US LevFin Wrap — Musk pulls banks back in, LBOs have few ways out, Enerflex braves primary

William Hoffman
+Will Caiger-Smith

6 October 2022•5 min read

The big deal is back on! Or at least, it looks like it is.

In a high-profile reversal, Elon Musk this week recommitted to his original offer to buy Twitter. There’s plenty of speculation about why he might have done this (he has said he wants to build a super-app called X) and also plenty of speculation about whether he could still avoid doing it.

There’s also plenty of speculation about Musk’s assertion that the deal is now contingent on debt financing being completed.

This phrase in Musk’s letter to Twitter has attracted a lot of attention, but in reality it might not mean much. In the same way that it was never really feasible for Musk to just walk away from the acquisition, it’s equally unlikely that the banks that underwrote the debt financing would pull out of their commitment.

You can spin any number of theoretical caveats to this assertion (some more fanciful than others), but for now it’s more or less the way things stand.

The banks may be annoyed that the deal is back on, because it might lead to them losing a lot of money, but there’s probably not much they can do about it. Barring any true curveballs, the big question now is how to approach syndication.

Just when they thought they were out (via Paramount)

So just how much would the banks stand to lose if they were to place Twitter’s debt in today’s moribund primary markets?

We did some rough deal math. Using Citrix as a recent software LBO comp, assuming a standard fee structure, and making some (generous) assumptions about caps and clearing levels: we estimate potential losses of close to $500m.

This is an extremely rough figure and there are many caveats to it. The losses could be bigger, or they could be smaller. Maybe the banks don’t syndicate it at all, and then the Fed stops hiking, markets bounce, and they offload it at a profit.

Anything is possible! But losses are likely.

Out of the game

What does this mean for other LBOs in the pipeline?

Well, this week’s markets somewhat resemble the sad affair that was yesterday’s Thursday Night Football: two teams that are supposed to be better, slogging through a low-scoring game that prompted fans to leave their seats early.

Underwriters were prepared to launch sizable LBO syndications for Nielsen and Tenneco in the mold of the Citrix selldown, which just about squeaked through before the end of September.

As tough as the credit story was for Citrix, some view the narratives around Nielsen and Tenneco (especially the latter) as even more challenged. So when Apollo postponed a financing package last week for Brightspeed carve-out of assets from Lumen Technologies, it all but killed the momentum for other large LBOs.

Time is not on the banks’ side. The take-private deal that will put Nielsen under the control of Elliott Investment Management and Brookfield Business Partners is set to close this month, and there’s little investor appetite for chunky LBO debt right now.

Many observers expect the banks will have little option but to fund some of these deals themselves. “Nielsen is going on the banks' balance sheet unless something radically changes in the next week,” said one portfolio manager.

Tenneco has more time to wait for markets to turn, but the business is highly cyclical and the automotive sector is under a considerable amount of strain right now. Still, some bankers remain confident.

“We’re not going to fire-sale these notes into one of the worst markets I’ve ever seen,” a leveraged finance banker told 9fin.

Diving in

Sentiment is nosediving, and some are proclaiming that the primary market is now shut for the year. But there are still some borrowers testing the waters, and some investors are willing to buy at the right price.

“I don't feel like people are panicked and saying, ‘I'll never buy a high yield bond again,’” said Andrew Feltus, high yield portfolio manager at Amundi Pioneer. “People are beaten up, don't get me wrong. But I don't hear people giving up on the asset class yet.”

Some issuers clearly have faith. Enerflex, an energy services provider, braved the primary market this week with a $625m offering of 9% SSNs due 2027, which ultimately priced at an OID of 90.676 for an all-in yield of 11.5%.

The final yield was tight of initial talk — at 12%, the talk was clearly enticing for some buysiders for a double-B credit in the booming energy sector. For more detailed coverage of the deal, check out our Credit and Legals QuickTake reports, published shortly after syndication launched.

UK-listed credit Entain, which provides services to the online gaming and sports betting markets, also tested the US loan market this week. It is offering a $750m seven-year TLB to fund its acquisition of SuperSport. Pricing is expected next week.

Other borrowers are finding ways to avoid the steep cost of issuing in primary. Satellite internet provider Viasat, for example, decided to divest a portion of its government business in order to pay for its previously announced acquisition of Inmarsat.

Viasat could still tap the market down the line, as we reported earlier this week, but the asset sale gives the company more flexibility for the size and timing of the issuance.

Casino operator Caesars Entertainment got a new $3bn credit facility, including a new $2.25bn revolver and a $750m TLA, which will pre-pay a TLB of the same size that is due to mature in 2024.

Elsewhere, Del Monte Foods upsized its asset-based revolver to $625m from $450m and extended the maturity to September 2027. The food product company is one of an increasing number of companies turning to the booming ABL market for liquidity in recent months.