US LevFin Wrap — Citrix makes way for Brightspeed, RCL sets sail with refi

William Hoffman
+Sasha Padbidri
+ 1 more

22 September 2022•6 min read

One day, someone will write a book about the Citrix buyout financing. It’ll probably get made into a documentary, and then a Netflix original series.

It’ll be fun to relive it all when that happens. But for now, we’re willing to bet that most people in the credit markets are just glad it’s over.

There’s just one catch: it’s not really over yet. The syndicated debt may have priced, but the banks are still sitting on a small mountain of Citrix debt that they would much rather not hold onto, so it’s a pretty fair assumption that they’ll already be working on strategies to offload it.

What kind of pricing they offer will depend on market conditions, obviously. So will the timing, to a certain extent — but as we reported yesterday, at least investors know that BofA and its fellow underwriters can’t begin offloading the TLA until next year.

What the market will look like then is anyone’s guess. “Four months from now I can see the loan index being four points higher or four points lower,” said one portfolio manager, referring to the expiry of the lockup period on the Citrix TLA.

But one clear takeaway from the Citrix syndication is that sentiment has got steadily more bearish over recent weeks. We’ll see how trading shakes out over the next few weeks, but for now the bonds and loans are all a touch lower in secondary — see that, and our coverage, here.

Bright and speedy

Underwriters already seem to be approaching the market more conservatively in light of how the Citrix syndication played out.

While Citrix pushed for tighter pricing and looser covenants, Apollo’s financing of the carveout of Lumen Technologies telephone copper wire business is trying a different tack.

Sources noted that the new company, rebranded as Brightspeed, is starting price talk wide of expectations. Marketing materials also tout an experienced management team and relatively compelling business narrative, pro-forma EBITDA estimates are fairly conservative, and the covenant package is relatively tight (for a sponsored LBO deal, at least).

BofA is leading a $2bn TLB due 2029 with price talk at S+CSA+500bps and a 92 OID. Barclays is leading a $1.865bn SSN due 2029, which sources said is talked at an 8% coupon with enough OID to get an all-in-yield of 10%.

Brightspeed will also price a $1bn TLA and receive $3.037bn of new sponsor equity. For more details on the financing package, read 9fin’s Credit QuickTake. If you are not a client but would like to request a copy, please complete your details here.

But this more gracious approach to the market could fall on deaf ears.

Investors are concerned the cost of Brightspeed’s plan to convert legacy copper wire connections to high speed fiber internet could balloon in the current inflationary environment.

And if operating cash flows aren’t maintained, the company could be back in the capital markets for more funding before the initial build out is complete.

The deal is somewhat polarizing with other investors pointing to an experienced management team — led by CEO Bob Mudge, who previously guided Verizon’s Fios build out — and its plan to reduce the costs of installation.

The hangover from Citrix and the Federal Reserve rate hikes this week are not only slowing the bookbuild for Brightspeed, but also delaying other highly anticipated LBO deals for market data collector Nielsen and automotive components maker Tenneco.

Tenneco could launch a $5.4bn debt package sometime in mid-October after Columbus Day, Bloomberg reported this week, and sources told 9fin Nielsen has been rumored to launch each of the last two weeks only to have it pushed back.

Citrix didn’t set a great tone for other transactions to come, one portfolio manager said, but investors should have more familiarity with the names in the pipeline.

“At least with Nielsen and Tenneco those names are well known in high yield and net-net they’ll comp off of Citrix because they all look similar with first lien paper,” the portfolio manager said.

“The good news for the buyside is that we are getting first lien paper at pretty big coupons for companies that have big scale and have either longer term operating history, or some kind of track record in the high yield market.”

High-grade calls

While underwritten LBO financing is taking center stage, cruise line Royal Caribbean snuck into the high yield market on Thursday with a $2bn deal to refinance a pair of bonds maturing in the second quarter of 2023.

Refinancing deals have been few and far between after borrowers took advantage of low borrowing costs in 2021, but cruise lines such as Royal Caribbean still have plenty of maturities to tackle after issuing so much debt to survive the pandemic.

The refinancing clears the bulk of the company’s 2023 debt maturities and means the company won’t have to rely on a $3.15bn backstop facility taken out with Morgan Stanley earlier this year.

Yet the 8.25% and 9.25% coupons on the new 2029 senior secured (rated Ba3/BB-) and senior priority guaranteed notes (B3/B+) show investors expect to be well compensated for an uncertain industry outlook. The bonds priced at par.

While Royal Caribbean said on Thursday that bookings are now well above 2019 levels at a higher price point, margins are being compressed by lower occupancy rates and rising fuel costs, according to S&P.

This could delay the company’s ambitions of reducing the amount of debt in its capital structure and returning to an investment grade, unsecured balance sheet, one analyst said.

That said, Royal Caribbean did include a 2.5 year call option in the new bonds, instead of its usual bullet structure, which gives them the opportunity to refinance the new debt at cheaper levels if the company’s credit profile and cost of borrowing improves.

Markets and the metaverse

This week, 9fin headed to the LSTA’s annual conference and cocktail reception at the NY Hilton, which focused on the theme of reassessing risk and reshaping markets. The event, which drew record attendance, was also the industry group’s first in-person annual conference since the pandemic.

In line with the theme, direct lending was one of the most talked-about topics at the conference. On a panel discussing the rise (and rise) of private credit, the asset class was estimated to be as large as $2trn, according to data from Proskauer’s private credit client survey — a testament to how quickly the space has grown since its nascent days following the 2008 financial crisis.

Other market participants highlighted growing activity in the secondary loan market, which recorded a peak trade volume of $80bn in April. Annual secondary loan trading volume is estimated to increase 10% to a record level of $858bn in 2022, up from $780bn in 2021, according to data provided by the LSTA.

Conference attendees were also eager to hear from keynote speaker Matthew Ball, venture capitalist and author of “The Metaverse”. Given that virtual reality technologies are poised to become a bigger part of our lives, 9fin asked conference attendees if future levfin conferences would be held in the metaverse, but the consensus seemed to be a resounding no.

“Of all the industries the metaverse could disrupt, I'm pretty sure leveraged finance is not that high up on the list,” said one.

Back in the real world, all eyes are on Credit Suisse, which is said to be considering a “radical overhaul” of its investment bank. While the bank has not revealed its exact plans, reports have indicated that this may include a sale of its securitized products business, or even a potential US exit — which Credit Suisse has since denied.

The bank, which reports third quarter earnings on 27 October, is also said to be mulling a potential sale of its LatAm wealth management operations excluding Brazil.