US LevFin Wrap — MedImpact confronts political pressure, Carlyle weighs Medtronics packages, Alphia goes wide

Bill Weisbrod
+Emily Fasold

5 October 2023•4 min read

High yield spreads are at their highest point of the year and the S&P 500 is down nearly 4% over the past month. Nobody panic!

Maybe just take a deep breath instead, and put things in perspective.

“The market is still pretty good, it’s just taking step backwards,” said a leveraged finance banker. “Repricings may get put on hold, but stuff can still get done.”

To that end, there are no new high yield issuances currently in market, according to 9fin’s tracker. Loan deals have been popular (we talked about why loans are in favor over bonds these days in last week’s wrap) thanks to strong buyside demand, but that market is quietening down.

“The market is definitely de-risking,” said a buyside analyst. “There’s just so much uncertainty in the macro picture right now, and it’s not a great environment for deals.”

Public deals

New deal announcements definitely slowed down this week, and sources tell us the pipeline has thinned out a little. Some of the borrowers that were still in the market after last week faced a mixed reception.

MedImpact, a pharmacy benefit manager, is a noteworthy test case for the strength of the loan market, as it seeks to raise $1.2bn in term debt to back a refinancing and acquisition. Commitments for that deal were due yesterday.

Buysiders are wary of the possibility that new regulations could upend the PBM industry. MedImpact has a customer niche among regional employers, but it is a small compared to rivals and its margins are already thin, as we reported this week.

Other borrowers have faced a bit of pushback from buysiders amid this week’s wobbly market conditions.

White-label pet food maker Alphia widened pricing and tightened covenants on a $640m term loan to back its buyout by PAI Partners. Lenders pushed back over concerns about consumers scaling down to cheaper cuisine for their pets, as well as brands bringing production in house.

On the other hand, home security company ADT is issuing a $1.4bn TLB while riding high from a Moody’s upgrade as well as an asset sale and debt paydown. Given the slowdown in new supply, the ratings upgrade could make the deal attractive to buyers looking for high-quality paper.

Private(ish) deals

The Carlyle Group is considering both syndicated and private credit options to back its bid for Medtronic. In our report yesterday, we revealed some of the direct lenders eyeing the deal, as well as the big gap in pricing between the private and syndicated options.

Our peers at Bloomberg reported that the private option includes a PIK component, which could take the sting out of the roughly 100bps premium in the unitranche coupon compared to the underwritten bank debt (oh, and don’t forget about the fees on the bank package).

If all these stressful syndications are making you sweat, don’t forget about the clubby term loan A market. We had the scoop on telecoms company Bluebird Network (owned by Macquarie Infrastructure Partners) working with TD Securities to raise a more than $300m for refinancing purposes.

Possible deals

Now that the wave of recent LBO-related issuance is over and the pipeline is more muted, where’s the new supply going to come from?

We took a look for you. Firstly, we examined Uber’s upcoming maturities and broke down the company’s options of refinancing in the bond market or paying down debt with its bountiful supply of free cash flow.

Meanwhile, Asbury Automotive Group plans to use cash and revolver availability to fund its acquisition of fellow car dealer Jim Koons Automotive Companies — but sources we spoke to are dusting off their analysis for a possible bond issue, as the company’s revolver comes due next year.

Asbury may simply opt to extend its revolver maturity instead, and neither that company nor Uber has explicitly said they plan to tap the debt markets anytime soon. Who could blame them if they didn’t? With rates continuing to inch upwards, kicking the can is an attractive option.

“Everyone keeps saying there will be pent-up demand and a wave of new issue,” said an origination banker said. “But that’s perpetually on the horizon. It feels like a ‘wait-and-see’ market.”