CLO Roundup: Minimal impact seen from TransDigm loan repricing
A $5.15 billion loan repricing effort by one of the most widely held obligors in U.S. collateralized loan obligations is unlikely to reduce CLO managers' keen interest in the aerospace firm's debt.
TransDigm, a manufacturer and distributor of aerospace engineering components, is refinancing three outstanding loans through the issuance of two replacement term loans that are being talked at a spead of Libor plus 275 basis points.
That is 25 basis points tight of the existing L+300 basis point coupon, presenting only a minimal impact on the firm's high debt service load or concerns from CLO investors, according to analysts.
TransDigm has $2.83 billion in loans held by CLOs, making it the third-largest obligor within CLO portfolios behind Dell Inc. ($3.13 billion) and Asurion Corp. ($2.85 billion), according to Thomson Reuters LPC.
"It will hurt," said Ted Basta, senior vice president of market data and analysis for the Loan Syndications & Trading Association, in an email. “But I doubt there will be any existing CLOs lenders that would not be in the deal because of the spread reduction."
“This transaction will somewhat reduce TransDigm's interest expense,” S&P Global Ratings wrote in a TransDigm ratings report issued Thursday. “However, we do not believe that it will significantly alter the company's credit metrics.”
According to the S&P report, TransDigm will use the proceeds from a new $1.5 billion five-year term Loan E to refinance its existing term loan E. The company will also pay off two existing loans, a $787 million term loan D and a $2.86 billion term loan F, with a new $3.66 billion term loan F.
S&P assigned a B+ issue-level rating and a ‘3’ recovery rating to the proposed loans, the same ratings on the existing loans.
Even with the refinancing, TransDigm remains a highly leveraged firm with approximately $7 billion in first-lien term loans and $4.6 billion of senior subordinated notes. It holds an estimated debt-to-EBITDA ratio of 6.5x-7.0x, according to S&P. TransDigm has an enterprise value of $23.9 billion, according to KDP Advisors.
The company has used its leverage to fund acquisitions costing nearly $3.2 billion since 2015, according to the firm, as well as push out large dividends to shareholder that have also totaled $3.2 billion in the last three years.
TransDigm carries a B+ corporate rating from S&P and a B1 from Moody’s Investors Service.
November's quick start
The fast pre-holiday pace of CLO issuance has stepped up in November, with 17 deals totaling $10.7 billion in new issues and refinancings pricing in the the first two weeks of the month, according to JPMorgan. Eight priced last week alone.
On Thursday, four deals were placed: Antares Capital Advisers priced its second transaction of the a year, the $1.2 billion Antares CLO 2017-2 through Credit Suisse; Saranac CLO Management reset its 2014 Saranac CLO II transaction through a new-issue $319 million Saranac CLO VII deal via Jefferies; CVC Credit Partners priced the $768 million Apidos CLO XXVIII via Citigroup; Crescent Capital reset the $428 million Atlas Senior Loan Fund III as arranged by Goldman Sachs; and Barings LLC priced its $502 million Barings Middle Market CLO 2017-1 through Natixis.
The new issuance pushes year-to-date deal volume at $101.8 billion, which has the market with “ear-shot of 2014’s record $124 billion,” Basta said in a newsletter published Friday.
Spreads on AAA discount margins have also continued to tighten, after shrinking in October to a near post-crisis average tight of 120 basis points. KKR is scheduled to close on a reset of its 2015-vintage KKR CLO 11 deal with a 118-basis-point spread. In comparison, the manager’s reset of its KKR Financial CLO 2013-1 deal in April netted a new 129-point-basis spread, according to Fitch Ratings.
In Europe, PGIM priced its third European CLO of the year with Dryden 56 Euro CLO 2017 B.V., totaling €616.95 million (US$718.28 million). PGIM has identified €312 million of the portfolio, which has a four-year reinvestment period and a weighted average spread of 3.67%. The manager has agreed to a 35% cap on cov-lite loans.
European new issuance has been entirely new-deal oriented with five CLOs pricing at €2.2 billion, according to JPMorgan.