By David Bell
NEW YORK, Feb 20 (IFR) - The US$2.58bn of junk bonds being sold to finance Digital Colony Partners and EQT Infrastructure's US$14bn leveraged buyout of Zayo Group drew over US$10bn of orders as investors piled into new paper from a well-known name despite tight pricing.
Lead banks are set to price a US$1.5bn seven-year non-call one secured bond and a US$1.08bn eight-year non call three unsecured bond this afternoon.
Price talk was 4.00%-4.25% on the B1/B rated secured notes and 6.25% area on the Caa1/CCC+ unsecured.
The company, which provides bandwidth infrastructure such as fiber cables and data centers, was also set to raise US$5.56bn in the loan market, setting pricing on a US$4.75bn dollar tranche at 300bp over Libor and an US$810m equivalent euro tranche at 325bp over Euribor.
Pricing on the bonds was seen as aggressively tight, given that it is a leveraged buyout and the unsecured bonds carry Triple C ratings, but this came as little surprise given relentless investor demand for new paper.
Strong demand allowed leads to upsize both the term loan and secured bonds by US$500m, reducing the size of the higher yielding unsecured bonds by an equivalent amount.
The sponsors are also kicking in US$6.388bn of equity into the US$14bn deal.
That takes leverage at the firm to 5.9 times net debt to annualized further adjusted Ebitda for the three months ended December 31, 2019, pro-forma for the transaction, according to research firm Covenant Review.
"They over-equitized it," said the source close to the deal. "You could have seen something in the mid-6 times area, or higher."
The deal contained some off-market covenant features, although the documents are understood to have seen some changes during the syndication process.
"It ticks a lot of the boxes for aggressive deals," said one investor who was not participating in the deal.
But investors still piled into a deal that offered a rare slug of new paper in a market that has been swamped with refinancing trades this year.
"It's a name that has been in the market for a long time, is viewed as pretty defensive and stable," said the person close to the deal. "It came in tight for the market, but not crazy."
CALL PROTECTION ERODED
Investors also caved to allow the secured bonds to offer only one year of call protection.
This bucked the normal convention of seven-year notes offering investors two years of call protection.
The move is a big positive for the issuer.
Although it ultimately depends on pricing, sponsors usually prefer to lean on loan financing for LBOs if they can, as they offer investors much shorter call protections - usually only six months.
This makes them easier to refinance than bonds, which require a prepayment penalty if they are taken out before the non call expires.
In the Zayo case, the bond financing was cheaper - some 50bp-75bp inside the loans, according to the source - but shortening the call protection to one year also makes the debt easier to refinance, making it a win-win.
The market should expect to see more bond issuers using the one year call option in future LBOs and that should be welcomed, the source close to the deal said.
"[Bond investors] are not going to get anything on some of these trades if they don't have more flexibility on the call protection," he said.
Without the shorter call protection Zayo would have pushed most of the secured financing into the loan market, he said.
Investors may balk at this erosion, but it could increase the attractiveness of bond financing in large LBO deals, at a time when the buyside is also complaining about the lack of new deals to invest in.
"I remember being frustrated when the market moved from an eight-year non call four, to a non call three as a standard. The market bears it," said one investor.
(Reporting by David Bell; Editing by Paul Kilby)
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