Junk, leveraged loan markets still face $100 billion LBO supply legacy even as banks offload risk

By Jennifer Lanning Drey

Portland, Ore., Sept. 3 - The high yield and leveraged loan markets are still up against nearly $100 billion of LBO supply after a year of selling hung debt at a trickle rather than a steady stream.

While the banks have succeeded in unloading much of the LBO overhang from their balance sheets, there is still a substantial amount of bonds and loans sitting on the sidelines that could appear as new deals when conditions permit.

The total debt still waiting to come into the market is $68.53 billion, plus another €866 billion and more than C$34.35 billion, according to figures calculated by Prospect News. Using Thursday's exchange rates, that figure comes to $102.058 billion.

At the same time, the amount of hung debt collectively on the banks' balance sheets sits at $81.378 billion, thanks to $20.68 billion of bridge loans that have been syndicated to investors with the right to roll them into bonds. This debt is included in Prospect News' legacy-related LBO supply figure based on the assumption that it will eventually show up in the high yield primary market.

The LBO supply figure, which only encompasses funding linked to leveraged buyouts, also includes financing for deals that closed without syndication, bridge loans that have been rolled into bonds, and $10.9 billion plus another more than C$34.35 billion of funding related to pending deals.

The figures do not include bank financing related to a few of last summer's closed deals that now sit in relatively ambiguous positions, including Chrysler Corp. and Clear Channel Communications Inc.

For these deals, additional syndications have occurred since January; however, the line between the amount that has been syndicated and any amount that may remain has become nearly impossible to trace for anyone outside the banks involved as transactions have been done quietly and behind the scenes.

A senior bank source did tell Prospect News that the $19.53 billion of debt related to the Clear Channel Communications' acquisition by Bain Capital Partners LLC and Thomas H Lee Partners LP has been reduced to about $3 billion still sitting at the banks.

In January, the total amount of unsyndicated debt related to the Chrysler and Clear Channel loans was $26.53 billion.

Chipping away at all of the loans has been a slow process, yet a lot has changed in the past year. At the end of August 2007, the high yield and leveraged loan markets faced a $312 billion overhang. That figure included commitments to provide $227 billion in loans backing leveraged buyouts and another $73 billion in bridge loans intended to be replaced by bonds, according to figures calculated by Prospect News at the time.

Bridges that will convert to bonds

As noted, the banks' balance sheets no longer include $20.68 billion of bridge loans that were syndicated to investors with the option of rolling them into bonds; however, Prospect News included them in the legacy-related LBO supply figure based on the assumption that they will eventually come into the high yield market as new deals.

Information collected by Prospect News indicated that these deals include Catalina Marketing's $490 million of bridge financing, First Data Corp.'s $6.75 billion bridge, which is expected to roll into bonds shortly, CDW Corp.'s $1.94 billion bridge and TXU Corp.'s $11.5 billion of bridge financing.

Rolling bridges

Possibly the most noticeable change in the unsyndicated debt totals between January 2008 and August 2008 was the rolling of hung bridge loans into bonds.

In total, $12.98 billion, plus another €141 million, of bridge funding has successfully been rolled into bonds since January as dealers take advantage of being able to convert bridges into Rule 144A notes after one year.

The LBO supply figure includes another $5.22 billion of bridge financing rolled into bonds related deals that closed without syndicating.

The deals encompassed by this figure are Guitar Center's $777 million bridge roll, HD Supply's $3.8 billion bridge roll, Source Interlink Cos.' $465 million bridge roll and Symbion Inc.'s $180 million bridge roll. These deals are shown in the top portion of the accompanying Table One.

Aeroflex Inc., Berry Plastics Corp., CCS Inc., CW Media Holdings, Harrah's Entertainment, Laureate Education, Sensata Technologies BV and Sequa Corp. were all able to complete bridge rolls.

ServiceMaster and U.S. Foodservice fall into the same category.

Limbo for some deals

The bottom part of Table One shows that a few deals remain at virtually the same spot where they were at the start of 2008, including Hexion Specialty Chemicals' previously planned acquisition of Huntsman Corp., which is now in limbo while parties argue in court over whether the transaction will actually occur.

Similarly, BCE Inc.'s previously announced plans to go private have been pushed back to Dec. 11.

Landry's Restaurants, Apria Healthcare Group and Q9 Networks Inc. are also included in the group of pending deals.

Deals are getting done

On a more positive note, the top part of Table Two shows that more than $49.07 billion of loans have been syndicated since January 2008.

Successful deals included financing for Goodman Global, Inc.'s acquisition by Hellman & Friedman LLC as well as financing for Axcan Pharma's acquisition by TPG Capital.

Other loans in this category were more difficult to trace, but senior bank sources told Prospect News that debt held by the banks in January related to LBO transactions by Aeroflex, Allison Transmission, Berry Plastics and CCS Inc. is all completely off the books now.

Bank sources further told Prospect News that debt held by the banks in January related to CDW Corp., CW Media Holdings Inc., Harrah's Entertainment, Laureate Education, Sensata Technologies, Sequa Corp. and TXU Corp. is also now completely off the books.

In the case of Alltel Corp., sources said it is widely assumed that both the bank debt and bonds will be eliminated by Verizon Wireless when it acquires the company. Most of the company's bank debt was sold to Verizon Wireless in June in connection with its agreement to acquire Alltel for about $5.9 billion from TPG Capital and GS Capital Partners. The Alltel debt is not included in the LBO supply figure.

Avaya Inc. has part of the $3.8 billion term loan B from its $4.33 billion of bank debt currently in the market, although sources have recently told Prospect News that syndication is not yet complete.

Tower Automotive currently has $570 million in the market while 1-800 Contacts Inc. launched its $194 million deal on Thursday.

Deals pulled

The bottom of Table Two shows deals that had less success for various reasons. As noted, a total of $19.34 billion of financing has been cancelled since January after the related deals were pulled. This figure includes the termination of Alliance Data System Corp.'s agreement to be acquired by affiliates of the Blackstone Group for $7.8 billion and Finish Line's merger agreement with Genesco Inc.

Myers Industries, Cumulus Media Inc., Penn National Gaming Inc., Reddy Ice Holdings and 3Com all faced similar fates.

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