By Emre Peker April 16 (Bloomberg) — Cerberus Capital Management LP and Phillips-Van Heusen Corp. led companies this week tapping banks to finance acquisitions as high-yield, high-risk loans extend a record rally that is spurring mergers and buyouts. Banks committed to back as much as $1.17 billion of Cerberus’s leveraged buyout of DynCorp International Inc. announced this week. Lenders began talks on a $2.45 billion loan package to support the purchase of Tommy Hilfiger BV by the New York-based apparel company, which owns the Calvin Klein brand. Companies seeking acquisitions and private-equity firms looking to deploy about $500 billion of funds raised for buyouts are tapping investor demand for leveraged loans after the debt rallied 69.6 percent from an all-time low in December 2008. The Federal Reserve’s commitment to near-zero percent interest rates and the U.S. economic recovery is prompting lenders to seek riskier assets to boost returns as banks are arranging almost four times as many loans as in 2009. “Banks are putting large-size commitments down, caps are much more reasonable and the competition is pretty fierce,” said Bill Hughes , head of the leveraged syndicate group for the Americas at Citigroup Inc. in New York. “Last year lenders were either committing conservatively or they weren’t willing to put meaningful caps on financing, which was constraining LBO activity.” Lending to speculative-grade companies rose to $77.6 billion this year, from $21.2 billion during the same period in 2009, according to data compiled by Bloomberg. High-yield, high- risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Boost in LBO Financing The S&P/LSTA US Leveraged Loan 100 Index rose 0.62 cent to 92.87 cents on the dollar this week, the highest since Jan 21, 2008. The index gained 5.7 percent this year, extending its 52 percent rally from 2009. LBO financing increased by 15 times to $13.6 billion in 2010 from the comparable period a year ago, according to S&P’s Leveraged Commentary and Data. “The environment right now for LBO sponsors and private- equity firms is pretty good from a financing perspective,” said Andrew Gordon , chief executive officer of Octagon Credit Investors LLC , which manages about $4 billion of high-yield debt, including $3.7 billion in leveraged loans. “Both in the bank loan market and the high-yield bond market, investors are being encouraged to look at taking more risk with interest rates as low as they are,” he said in a telephone interview from his New York office. ‘Significant Restraints’ Fed Chairman Ben S. Bernanke this week told Congress that high unemployment and weak construction are among the “significant restraints” on the pace of growth, and he repeated the Fed’s view that borrowing costs are likely to stay low for an “extended period.” The target range for the central bank’s Fed funds rate for overnight bank lending is 0 percent to 0.25 percent. The number of Americans filing claims for jobless benefits unexpectedly increased by 24,000 to 484,000 in the week ended April 10, the highest level since Feb. 20, the Labor Department said yesterday, indicating it will take time for the labor market to improve. “Investors are getting more and more comfortable that the economy is going to continue to grind forward at a 3 percent to 3.5 percent rate of growth,” Octagon’s Gordon said. That makes lenders interested in financing leveraged buyouts, he said. Cerberus’s Buyout Bank of America Corp. , Citigroup Inc., Barclays Plc and Deutsche Bank AG committed to provide a senior secured credit facility consisting of a $565 million term loan and a $150 million revolving credit line to back Cerberus’s acquisition of Falls Church, Virginia-based DynCorp, according to a regulatory filing. The banks also agreed to back $455 million in senior unsecured term loans. The New York-based private-equity firm, known for its $7.4 billion buyout of Chrysler LLC in 2007, will invest $591.6 million in equity financing, according to the filing. The buyout is valued at about $1.5 billion, DynCorp said April 12. “Relative to where leverage was in May 2007, it is still down significantly in terms of where banks are underwriting a loan tranche as well as the total amount of leverage they will underwrite,” said Jonathan DeSimone , a managing director at Sankaty Advisors LLC , which manages $20 billion of assets including leveraged loans. There’s been some “pressure” on minimum equity contributions to buyouts, which are currently between 30 percent and 50 percent, compared with below 20 percent during the peak of the market in 2007, Citigroup’s Hughes said. Confidence in Recovery “Equity checks are starting to come down, six months ago you were hard pressed to do a transaction unless you had close to 50 percent equity,” said Jeff Titus , a managing director overseeing loan sales and trading at SunTrust Banks Inc. in Atlanta. “Investors are more confident that a recovery is on the way and hungry for new issue, so they’re allowing a little bit more leverage as a result.” The loan market got stronger and opened up on the heels of corporate acquisitions and LBOs that occurred late last year, according to Citigroup’s Hughes and Sankaty’s DeSimone. Barclays, Deutsche Bank, Bank of America, Credit Suisse Group AG and RBC Capital Markets are arranging the loans to help finance Phillips-Van Heusen’s $3 billion acquisition of Tommy Hilfiger from Apax Partners LP. The debt includes a $1.5 billion six-year term loan B, a $500 million five-year term loan A and a $450 million five-year revolving credit line. Lenders have until April 28 to submit responses to the banks. For Related News and Information: Weekly loan market wraps: TNI SYNLOANS WRAP Stories about syndicated loans: NI SYNLOANS Loan issuance and amendments: NIM14 Top loan news: TOP LOAN Top deal news: TOP DEAL Search loans: LOAN
See original here:
Cerberus Goes to Banks for DynCorp LBO as Leveraged Loan Rally Spurs M&As
