TRLPC:Petco's buyout financing joins US$14bn US leveraged loan pipeline

By Jonathan Schwarzberg
NEW YORK, Nov 25 (Reuters) - A debt financing of around
US$3bn backing CVC Capital Partners and the Canada Pension Plan
Investment Board's US$4.6bn acquisition of Petco Animal Supplies
is joining a US$14bn pipeline of US leveraged buyout loans that
are waiting to be sold after a US$5.5bn deal for data storage
provider Veritas was pulled last week.
While Petco is viewed as one of the higher-quality credits
that investors are still keen to lend to, the deal is likely to
be syndicated next year, sources said. Conditions in the US
market remain challenging and a volatile market and low average
secondary prices continue to pose a threat to new issue.
The SMi index of the most actively-traded names was 95.70 on
Nov 24, according to Thomson Reuters LPC data, which makes
syndicating new deals at 100% of face value or par difficult as
the secondary market continues to offer cheaper alternatives.
"It's a sloppy - to say the best - environment," said one
investor.
The completion of Petco's buyout shows that banks are still
willing to take risks and underwrite deals for companies that
are viewed as strong credits. Chipmaker Avago Technologies was
able to increase a term loan by US$2.25bn to US$9.75bn and added
a 900m euro tranche to the deal that backs its purchase of
Broadcom (O:BRCM) immediately before Veritas was pulled on Nov. 17.
"For now there seems to be a continued bid for the better
market," said a banker. "But sentiment can turn on a dime and
already people are in the mode. You don't even have to be too
bad to fall into the bad bucket."
The decision to go ahead with Petco's debt financing, which
was underwritten by Barclays (L:BARC), Citigroup (N:C), Royal Bank of Canada,
Credit Suisse (VX:CSGN), Nomura and Macquarie, reflects the company's
strong credit profile and a good following with investors after
multiple recapitalisations, which is reflected in its trading
profile in the secondary loan market.
Petco's existing US$1.2bn loan traded up to par after the
buyout was announced, as expected, but the loan was trading at
around 99.75 before the deal was announced - well over the 95.70
average bid.
Underwriting banks were also helped by the trading profile
of a comparable deal for PetSmart Inc (O:PETM), which syndicated a
US$4.3bn term loan backing its buyout by BC Partners in
February. That loan was priced at 400bp over Libor with a 1%
floor before being repriced at 325bp over Libor in May.
PetSmart has traded well in secondary and was priced at
around 99% of face value after the announcement of Petco's sale,
which is expected to close in early 2016.
PetSmart's relatively high secondary pricing is boosting
Petco's prospects as a comparable deal, however, due to current
market dislocation, Petco's deal is unlikely to match PetSmart's
pricing of 325bp in May.
"I would think the (Petco) loan would be very appealing to
accounts given it is priced correctly," said a loan investor.

LOVEABLE LOANS?
Petco is the second-biggest pet retailer in the US, a senior
banker said, after PetSmart. Petco's buyout is expected to be
well supported when the deal is launched in early 2016. The deal
is seen as a stable - almost defensive - play due to customers'
affection for their pets.
"People have pets, and they have to buy the food. It's a
pretty steady business. So why are they going to turn their
noses up at an LBO that will, roughly speaking, have a capital
structure similar to another deal that has performed very well?"
the banker asked.
Although precise details of Petco's debt financing have yet
to be released, the financing is expected to mirror PetSmart's
recent deal, with a similar loan and bond structure and leverage
in the same range of around 4.0-4.5 times senior debt and
6.0-6.5 times total debt side, banking sources said.
Standard & Poor's put Petco on negative ratings watch after
the announcement. The company is currently rated B, but S&P
noted the deal will increase leverage to "well above" the
current level of 5.0 times and that higher interest could keep
the company from reinvesting in improving the customer
experience.
Petco repriced its US$1.2bn loan at 300bp over Libor with a
1% floor in February 2013.