INSPIRE BRANDS PREPS US$1bn LOAN2OARKû#APITALû'ROUP
BACKEDûRESTAURANTû
company INSPIRE BRANDS is looking to add on
53BNûTOûITSûTERMûLOANûDUEûINû&EBRUARYû
ûTOûlNANCEûTHEûACQUISITIONûOFûFASTûFOODû
CHAINû3ONICû#ORP
Barclays is leading the deal with Bank of
America Merrill Lynch, Credit Suisse, Morgan
Stanley, Wells Fargo and KeyBank. A bank
meeting is scheduled for Tuesday.
)NSPIREû"RANDSûLINEDûUPûAû53BNûTERMû
LOANûINû*ANUARYûTOûBACKû!RBYSû2ESTAURANTû
'ROUPSûACQUISITIONûOFû"UFFALOû7ILDû7INGSû4HEûLOANûWASûPRICEDûATûBPûOVERû,IBORûWITHû
AûSTEPûDOWNûTOûBPûOVERû,IBORû
First-lien leverage at the company will be
ûTIMESûFOLLOWINGûTHEûADD
ON
Inspire Brands is buying Sonic for
53BNû4HEûACQUISITIONûISûEXPECTEDûTOû
CLOSEûBYûTHEûENDûOFûLeverage rising on LBO loans after
regulation relaxed
US Six times leverage limit exceeded by 73.1% of buyout loans this yearLeverage ratios on private equity-backed
deals are rising again as banks compete more
aggressively for lucrative private equity loans
after regulators relaxed leveraged lending
guidelines earlier this year.
The guidelines were put in place in 2013 to
limit systemic risk and prevent a re-run of the
financial crisis, but were relaxed in February
and further emphasised in September, by the
Republican administration.
In the first nine months of 2018, the
guidelines’ original limit of 6.0 times leverage
was exceeded by a record 73.1% of private equity
buyout loans, up from 64.2% in 2017. This
exceeds the previous peak of the market in 2007
immediately before the financial crisis, when
61.5% of deals were leveraged at that level,
according to LPC data.
“The shackles have been taken off,” a banker
said.
Strong investor demand for floating-rate
leveraged loans is exceeding a limited supply of
deals as cash continues to pour into the asset
class in a rising interest rate environment. Toppy
equity markets mean that private equity firms
are paying high enterprise valuations, which is
producing more highly leveraged loans as banks
compete for mandates.
The most aggressive highly leveraged deals are
also setting new records, with 41.4% of sponsored
deals carrying leverage of more than 7.0 times.
This eclipses the market’s previous high in 2007,
when 38.5% of deals reached that level.
Credit Suisse is in the market with US$372m
of incremental term loan debt backing a
dividend for enterprise software company
HYLAND SOFTWARE’s private equity firm Thoma
Bravo, which will put adjusted leverage at 7.5
times, according to Moody’s.
“Most of the time banks are now underwriting
to market-clearing levels now as opposed to
regulatory levels,” the banker said.
The Federal Reserve, however, expressed
concern about the changes in the US$1.1trn US
leveraged loan market in September.
“Some participants commented about
the continued growth in leveraged loans, theloosening of terms and standards on these
loans, or the growth of this activity in the non-
bank sector as reasons to remain mindful of
vulnerabilities and possible risks to financial
stability,” according to the minutes of the policy
meeting.BRAKES OFF
When the guidelines came into effect in 2013,
deals with debt-to-Ebitda leverage ratios of
more than 6.0 times received unwelcome extra
scrutiny from regulators including the Office of
the Comptroller of the Currency, the Federal
Reserve and the Federal Deposit Insurance Corp.
Regulated banks were instructed to make
sure that all of a company’s secured debt, or half
of its total debt, could be paid down within five
to seven years, and to explain any exceptions on
‘criticised’ deals.
This immediately handed a competitive
advantage to institutions not subject to the
guidelines, which were able to lead more highly
leveraged loans than regulated banks.
That edge disappeared in September, when
the Fed and the OCC said the guidelines are not
technically rules, following February’s comments
by Comptroller of the Currency Joseph Otting
that banks could underwrite outside the
guidelines as long as they did so prudently and
had capital to support it.
Relaxing the guidelines has given banks that
were previously worried about attracting adverse
attention, or even penalties from regulators, a
free hand to underwrite loans with leverage of
more than 6.0 times.
Regulated banks are, however, emphasising
that they are still underwriting responsibly and
without the loose criteria that preceded the
credit crisis in 2008, bankers said.
“Our bank is really underwriting the same
way,” the banker said. “But we don’t feel like
we have to worry about the regulators cracking
down if we do a deal with too much leverage.”
The US$5.45bn term loan backing the buyout
of ENVISION HEALTHCARE had leverage of 7.2
times, according to Moody’s, but was marketed
at less than 7.0 times with Ebitda adjustments.The deal was underwritten by regulated
banks including Credit Suisse, Citigroup, Morgan
Stanley, Barclays, Goldman Sachs, UBS, Royal
Bank of Canada, Societe Generale, HSBC,
Mizuho, BMO, SunTrust and Credit Agricole, and
alternative lenders including Jefferies and KKR
Capital Markets.STIFF COMPETITION
Despite a more level playing field, regulated
banks are not yet eroding the market advantage
established by lenders including Jefferies
and Macquarie, which were not subject to the
guidelines in the past few years.
Jefferies was one of the main beneficiaries of
the lack of regulation and has held steady this
year. In the first three quarters of 2018, Jefferies
was 12th in US leveraged lending, the same
place as a year earlier.
Macquarie has risen to 19th for the year
to date from 25th in 2017. Nomura has also
increased its position in 2018, moving up to 25th
from 28th.
“There have always been one or two banks
willing to cross over the LLG line. Now there
are just more banks on every deal,” said
a banker from a firm not subject to the
guidelines.
Firms that do not have to comply with
the guidelines are expected to continue to
underwrite highly leveraged loans, which will
force regulated banks to remain competitive
as alternative lenders continue to snap at their
heels.
Jefferies is leading a US$740m buyout deal
for agricultural processing equipment maker CPM
HOLDINGS with adjusted leverage of 6.7 times,
according to Moody’s. The deal backs American
Securities’ purchase of the company from Gilbert
Global Equity Partners.
“I’m seeing these lenders and many direct
lenders on just about every deal,” a leveraged
finance lawyer said. “These folks now have
an enormous impact on the industry, and
they aren’t going away because the federal
government is loosening restrictions.”
Jonathan Schwarzberg