When a private equity consortium agreed to buy Univision Communications, the Spanish-language US broadcasting group, for $12.3bn last year, the deal easily made the top 10 list of leveraged buy-outs.
But even with one of the biggest leveraged loan financings ever seen in the US market – more than $8bn – the numbers now seem so modest compared with the $40bn of LBOs agreed in recent weeks that few have paid much attention.
Yet the whole deal, and the financing in particular, is a case study for the latest trends in LBOs. The debt in the deal is worth an estimated 12.5 times earnings before interest, tax, depreciation and amortisation – an eye-catching ratio that is easily the highest many in the market can remember.
The package also reflects issuer-friendly features that are becoming increasingly common in the credit markets – from “covenant-lite” loans that offer creditors fewer protections than they once expected, to “Pik toggle” bonds that essentially give Univision the option to defer some coupon payments.
Even on the management front, Univision is fitting the new LBO mould. The company is hiring Omnicom’s Joe Uva to be its next chief executive. That makes Mr Uva the latest senior executive to leave a public company for the incentives of the buy-out world.
The buy-out consortium of Madison Dearborn Partners, Providence Equity Partners, Saban Capital, Texas Pacific Group and Thomas H Lee Partners is writing a cheque for almost $4bn of equity. Debt will add up to more than $10bn including existing debt.
“Leverage will be one of the highest we have seen,” says Matthew Wilcox, analyst at KDP Advisors. “[It will place] a significant burden on a company that is otherwise quite healthy. Management will certainly have increased pressure to perform with little room for error.”
He estimates the debt burden could put Univision’s cash flow into the red temporarily, although he says the leverage ratio could come down as the company’s bottom line grows, with positive cash flow resuming quickly.
The deal’s underwriters, Deutsche Bank, Credit Suisse and Bank of America, are emphasising the potential for rapid revenue and profit growth.
Moody’s, the rating agency, says Univision benefits from its “leading market position in Spanish-language media within the United States, good operating margins, and favourable intermediate-term growth prospects, supported by Hispanic demographic trends.” That has many investors excited, and has led to pricing on the loans of Libor plus 200-225 basis points, the low end of expectations.
“This is the best business I’ve ever seen come to the high yield market in 15 years,” says Al Alaimo, portfolio manager and director of research at SCM Advisors, which has put in orders for the loans and the bonds.
“It’s very levered, but the leverage is actually manageable and supported by the enterprise value of the company.”
The debt package includes $7bn of senior secured loans, a $750m senior secured revolver, $500m of second-lien loans with a junior claim on the security and $1.5bn of unsecured notes. There is another $450m of credit available to replace some of Univision’s existing debt as it matures.
Observers say the loan package, which was set to close on Friday evening, has been very well received. “It’s a blow-out,” says Steven Miller, managing director at Standard & Poor’s LCD.
He says the loan financing included “hot” features, including a weak package of creditor protections which is now relatively common. In a borrower’s market, he adds, investors are resigned to this feature, which gives the borrower more flexibility than traditional bank loans.
“I think what people are focused on is having security [over assets] rather than covenant packages,” he says.
Second-lien loans – the corporate equivalent of piggy-back mortgages that have a claim against the value of a home only after the main mortgage has been repaid – are controversial, but Mr Miller’s analysis suggests in general investors are paid “pretty well” for the extra risk they take. Fitch Ratings, which expects to downgrade Univision with its new financing package, estimates the second-lien loans would recover 11-30 per cent of their value in a bankruptcy and plans to rate them B-, against B+ for the senior loans.
Fitch and S&P both rate the new bonds at CCC+. These contain a “Pik toggle” – an option for the borrower to pay coupons in the form of new bonds rather than cash.
Market participants are divided on whether these notes give borrowers too much flexibility or are helpful in allowing them to avoid a default in a short-lived cash crunch. Either way, they are now commonplace in LBO financings.
“Almost every deal comes with a Pik toggle,” says Bill Ingrassia, head of credit research at asset manager BlueMountain Capital Management. But he is steering clear of the Univision deal overall.
“There are a number of aggressive assumptions,” he says. “But we can certainly see the de-leveraging prospects. I am not saying they have taken on unmanageable risk. It’s a perfectly good credit story, just at an inappropriate price.”
In the current borrower-friendly markets, Mr Alaimo of SCM expects Tuesday’s market turmoil to have little effect on the financing. “I doubt the spread of the bank debt will widen at all,” he says. “That’s because there’s such tremendous demand from [collateralised loan obligations] and buy and hold investors.”
And, in spite of the weakness seen in high yield markets, he doubts the underwriters of the bond deal, due to price on Thursday, will have to change much. They might, he says, price the deal a little more favourably and leave a little more room for the bonds to trade up in the secondary market.
That, he says, is “the most one could hope for”.
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