Blackstone Seeks Covenant-Lite Emdeon Loan as Prices Decline
August 26, 2011, 12:18 PM EDTBy Christine Idzelis
(Updates with Bernanke speech in 17th paragraph)
Aug. 26 (Bloomberg) -- Blackstone Group is seeking a $1.2 billion loan to back its buyout of Emdeon Inc. that won’t contain typical protection for creditors as the market for the debt fell to a 20-month low.
The term loan for the provider of billing systems and software will be covenant-lite, meaning it won’t carry any financial maintenance requirements. The debt is part of a $2 billion financing backing the private-equity firm’s $3 billion purchase of Emdeon.
Loan transactions with riskier terms are facing push back as a weakening outlook for the economy pushed leveraged-loan prices down this week by 0.72 cent to 87.7 cents on the dollar, the lowest since December 2009, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. Last week, Immucor Inc. added a financial covenant and increased yield on a $615 million senior secured loan backing its leveraged buyout by TPG Capital.
“Anything that comes with a non-standard structure will have a much more difficult time finding a home with investors,” said Russell Morrison, the Charlotte, North Carolina-based head of high-yield investments at Babson Capital Management LLC.
Emdeon has proposed paying 4.75 percentage points more than the London interbank offered rate on a $1.2 billion covenant- lite term loan, according to an Aug. 22 regulatory filing. The lending benchmark would have a 1.5 percent floor.
Immucor Changes
Immucor, a Norcross, Georgia-based developer of blood- screening tests, boosted the interest rate and added a senior secured leverage covenant to the loan backing its buyout, according to data compiled by Bloomberg.
Pricing on the debt was increased to 5.75 percentage points more than Libor from the 4.5 percentage points to 4.75 percentage points initially proposed, the data show.
The sale of leveraged loans and high-yield bonds has largely been put on hold until after Labor Day, Morrison said. Deals that have gotten done recently involved higher costs for the borrower.
Smart Modular Technologies Inc. ceded more yield to investors on a $310 million loan backing its buyout by Silver Lake Partners, agreeing to pay 7 percentage points more than Libor, with a 1.25 floor on the lending benchmark. That’s 250 basis points more than its original proposal to pay 4.5 percentage points more than Libor. A basis point is 0.01 percentage point.
It will also issue the debt at a discount of 90 cents on the dollar, after originally seeking to sell it for 98 cents to 98.5 cents, Bloomberg data show.
Loan Calendar
The market is now expecting between $20 billion and $30 billion of financing, said Morrison, who oversees $26 billion of high-yield bonds and loans for Babson. “Everyone is wondering what is going to become of that,” he said.
Apax Partners LLP plans to fund its purchase of Kinetic Concepts Inc., the biggest LBO since the collapse of Lehman Brothers Holdings Inc. in September 2008, with $4.95 billion of loans and bonds.
ConvaTec Inc., owned by private-equity firms Nordic Capital and Avista Capital Partners LLC, has made a rival bid for Kinetic, topping Apax’s agreement in July to pay $68.50 a share for the wound-care company, according to two people familiar with the offer, who asked not to be identified because details aren’t public.
As investors pull money from funds that buy high-yield debt, money managers need to determine how much in loans to buy in the secondary market versus purchasing new issue deals, said Morrison.
Seeking Guidance
U.S. floating-rate funds, which buy bank loans, had $1.88 billion of outflows during the week ended Aug. 17, topping record outflows of $1.36 billion the previous week, according to data from EPFR Global. Demand for floating-rate debt fell after the Federal Reserve pledged on Aug. 9 to keep its benchmark rate at record lows low until at least mid-2013.
“We’re in a situation where the market is looking for some guidance or needs a catalyst,” said Kurt Karl, chief U.S. economist at Swiss Re in New York.
In a speech today at an annual symposium in Jackson Hole, Wyoming, Fed Chairman Ben S. Bernanke sought to reassure investors that U.S. growth is safe in the long run and the central bank still has tools to bolster the recovery if needed. He didn’t provide details on how or when those tools might be used.
“The economy needs some kind of stimulus,” said Karl, speculating that the Federal Reserve will eventually begin a third round of bond-buying known as quantitative easing. “I think it’s going to happen before year-end.”
Jobless claims climbed by 5,000 to 417,000 in the week ended Aug. 20, Labor Department figures showed yesterday in Washington. The U.S. economy grew one percent in the second quarter, revised Commerce Department figures showed today in Washington. That’s less than previously estimated and caps the weakest six months of the recovery that began in mid-2009.
“A low-growth environment is okay for high-yield,” said Babson’s Morrison. “The companies that we have invested in are well-prepared.”
--Editor: Chapin Wright
--Editors: Chapin Wright, Faris Khan
--With assistance from Krista Giovacco, Cristina Alesci and Jeffrey McCracken in New York; Jeannine Aversa, Scott Lanman, Robert Willis and Craig Torres in Washington.
Editors: Faris Khan, Chapin Wright
To contact the reporter on this story: Christine Idzelis in New York at cidzelis@bloomberg.net
To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net
