Debt buyers are getting some surprising early guidance on where
loans may be shopped.
Bankers have been hard at work trying to line up buyers for the roughly $14 billion in so-called covenant-lite debt underwritten to finance the privatization of Greenwood Village, Colo.-based First Data by Kohlberg Kravis Roberts.
First Data debt has been held by its underwriters for months as a credit crunch has unfolded on Wall Street, so the deal could serve as a bellwether for the market as banks look to unwind billions in unwanted buyout debt.
There are many details yet to be hashed out tied to the deal's marketing. But early guidance suggests that
and its co-underwriters are looking to unload the term loan portion of the First Data debt at prices equivalent to a spread of about 275 basis points over the London Interbank Offering Rate, or Libor, says one potential buyer who has seen First Data guidance distributed via
That's equivalent to a rate of around 8.5% -- a surprisingly low rate given all the debt that stands to come to market in coming months, as well as the easy terms First Data got from banks that at the time were eager to curry favor with the likes of KKR. At a spread of 275, the First Data offering would be sold at a level equivalent to 96 cents on the dollar, which factors into an even thinner 97.5-to-98-cent effective price to banks when factoring in the 150 to 200 basis points that they typically obtain in fees related to the transaction.
Market watchers also speculate that the banks may look to shop just part of the debt, rather than a huge $14 billion slug that could prove hard to move in a slow market for high-yield bonds. These people note that shopping, say, half of the debt could make for a smoother pricing.
The sale of the First Data debt is still several weeks away, but expectations are that full market material and road show could take place in the next few weeks.
Much could change between now and then, and demand for so-called hung bridge loans -- financing that the banks intended as temporary but that hasn't been replaced as yet by balky investors in the debt markets -- has not been fully vetted. But the preliminary numbers suggest that banks may not take as bad a haircut on the deal as originally anticipated.
Shaky residential mortgage loans offered to borrowers with dubious credit quality began causing skittishness in the broader market months ago. That flight caused a pervasive seizing up of the credit markets and forced banks to hold onto debt for months.
Now, the Street is watching the market closely. Some $300 billion in bridge debt underwritten by big investment banks to help fund the buyout boom is said to be ready to hit the market in the next several weeks and months. Other deals under scrutiny include
Many banks believe that even with the discounts attached to First Data, potential buyers might ask for the covenant-lite terms to be eliminated altogether before they are shopped. One loan buyer says that he would still ask for roughly 300 basis points in premium to own covenant-lite paper -- despite the fact that First Data is viewed as a positive cash flow generating business.
Syndication of First Data, which was announced to be bought by KKR in April, was supposed to kick off two months ago.