Академический Документы
Профессиональный Документы
Культура Документы
Leveraged Finance:
Reshuffling The Debt: The Credit
Implications Of The New Wave Of
LBOs
Primary Credit Analyst:
Allyn Arden, CFA, New York (1) 212-438-7832; allyn_arden@standardandpoors.com
Secondary Credit Analysts:
William Wetreich, New York (1) 212-438-7869; william_wetreich@standardandpoors.com
Kenneth G Drucker, New York (1) 212-438-7831; ken_drucker@standardandpoors.com
Table Of Contents
The Mega Deals Of 2005-2007 Are Likely A Thing Of The Past
Where Are The 2005-2007 LBOs Now?
What Is Behind The LBO Resurgence?
The New LBOs: Transaction Size And Structures
Recent LBOs Have Not Caused Ratings To Fall As Precipitously As In
The 2005-2007 Period
We Expect More LBOs In 2011
www.standardandpoors.com/ratingsdirect 1
849709 | 300025534
Leveraged Finance:
Reshuffling The Debt: The Credit Implications
Of The New Wave Of LBOs
(Editor's Note: This article is part of Standard & Poor's Ratings Services' "Reshuffling The Debt" series, which we
launched at the beginning of 2011. The series rekindles the "Leveraging Of America" series of articles that Standard
& Poor's published in 2007, which commented on the large increases in nonfinancial corporate issuers' debt
leverage shortly before the Great Recession began. "Reshuffling The Debt" investigates the leveraging trends of
these entities now that we are in the wake of the recession.)
Are we approaching another boom period for leveraged buyouts (LBOs)? Private equity firms have been completing
more of these deals since early 2010, bolstered by a modestly improving economy, healthier credit markets,
increasing appetite for risk among bond investors, and low interest rates. These companies have large amounts of
cash, possibly over $400 billion in total, and generally will need to invest much of it over the next few years.
Therefore, Standard & Poor's Ratings Services expects this pickup in LBO activity to continue in 2011. However,
we believe the days of mega LBOs--$10 billion to $15 billion in size or greater--will likely remain in the past, given
current market conditions.
There are some important distinctions that have characterized the recent wave of LBOs compared to the one that
took place a few years ago:
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 22, 2011 2
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
Nevertheless, Standard & Poor's believes that a low interest rate environment, strong credit markets, large cash
positions held by private equity investors, and an increasing appetite for risk will result in an ongoing flow of LBO
deals. We also expect these transactions will have somewhat greater debt burdens and weaker credit measures going
forward, although it is unlikely that we will experience a resurgence of the mega LBOs that occurred from 2005 to
2007, given current credit market conditions.
Despite current robust high-yield bond and syndicated loan markets, the CLO market has dramatically shrunk from
peak levels. Moreover, Standard & Poor's believes that more stringent banking regulations, in their various forms,
will lead to higher capital requirements and more refined leverage constraints at banks. This will make it difficult for
banks and CLOs to fuel a substantial surge in LBOs.
Most of the other LBOs of this period did not fare as well. Companies such as Tribune Co. and Station Casinos Inc.
filed for Chapter 11 bankruptcy in December 2008 and July 2009, respectively. Realogy Corp., a residential real
estate franchisor, fell on hard times due to a declining real estate industry and an overleveraged balance sheet. We
initially lowered the corporate credit rating to 'B+' from 'BBB' (both with a negative outlook) when the LBO
transaction was completed in April 2007. We currently rate Realogy 'CCC' because of the company's thin interest
coverage of 1x.
Freescale Semiconductor (B-/Watch Pos/--) suffered from its high customer concentration with a cell phone
manufacturer and the auto industry's steep decline. We lowered our rating on the company to 'BB-' with a negative
outlook from 'BBB-' after the transaction closed. The current rating largely reflects its elevated leverage of about 8x
and its exposure to the now improved, but still below peak, auto industry, along with its recent IPO filing.
Table 1
Examples Of LBO Rating Migrations (2005-2007 LBO Deals)
Post-LBO
Transaction Pre-LBO Post-LBO Rating adjusted Current
Company size (bil. $) Sector rating/outlook rating/outlook differential leverage rating/outlook
Energy Future 44.5 Utilities BBB-/Negative B-/Stable 6 notches -- CCC+/Negative
Holdings Corp.
HCA Inc. 33.8 Health Care BB+/Stable B+/Negative 3 notches 7.0x B+/Stable
www.standardandpoors.com/ratingsdirect 3
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
Table 1
Examples Of LBO Rating Migrations (2005-2007 LBO Deals) (cont.)
First Data Corp. 28.7 High Tech A/Stable B+/Negative 8 notches 9.0x B/Stable
Harrah's 27.8 Hotels & BBB-/Negative B+/Stable 5 notches 9.5x B-/Stable
Entertainment Inc.* Gaming
ALLTEL Corp. 27.0 Telecom A-/Watch Neg B+/Negative 7 notches 10.0x NR
CC Media Holdings 24.5 Media BBB-/Negative B/Stable 3 notches 10.0x CCC+/Positive
Inc. (Clear Channel)
Knight Inc.¶ 21.0 Energy BBB/Stable BB-/Stable 4 notches -- BB/Stable
Freescale 18.4 High Tech BBB-/Stable BB-/Negative 3 notches 5.6x B-/Watch Pos
Semiconductor Inc.
Intelsat Ltd.§ 16.4 Telecom BB-/Stable B/Stable 2 notches 9.1x B/Stable
Tribune Co. 14.5 Hotels & BBB-/Negative B/Negative 5 notches 9.5x NR
Gaming
Univision 13.7 Media BBB-/Stable B/Negative 5 notches 12.0x B/Stable
Communications Inc.
SunGard Data 11.5 High Tech BBB+/Watch Neg B+/Stable 6 notches 7.0x B+/Stable
Systems Inc.
Realogy Corp. 9.3 Hotels & BBB/Negative B+/Negative 5 notches 10.0x CCC/Positive
Gaming
Station Casinos Inc. 8.8 Hotels & BB-/Watch Neg B+/Negative 1 notch 10.0x NR
Gaming
ARAMARK Corp. 8.1 Consumer BBB-/Stable B+/Negative 4 notches 7.0x B+/Stable
Prods
Dollar General Corp. 7.2 Retail BBB-/Negative B/Negative 5 notches 8.0x BB/Stable
Neiman Marcus 5.3 Retail BBB/Watch Neg B+/Stable 5 notches 6.5x B/Stable
Group Inc. (The)
Average 18.9 8.7x
*Now known as Caesar's Entertainment Corp. ¶Now known as Kinder Morgan Inc. §Now known as Intelsat Global S.A. NR--Not rated.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 22, 2011 4
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
Other factors contributing to the increase in LBO activity, we believe, are low interest rates and healthier credit
markets. These factors, coupled with improving corporate earnings and stronger credit profiles, have resulted in
tighter spreads for corporate debt issuance relative to 2009. According to Standard & Poor's Leveraged
Commentary & Data (LCD), the average institutional LBO loan spread was 462 basis points over LIBOR in 2010.
While spreads have tightened from very high levels in 2009, we note that they are still above recent historical trends
and could improve over the next year, especially if credit conditions remain healthy. Additionally, lender demand for
corporate debt is robust, and oversubscription of deals has often led to a flex-down in pricing for recent deals from
initial levels. Tightening spreads for corporate debt, combined with the recent declines in equity contribution from
peak levels, could potentially result in higher leverage and larger transaction sizes for future LBO deals.
www.standardandpoors.com/ratingsdirect 5
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
Still, we have seen a few instances where proposed large LBOs have fallen through. One example was the proposed
$7 billion buyout of hard-disk drive manufacturer Seagate Technology (BB+/Watch Neg/--) in October 2010.
According to LCD reports, the company decided to terminate discussions because the valuation was not attractive or
in its shareholders' best interests. However, Seagate remains on CreditWatch as we assess its future financial policy.
Another large LBO transaction that was not completed was the proposed $15 billion acquisition of U.S. banking
and payments technology provider Fidelity National Information Services Inc. (BB/Stable/--) in May 2010 by a
private equity consortium led by the Blackstone Group, also reportedly because of a disagreement on valuation. This
transaction would have represented the largest LBO deal since the 2008 financial crisis. Instead, the company ended
up pursuing a leveraged share repurchase program that resulted in a one-notch downgrade.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 22, 2011 6
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
still higher than the 15-year average of around $800 million. Moreover, overall credit protection measures
associated with LBO deals are healthier than in the 2005-2007 period, and we saw fewer instances of weak creditor
protection provisions, such as covenant-lite loans and PIK toggle notes. According to LCD, average pro forma debt
leverage (total debt to EBITDA) was around 4.8x (not including Standard & Poor's adjustments) in 2010, compared
to 6.1x in the peak year of 2007. Moreover, credit measures are also comparable with the average over the past
decade.
Nevertheless, Standard & Poor's believes that new take-private deals could have increasing levels of debt, reduced
equity participation, and weaker credit protection measures over the next year. In fact, some of the recently
launched LBO transactions have carried more aggressive capital structures. For example, pro forma unadjusted
leverage for the recent Del Monte Foods Co. LBO is 6.7x (6.8x adjusted), while leverage for the Burger King Corp.
take-private acquisition was 5.9x (6.8x adjusted). Additionally, we have started to see a resurgence of less
credit-friendly trends, such as with the CommScope Inc. (B+/Negative/--) and Gymboree Corp. (B+/Stable/--) LBOs,
both of which had covenant-lite term loans. Other LBO deals, such as Del Monte and J. Crew Group Inc.
(B/Stable/--), also included term loans with weaker protective covenants.
www.standardandpoors.com/ratingsdirect 7
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
Table 2
Examples Of LBO Migrations (2010 And 2011 LBO Deals)
Transaction size Pre-LBO Post-LBO Rating Post-LBO
Company (bil. $) Sector rating/outlook rating/outlook* differential leverage
Del Monte Foods Co. 5.3 Consumer BB/Stable B+/Stable 2 notches 6.8x
Prods
IMS Health Inc. 5.2 Health Care NR BB-/Stable N/A 5.1x
Burger King Corp. 4.0 Retail BB-/Stable B/Stable 2 notches 6.8x
NBTY Inc. 4.0 Consumer BB/Positive B+/Stable 2 notches 5.4x
Prods
EXCO Resources Inc. 4.0 Oil & Gas BB-/Stable TBD TBD TBD
CommScope Inc. 3.9 High Tech BB-/Positive B+/Negative 1 notch 5.7x
Interactive Data Corp. 3.7 Media NR B/Stable N/A 7.5x
J. Crew Group Inc. 3.0 Retail BB+/Stable B/Stable 4 notches 6.7x
Syniverse Holdings Inc. 2.6 Telecom BB-/Stable B+/Stable 1 notch 5.9x
Advantage Sales & 2.0 Retail NR B+/Stable N/A 6.8x
Marketing Inc.
Gymboree Corp. (The) 1.8 Retail NR B+/Stable N/A 6.1x
Michael Foods Inc. 1.7 Consumer B+/Stable B+/Negative 0 notches 5.8x
Prods
TASC Inc. 1.6 High Tech NR B+/Stable N/A 6.2x
Jo-Ann Stores Inc. 1.6 Retail BB-/Stable TBD TBD TBD
CKE Restaurants Inc. 0.9 Retail BB-/Stable B/Stable 2 notches 5.8x
BWAY Holding Co. 0.9 Packaging B+/Positive B+/Negative 0 notches 5.4x
HGI Holding Inc. 0.9 Health Care B/Stable B/Stable 0 notches 5.5x
Dave & Buster's Inc. 0.6 Retail B/Stable B/Stable 0 notches 6.4x
Average 2.6 6.1x
*Ratings on some of these entities may have changed subsequent to their LBOs. NR--Not rated. N/A--Not applicable. TBD--To be determined.
In our view, the recent LBO deals have not resulted in more material downgrades because:
• Most of the recent LBO targets were initially in the 'B' or 'BB' categories, whereas the earlier wave of large LBOs
included a number of investment-grade credits.
• Private equity sponsors have contributed more equity, and valuations are more reasonable. As a result, recent
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 22, 2011 8
849709 | 300025534
Leveraged Finance: Reshuffling The Debt: The Credit Implications Of The New Wave Of LBOs
LBO transactions have had stronger credit measures than the ones during the 2005-2007 period. The average
leverage (including Standard & Poor's adjustments) for some of the largest rated LBO deals was about 6x, versus
9x for earlier large deals (see tables 1 and 2).
• In some cases, our rating prior to the LBO transaction already anticipated a potential increase in leverage.
www.standardandpoors.com/ratingsdirect 9
849709 | 300025534
Copyright © 2011 by Standard & Poors Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified,
reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content
shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or
omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is
provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any
party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without
limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or
recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any
form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or
clients when making investment and other business decisions. S&P's opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or
an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or
independent verification of any information it receives.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result,
certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the
confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right
to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and
www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party
redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Standard & Poor’s | RatingsDirect on the Global Credit Portal | February 22, 2011 10
849709 | 300025534