from private equity firm Welsh, Carson, Anderson and Stowe in a $570 million transaction.

The deal is expected to close in the first half of 2014.

Greensboro, North Carolina-based Solstas is a full-service commercial laboratory company with operations in the Southeastern U.S., including North and South Carolina, Virginia, Tennessee, Georgia, and Alabama.

NYSE-listed Quest Diagnostics offers cost-effective diagnostic testing through a national network of laboratories and 2,000 patient locations in the U.S., as well as operations in India, Ireland, Mexico and Britain.

Welsh, Carson, Anderson and Stowe specializes in the information/business services and healthcare industries. – Abby Latour

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Ortho-Clinical Diagnostics nets financing for Carlyle-led buyout

Ortho-Clinical DiagnosticsBarclays, Goldman Sachs, Credit Suisse, UBS and Nomura have committed to provide debt financing for The Carlyle Group’s $4.15 billion purchase Johnson & Johnson’s Ortho-Clinical Diagnostics business, sources said.

The deal, which won’t close until mid-2014, would include $2.15 billion of term debt and roughly $1.15 billion of bonds, sources said.

The unit is a global provider of solutions for screening, diagnosing, monitoring and confirming diseases. Headquartered in Raritan, N.J., with manufacturing operations in Rochester, N.Y., Pompano Beach, Fla. and Pencoed, Wales, OCD operates in 130 countries. OCD serves clinical laboratories and the transfusion-medicine community around the world. – Chris Donnelly