10 Billion Corporate Debt Sale Highlights Credit Market's Recovery
15 March 2019 - 9:29PM
Dow Jones News
By Sam Goldfarb and Soma Biswas
The world's largest maker of automotive batteries is set to sell
more than $10 billion worth of speculative-grade debt Friday to
fund its purchase by an investor-group led by Brookfield Business
Partners LP, underscoring the recent resurgence in demand for
low-rated bonds and loans.
Power Solutions, the automotive-battery business currently owned
by Johnson Controls International PLC, is poised to sell roughly
$3.7 billion worth of secured and unsecured bonds, denominated in
both dollars and euros, along with around $6.5 billion in loans,
also split between euro and U.S. dollar tranches.
The long-anticipated sale is on track to be relatively easy for
a large group of underwriting banks, as investors have eagerly
embraced what many see as a stable business that is able to
shoulder the large amount of debt being placed on it.
The expected completion of the Power Solutions deal is a
testament to the improved tone in high-yield debt markets, several
investors said. Though fears of an economic slowdown led to a sharp
decline in bond and loan sales in the final months of 2018,
issuance picked up in the middle of January and has been fairly
steady since then.
Through Wednesday, businesses had sold a total of $106.9 billion
of speculative-grade bonds and loans this year, according to LCD, a
unit of S&P Global Market Intelligence. That is down from $162
billion in the same period last year.
After a lengthy roadshow, banks this week were able to cut the
expected yields on all of the bonds and loans, an indication that
demand had well outstripped supply, investors said. They were also
able to increase the size of the loan portion of the deal by $1
billion while decreasing secured bonds by the same amount. That was
a positive sign for private equity-backed companies that typically
prefer to borrow in loans because they are usually easier than
bonds to repay ahead of their scheduled maturities.
Among the multiple pieces of the debt package is an expected
$1.95 billion worth of unsecured bonds due 2027, which investors
late Thursday were anticipating will initially yield around 8.5%,
down from original guidance of roughly 9.25%. JPMorgan Chase &
Co. was the lead underwriter for the secured dollar bonds and
loans, while Barclays PLC led marketing of the euro debt and Credit
Suisse Group AG was the lead underwriter of the unsecured dollar
bonds.
Some investors cautioned that the likely success of the Power
Solutions deal doesn't necessarily mean other businesses will find
it as easy to sell such a large amount of debt in the current
market. Even using conservative assumptions, analysts expect the
company should be able to generate ample free cash flow in the
coming years. Its secured bonds and loans, in particular, appealed
to investors who have been eager to buy debt at the higher end of
the speculative-grade ratings scale.
Not everything about the deal pleased investors. Prospective
buyers were able to make some changes to the package of investor
protections, known as covenants, an unusual outcome for such an
in-demand deal. Yet the result, some said, still gives the
company's owners plenty of room to pay themselves dividends and
remove collateral from the business, in keeping with the long-term
trend toward weaker covenants.
Johnson Controls, an industrial and technology conglomerate with
headquarters in Cork, Ireland, announced in November it was selling
Power Solutions to the Brookfield Business Partners-led group for
$13.2 billion in cash. The deal is expected to close by June
30.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Soma Biswas at
soma.biswas@wsj.com
(END) Dow Jones Newswires
March 15, 2019 06:14 ET (10:14 GMT)
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