Bloomberg News

KKR Wins Lower Rates on Capsugel Loan as Returns Turn Positive

July 29, 2011

July 29 (Bloomberg) -- KKR & Co. obtained lower rates on $1.76 billion of loans backing its buyouts of Capsugel Holdings Inc. and Academy Sports & Outdoors Inc. as returns on the debt are poised to turn positive for first time in two months.

Capsugel, a provider of hard capsule and drug delivery systems which Pfizer Inc. is selling to the private-equity firm for $2.4 billion, cut the interest rate on a $920 million deal to 4 percentage points more than the London interbank offered rate. Academy Sports, a sporting goods retailer, reduced the rate on an $840 million buyout loan by as much as 0.5 percentage point, to 4.5 percentage points more than the lending benchmark.

Investors are buying loans sold by speculative-grade borrowers deemed most creditworthy as lawmakers in the U.S. struggle to reach an agreement to increase the government debt ceiling before an Aug. 2 deadline. Returns on leveraged loans are poised to turn positive in July with buyers seeing gains of almost 0.26 percent after facing losses for the last two months.

“Stronger credits are able to price tighter while others merit a wider price for investors to take on that perceived incremental risk,” Mike Freno, a Charlotte, North Carolina- based managing director at Babson Capital, which oversees $135 billion, said in a telephone interview. “Investors are doing a good job of pricing in appropriate risk.”

Credit fundamentals are the strongest since before the collapse of Lehman Brothers Holdings Inc. The trailing 12-month default rate of speculative grade global credits dropped to 2.2 percent in the second quarter, from 2.5 percent in the first quarter and 6.2 percent a year ago, according to Moody’s Investors Service. The last time the default rate was as low was in June 2008, when it was 2.1 percent, according to Moody’s.

Falling Prices

The Standard & Poor’s/LSTA 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, declined to 94.57 cents yesterday, down 0.13 cent over the week and the lowest since June 30, when the index closed at 94.23 cents. The index reversed two consecutive months of negative returns, when it returned negative 0.65 percent and negative 0.41 percent, in June and May, respectively.

“Investors are focusing on the primary market, where there’s a healthy deal flow and where people have focused a lot of time and resources because deals are coming at very attractive levels,” Freno said. “To the extent there are attractive opportunities in the primary market, the secondary market will trade a little rangebound.”

Debt Ceiling

House Speaker John Boehner delayed yesterday’s planned vote on debt-limit legislation and the Senate is expected to vote this weekend on a possible compromise to avert a potential U.S. default and raise the debt ceiling by the full $2.4 trillion President Barack Obama requested. Boehner’s plan would provide an immediate $900 billion debt-ceiling boost, cut $915 billion in spending and tie a future borrowing increase to enactment of a deficit-slashing law late this year.

New issue institutional loan volume declined to $20.9 billion in June from $29 billion in May, according to Highland Capital Management LP. Investors’ risk appetite has limits, Highland said in a July note and investors are demanding more yield for some credits.

Smart Modular Technologies Inc. increased the rate on a $300 million term loan to support its buyout by Silver Lake Partners, according to a person with knowledge of the deal who declined to be identified because it’s private. The maker of data-storage products now is offering to pay seven percentage points more than Libor on the debt, compared with 4.5 percentage points more than Libor as outlined in a May 25 regulatory filing.

Institutional Spreads

The average institutional first-lien loan spread rose to 490.54 basis points as of July 28, up from 428.75 on June 30, according to Standard & Poor’s LCD. That’s off a year low of 378 basis points at the end of February and off July 2010’s all-time high of 589.1 basis points. A basis point is 0.01 percentage point. First-lien loans are repaid first in a bankruptcy or liquidation, second-lien debt is repaid next.

Capsugel slashed the rate on its facility by 0.5 percentage points, from 4.5 percentage points initially proposed. The company, based in Peapack, New Jersey, sold the seven-year debt at 99.5 cents on the dollar, reducing proceeds for the borrower and boosting the yield for investors.

Academy Sports initially proposed to pay as much as five percentage points more than Libor on its seven-year term loan. The Katy, Texas-based company sold the debt at 99 cents.

“There are periods of ebbs and flows where everything tightens rapidly and when things move back rapidly, but, on average, we’ll continue to see this disciplined approach where investors are being paid appropriately for levels of risk they are taking,” Babson’s Freno said.

--With assistance from Michael Amato in New York and Peter Cook and Catherine Hodge in Washington. Editors: Faris Khan, Chapin Wright

To contact the reporter on this story: Krista Giovacco in New York at

To contact the editor responsible for this story: Faris Khan at

The Aging of Abercrombie & Fitch
blog comments powered by Disqus