Leveraged transactions are almost impossible amid a bank market that has tightened its lending standards and reduced cash flow for senior debt by over three times of what it offered one year ago. For a public company considering a transition to the private market, funding its shareholder takeover may mean exploring alternative markets.
For those at the forefront of this movement one consideration takes them to the private credit tenant lease (CTL) market, where long-term lending standards and healthy appetite might equate to a viable road for retail "go-privates" - public companies looking to become private entities. Yet, the path may not be as easy in a market that has recently turned retail-wary and requires the best of the crop before an investor lends under the long-term maturities.
Still, most of the these companies intending to go private are multi-union retailers forgotten by Wall Street but still performing, which in a credit-sensitive market known for its research coverage might result in a successful combination, said a sellside source who has recently received several inquiries for such deals. With its large physical properties, a company can raise between $50 million to $60 million per CTL, enough funding to take it private, explained the source.
"For the most part these [issuers] have to be viewed as an investment-grade company capitalized with at least $100 million, with anything smaller the NAIC typically has a hard time no matter how good the financials are," said one source familiar with the market.
It takes more than a rating
Regardless of a company's ability to fulfill the typical CTL requirements, these retail-sector public companies must also face a market saturated with similar deals from competing public companies like Home Depot and Wal-Mart Inc.
Historically these large companies have sought the CTL market as an alternative funding source that alleviates their bank loans, not as a base for money to go private added the buyside source. Notwithstanding its funding needs, retail issuers are increasingly becoming a tough sell for any market, he added.
"At some point in time, each and every company that is in the market buying this CTL stuff gets to their threshold where they say I've got my exposure to you and I need to go on,'" said the buyside source. "Take a look at something that once had a respectable name on the Street, like J.C. Penny [& Co.] or K-Mart, all these stores that at one snapshot in time seemed like worthy investments aren't anymore."
While investors continue to be leery of going long-term with retail issuers, the "go-private" initiative arouses its own suspicions with many investors questioning a company's decision to turn private, said one sellside source. "Most of the companies trying to go-private end up not being investment-grade," he added.
"We have not yet seen anybody saying Here is what the money is being used for,'" said the source. "It's something that I may be asking the question especially if it's a company that has a big piece of property that they are looking to do and looks like it represents a substantial part of their net worth."