US LevFin Wrap — CDK and Intertape test LBO demand, Avaya offers juicy spread

William Hoffman
+Will Caiger-Smith
+ 1 more

9 June 2022•6 min read

The LBO market is back! Or is it…?

CDK Global’s bond and loan syndication suggests it might be. Final pricing came at a healthy discount, but not as much as the market has become used to in recent weeks. There were extensive changes to the covenant package, but the docs are still pretty loose.

Despite its reliance on the auto market (which is cooling off after a hot stretch) and a selloff in tech stocks in recent weeks, CDK got a good reception. Many buysiders are familiar with it, and a better than expected B2 rating from Moody’s helped boost demand.

Syndication was accelerated early on, and final pricing was in line with talk. Buysiders had plenty of conditions; bankers unveiled a long list of lender-friendly covenant changes on Thursday. But sources noted that incoming sponsor Brookfield retains plenty of flexibility.

“They didn’t do much to tighten up the baskets, so they still have significant room for restricted payments, there’s not much protection there,” said a CLO manager. Lead arranger Credit Suisse declined to comment, while Brookfield and CDK did not respond to requests for comment.

The basic credit profile is classic LBO fare: net leverage is 5.2x through first lien debt and 6.3x through total debt (which includes the second lien pre-placed with Goldman’s private credit arm). That’s based on $811m of adjusted EBITDA, which includes $146m of synergies.

Essentially, while CDK was not the most aggressive buyout debt syndication, it had two of the hallmarks of deals done in more bullish markets: heavily adjusted EBITDA and an aggressive covenant package.

To offset that, it had a solid business outlook, a well-regarded sponsor, and a rating that put it in the sweet spot for CLOs.

The fact that it went well is encouraging for the other LBO financings waiting in the wings (Citrix, Nielsen, and Twitter, among others) although those credits (Twitter especially) may be seen as slightly more challenging

“I think it will set the tone for these other LBO deals,” said an investor. “It’s really the first higher quality deal that's coming to market for a while.”

Out of the box

On the other end of the spectrum, Intertape Polymer Group is demonstrating the difficulties that lower-rated issuers will face in this market.

Intertape, which makes plastic and paper-based packaging and counts Amazon and Walmart among its clients, is being acquired by Clearlake at a roughly $2.6bn valuation. That acquisition is being funded with a $1.9bn package of bonds and loans, due to price next week.

The issuer’s $400m SUNs (rated Caa2/CCC+) look set to test the terms of the underwrite, which set a 10% cap on the coupon. Average triple-C and lower yields have blown out to almost 13% this week, compared with the 9% range when the deal was signed in March.

The notes are talked at an OID in the low 90s, which would imply an all-in-yield in the high-11% to 12% range ( clients can see 9fin’s news coverage of the deal here, our Credit QuickTake here, and our Legals QuickTake here.). If you are not a client but would like a copy of our QuickTakes, please complete your details here.

This highlights a major headwind facing LBO underwriters right now: poor demand for senior unsecured debt. CDK got around this by replacing its unsecured bonds with its privately-placed second lien facility; Intertape is testing the public markets instead.

Those markets have been highly volatile. Last week’s tighter pricing is long gone: according to ICE BofA, average yields are now 57bp wider from their recent tights at the end of May, at 7.45% as of yesterday.

Sentiment turned even more negative on Friday, thanks to inflation. The Consumer Price Index rose 8.6% year-over-year, above expectations of 8.3%. Equities sold off on this data, and the US HY ICE BofA index is down by over 1% on the day.

For banks looking to offload LBO risk, this perpetual instability is unwelcome.

“At some point the risk department taps the syndicate team on the shoulder to say ‘I don't care what your cap rate is, you gotta bring a deal to get it off our books and into the market’,” said a buysider.

Cash constraints

Communications tech company Avaya raised eyebrows with initial price talk on a new $500m 2027 first lien term loan due 2027, with proceeds to refinance convertible bonds and add liquidity. Talk is S+900bp, with a 1% floor and a 96 OID, with commitments due June 17.

The company spooked investors in May, when it said it would burn cash at around 7% of revenue in 2022. During the previous quarter, it had forecast that it would generate free positive free cashflow equivalent to 1% of revenue.

Avaya’s $350m 2.25% 2023 convertible notes, which will be refinanced with the new loan, slumped almost 20 cents on the dollar to a cash price of 77 after the earnings report, before recovering to around 93. Its 6.125% SSNs due in 2028 also briefly dropped below 70.

“Taking out the convertible with 10% secured debt will clearly be another constraint on free cashflow going forward,” said one buysider. “The company is heading in the right direction, but it has to find lenders to help bridge that gap to turn itself around.”

Odds and ends

Even for strong double-B credits, new issue pricing was mixed this week. KB Home did manage to price a $350m SUN due in 2030 at par with a coupon of 7.25%, after starting price talk at 98-99 to yield 7.125%–7.25%.

But that implied a more than 100bp concession over its existing 4% SUNs due in 2031, which were trading at a yield to maturity of 6.164% prior to the announcement of the new deal. That large concession, as well as KB’s strong market position, helped bring investors to the table.

“We understand homebuilding is cyclical and we could be towards the tail end of what has been a strong market, but we think these are strong operators,” one portfolio manager said. “It’s a solid double-B company, and I think they have good financial policies through the cycle.”

Similarly, satellite company Maxar Technologies paid a high concession over its existing curve. But it was under some time pressure, tapping the market this week to take out a 2023 maturity that comes current later this year (check out this weeks’ Cloud 9fin podcast for more).

Elsewhere, Callon Petroleum met little resistance in the pricing of its $600m 7.5% SUNs due in 2030 rated B3/B/B+, as the energy sector continues to flaunt its strength.

In loans, restaurant company Dave & Buster’s is out with a new term loan to finance its acquisition of Main Event Entertainment. The deal comes amid fears that inflation and a potential recession could hit demand for the company’s gaming and dining experiences.

Also this week, packaging provider Imperial Dade wrapped a loan deal backing Advent’s acquisition of a minority stake, with extra proceeds paying down revolver borrowings. Pricing came tight to talk.

Meanwhile, Spanish-language media company Univision priced a refinancing deal, with its new term loan pricing tight to talk and the secured bond component coming at the tight end of guidance.

“Things that were waiting in the wings have come out,” said an analyst said. “The past week or two has been a bit better, and a lot of banks have lined up deals to push out.”