JCI Johnson Controls International PLC

By Sam Goldfarb and Soma Biswas 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 16, 2019).

The world's largest maker of automotive batteries is set to sell more than $10 billion worth of speculative-grade debt 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 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.

Investors had expected the sale to be completed Friday, but were told it had been pushed to Monday because banks were still putting the finishing touches on the transaction by the end of the workday in London.

Still, the expected completion of the Power Solutions deal is a testament to the improved tone in high-yield debt markets, several investors said. 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.

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.

Among the multiple pieces of Power Solutions' debt package is an expected $1.95 billion worth of unsecured bonds due 2027, which investors late Friday 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 say 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 modestly strengthen the package of investor protections, known as covenants, an unusual outcome for such an in-demand deal. Yet even after the revisions, some said, the company's owners would still have wide latitude 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 16, 2019 02:47 ET (06:47 GMT)

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