David Bonderman, the founder of TPG, claims that large deals are back, and they are back to stay. Fueled by cheap credit and impatient investors, mega LBOs will return, and according to him, TPG will be at the forefront. TPG has not been shy of these deals in the past, leading the $44 billion takeover of TXU with Goldman Sachs and KKR in 2007. Surprisingly, investor memories are short, and the same leverage multiples and weak capital structures we saw in 2006 are emerging today in the private equity industry. As takeover multiples rise, so will leverage. And funny thing is, banks are willing to provide it more than ever.
“Larger deals are back,” Mr. Bonderman said Thursday at the SuperReturn conference in Berlin. “It is as I said before absolutely possible to do a 10-to-15-billion-dollar deal now. It might not be one you want to do. It might not be one you should do. But the capital is available.”
Recent private equity deals have been valued at $5 billion or less, a far cry from those of the 2006-2007 buyout boom. Indeed, in 2007 TPG teamed up with KKR and Goldman Sachs to buy the energy company TXU for $44 billion.
But money for private equity deals dried up in the financial crisis and the recovery so far has brought only smaller deals.
Among those deals is the $3 billion leveraged buyout of the preppy retailer J. Crew by TPG and Leonard Green & Partners, a deal that was approved by the company’s shareholders this week.
Along with larger deals, Mr. Bonderman and other private equity executives at the SuperReturn conference were all abuzz about the potential of emerging markets.
Mr. Bonderman called emerging markets the “flavor of the month” and predicted that initial public offerings in emerging markets would represent an even larger proportion of the deals in years to come.
“Interesting enough, if you survey folks like all of us in this room, everybody sees emerging markets growing just about as fast as mature markets in the deal business, which of course has never been the case before now,” Mr. Bonderman said, adding that the upside potential for deals remained high.
Growth in emerging markets is being fueled by China’s booming economy, which could even be on the verge of a bubble, as well as broader trends, including the rise of the middle class in those regions, Mr. Bonderman said.
“Even Brazil is a China story,” Mr. Bonderman said, adding that the emerging middle class would add trillions of dollars to emerging economies, particularly on the consumption side. This should lead to a “huge rebalancing of how the world sees itself,” he said.
Mr. Bonderman was asked about TPG’s recent exit from the Turkish spirits company Mey Icki , which TPG acquired in 2006 for about $800 million and sold in February for $2.1 billion.
He responded: “We thought it was a good opportunity, and it turned out to be. We would have taken it public had Diageo not shown up. As in any other place, if you can sell the whole business, you’re better off than taking it public, where you have to dribble it out even though you might get a nominally higher value. We like Turkey as a place to invest and we’ll be back.”
On the sovereign crises, such as the one in Greece, Mr. Bonderman said: “When governments are selling, you should be buying. And when governments are defaulting, we should look at that as an opportunity. Prices are always lower when the troops are in the street. A good default, like Portugal or Greece, would be very good for the private equity business. Might not be so good for the republic, but it would be good for us.”
HCA Holdings, the large hospital operator in the world, confirmed that it had set a preliminary price range for its initial public offering of $27 to $30 a share last month. The company was taken private in 2006 for about $30 billion, with an equity check that was only 15% of its purchase price! Last year, HCA’s $4.3 billion dividend recapitalization itself made many parties in the deal whole on their initial investment. The IPO is gravy, icing on the cake. And to top it all off, this had been done with the hospital operator before: “The company had been under private-equity ownership before, completing a $5.1 billion leveraged buyout in 1989. When it went public again in 1992, it handed its backers, including units of Goldman Sachs Group Inc. and JPMorgan Chase & Co., a more-than- eightfold gain, BusinessWeek magazine reported at the time.”
According to BusinessWeek, after a tepid turnout in 2010, there has been a modest uptick in buyout-backed offerings this year, with several exceeding expectations. Among the recent I.P.O.’s are Nielsen Holdings, Kinder Morgan and Bank United. HCA is currently pitching its offering to investors.
A private equity consortium, including Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch, acquired HCA in 2006, loading the company up with debt. HCA, in its filing, said it planned to use proceeds from its offering to pay off some of its debt.
What a difference 10 months have made for HCA Inc. and its private-equity owners, KKR & Co., Bain Capital LLC and Bank of America Corp.
When the hospital operator, which went private in a record leveraged buyout in 2006, filed in May to go public, U.S. initial offerings were stumbling, with deals in the first four months raising an average of 13 percent less than sought. Rather than press ahead, the owners took on more debt to pay themselves a $2 billion dividend in November, in a transaction known as a dividend recapitalization.
This month, HCA’s owners are betting that stock markets have recovered enough for investors to pick up the shares, even with the additional debt. If they’re right, they may triple their initial investment in what would be the largest private- equity backed initial public offering on record.
“This has been a classic case of buy low, sell high from the beginning,” said J. Andrew Cowherd, managing director in the health-care group of Peter J. Solomon Co., a New York-based investment bank. “Private-equity buyers have timed capital markets perfectly on this deal.”
The offering, if successful, underscores the crucial role played by the capital markets in leveraged buyouts, at times eclipsing the impact of operational changes private-equity firms make at their companies. A surge in demand for stocks and junk- bonds, fueled by asset purchases of the Federal Reserve that sent investors searching for yield, have helped KKR and Bain reap profits from HCA, even as the company remains burdened with $28.2 billion in debt and slowing revenue growth.
KKR, Bain, Bank of America and other owners invested about $5 billion in equity in the $33 billion takeover of HCA, which including debt was the largest leveraged buyout at the time. The backers, who took out $4.3 billion in dividends from HCA last year as the high-yield market soared, stand to get more than $1 billion from the IPO and will retain a stake in HCA valued at about $11 billion.
In acquiring Nashville, Tennessee-based HCA, KKR and Bain chose a company with steady cash flow and a business that’s protected from swings in the economy. Cash flow from operations was $3.16 billion in the year before the 2006 buyout, according to data compiled by Bloomberg. As of Dec. 31, 2010, that number was little changed at $3.09 billion.
The company had been under private-equity ownership before, completing a $5.1 billion leveraged buyout in 1989. When it went public again in 1992, it handed its backers, including units of Goldman Sachs Group Inc. and JPMorgan Chase & Co., a more-than- eightfold gain, BusinessWeek magazine reported at the time.
Unlike some other buyouts of the boom years that had less predictable income streams, HCA has reported revenue growth of between 5 percent and 6 percent every year it was private, except in 2010, when growth slowed to 2.1 percent. Net income has increased 17 percent since the end of 2006.
NXP Semiconductors NV, another 2006 buyout involving KKR and Bain, had combined losses of $5.8 billion between the takeover and its IPO in August. NXP, which sold just 14 percent of its shares, had to cut the offering price, leaving investors with a 21 percent paper loss as of Dec. 31. The stock has more than doubled since the IPO.
HCA, the biggest for-profit hospital chain in the U.S., attributes gains in income to cost-cutting measures and initiatives to improve services for patients. The company sold some hospitals after the buyout and made “significant investments” in expanding service lines, as well as in information technology, HCA said in a regulatory filing.
“HCA was already one of the better operators when it was taken private so it was hard to see how much cost could be driven out of the business,” Dean Diaz, senior credit officer at Moody’s Investors Service in New York, said in a telephone interview. “But they are very good at what they do and are above where we would have expected on Ebitda growth.”
Some of the improvements in earnings have come from “aggressive changes in billing and bad debt expense reserves,” Vicki Bryan, an analyst at New York-based corporate-bond research firm Gimme Credit LLC, said in a Feb. 22 report.
Provisions for doubtful accounts dropped 19 percent last year, to $2.65 billion. Capital spending, or money invested in the company, declined to about 4 percent of revenue last year from 7 percent in 2006. The company hasn’t used its cash to bring down the debt load, which is about the same as it was at the time of the takeover.
That debt will contribute to a negative shareholder equity, a measure of what stockholders will be left with if all assets were sold and debts were paid, of $8.6 billion, according to Bryan. Excluding intangible assets, new investors buying the stock would own a negative $51 per share, she said.
‘Funding the LBO’
“Today’s HCA stock buyers are still funding the 2006 LBO, which enriched many of the same equity owners for the second time, plus the massive dividends and management fees paid to those equity investors who will remain very much in control,” Bryan wrote in the report.
While it’s not unusual for companies that exit LBOs to have more debt than assets, it means they will have to use cash flow to reduce debt rather than pay out dividends, limiting returns for shareholders. HCA’s share price doubled in the 14-year period between its 1992 IPO and the 2006 buyout, not including the impact of stock splits.
Ed Fishbough, an HCA spokesman, declined to comment, as did officials for New York-based KKR, Bain in Boston, and Bank of America in Charlotte, North Carolina.
Even so, investors may pick up the stock after U.S. equity markets rallied to the highest levels since June 2008. So far this year, eight companies backed by private-equity or venture- capital firms have raised $5.9 billion in initial public offerings, five times the amount that such companies raised last year, according to data compiled by Bloomberg.
At the midpoint of the price range of $27 to $30, the IPO would value the company at $14.7 billion. Based on metrics such as earnings and debt, that valuation would give HCA a “slight premium” to rivals such as Community Health Systems Inc. and Tenet Healthcare Corp., according to a Feb. 22 report from CreditSights Inc.
Community Health Systems, currently the biggest publicly traded hospital operator, in December bid $3.3 billion to buy Tenet in Dallas. If the takeover is successful, the combined company with about $22.2 billion in revenue as of Dec. 31, 2010 will still be smaller than HCA.
With as much as $4.28 billion in stock being sold, the HCA offering is poised to break the record set by Kinder Morgan Inc., the buyout-backed company that last month raised $2.9 billion in an IPO.
Shareholders will also have to weigh the impact of government spending cuts and changes to hospital payment schedules prompted by the 2010 U.S. health law and rules from the Centers for Medicare and Medicaid, which administer the federal programs.
Baltimore-based CMS has been pushing to bundle payments to doctors and hospitals, giving them a set amount for a procedure that has to be split among providers. The agency also plans to penalize providers if patients acquire infections while in treatment or fare badly after stays. Too many readmissions, once regarded as more revenue, may now result in lower payment rates.
The federal health-care law will extend health insurance to 32 million more Americans and may prompt some employers to drop company-sponsored health benefits in favor of sending employees to state insurance exchanges the new law creates. While the newly insured may mean less bad debt for hospitals, fewer private sector-paid benefits may mean lower revenue for for- profits like HCA, because commercial payers and employers tend to pay the highest rates to providers.
“Hospitals are going to have to learn how to be productive and profitable on a Medicare rate schedule,” said R. Lawrence Van Horn, who teaches at the Owen Graduate School of Management at Vanderbilt University in Nashville. Medicare and Medicaid pay less for procedures and treatment than employers and commercial insurers, which are “traditionally the most generous payers,” he said.
HCA said in its filing that it can’t predict the impact of the changes on the company.
For-profit hospitals like HCA depend more on commercial payers and less on government beneficiaries than do nonprofits, which have already seen their revenue reduced by government cutbacks, particularly in Medicaid. Chains like HCA, with their access to capital, may be able to take advantage of weakness among nonprofits to consolidate the industry further, Van Horn said.
Megan Neuburger, an analyst at Fitch Ratings in New York, said the biggest impact of the health-care reform won’t be felt until 2014, and the market recovery will play a more important role for now in determining HCA’s success.
“In the short term, the pace and progress of economic recovery will probably be more influential to the industry’s financial and operating trends than health-care reform,” Neuburger said in an interview.
For KKR and Bain, the timing of the IPO is crucial also because their clients want to see whether buyouts made just before the credit crisis can be profitable, before they commit capital to new funds. KKR is seeking to raise its 11th North American-focused buyout fund this year.
Buyout firms have been able to return some money to investors through dividend recapitalizations, as near-zero interest rates have spurred a demand for junk bonds. Borrowers sold $47 billion of debt last year, or 9 percent of offerings, to pay owners, compared with $11.7 billion in 2008 and 2009, according to Standard & Poor’s Leveraged Commentary and Data.
Investors in Bain’s 2006 fund have received $1.6 billion in distributions so far, or about 20 percent of the $8 billion deployed. HCA’s dividends recapitalizations accounted for about $302 million of the total Bain paid out to the fund’s clients, according to an investor in the fund. The fund has generated an average annual loss of 6.4 percent, according to another person familiar with the fund.
“Investors committed an unprecedented amount of money over a short time period,” said Jeremie Le Febvre, the Paris-based global head of origination for Triago, which helps private- equity firms raise money. “Investors most likely won’t be as generous a second time, or even have the means to double down on a firm, as reputable as it may be, without first seeing money flowing back into their pockets.”
–With assistance from Lee Spears in New York and Christian Baumgaertel in 東京. Editors: Christian Baumgaertel, Larry Edelman
Toys R Us was an Opco-Propco deal done by KKR, Bain, and Vornado in 2005 for $6.5+ billion. The company was one of the largest owners of real estate in the United States, other than McDonalds. Since the toy business was not performing well and Babies R Us could not yet produce enough EBITDA to drive the company’s public valuation, these three players found an opportunity to take advantage of its real estate holdings (good call, right?). Unfortunately, the company now has $5.5 billion in debt on its balance sheet and only has 2.3% growth in sales, a $35mm loss in earnings, down from $95mm in profit last year, and a 25% increase in expenses year over year (SA). Cash used in operations also increased from $800mm to $1.2 billion over that time period. Sounds like a great time to IPO, right? Well, the sponsors in this deal seem to think so. With equity markets topping, they are trying their hardest to take advantage of foolish retail investors. Invest at your own risk:
“(Reuters) – Toys R Us Inc TOY.UL is looking to raise around $800 million in an initial public offering in April, though a final decision has not been reached, the New York Post said on Saturday.
The New Jersey-based retailer, which operates stores under its namesake brand and the Babies R Us and FAO Schwarz labels, had put off plans for an IPO in 2010.
“Toys R Us took more market share from competitors last year than they have in the past 20 years,” said one source the Post described as close to the company. “But I don’t think they were satisfied with how they did on the profit level.”
Toys R Us spokeswoman Kathleen Waugh said the company could not comment on the matter.
For December 2010, Toys R Us reported a 5.4 percent total sales rise at its U.S. unit as it lured holiday shoppers away from No. 1 toy retailer Wal-Mart with more temporary stores and exclusive toys. But same-store sales fell 5 percent at its international segment.
Overall, a tough 2010 holiday season had margins hit across the toy industry by bargain-seeking, recession-hit consumers.
So the economic environment has stoked continued debate between management and owners at Toys R Us about whether this is the best time to re-launch an IPO, according to a source briefed on the situation, the Post reported.
Toys R Us was taken private in 2005 by Kohlberg Kravis Roberts KKR.AS, Bain Capital and Vornado Realty Trust in a $6.6 billion deal.
In May 2010, the company filed to raise as much as $800 million in an IPO. But that was not launched.
Toys R Us’s net loss widened to $93 million in the third quarter ended on October 30, 2010, from $67 million a year earlier. While sales were up 1.9 percent in the period, total operating expenses rose about 9.4 percent.
Last fall, the retailer opened 600 smaller “pop-up” stores that added to the more than 850 larger year-round stores it operates in the United States, the Post said.”
The leveraged loan and high yield markets are currently on fire! Issuance is up 30% yoy, despite 2009 being a very strong year in issuances. Bank of America was leading the charge in market share, beating JPMorgan and taking 24%. JPMorgan, the nearest bank was only at 14% market share, due to its conservative underwriting standards.
According to Ioana Barza of Thomson Reuters, “The U.S. syndicated loan market is firing on all cylinders heading into the fourth quarter. Although increased volatility is becoming a market staple and poses challenges for underwriters, the upside is that loan issuance has rebounded on the back of a strong bond market.
Lending activity in 1-3Q10, at $716.5 billion, was up 92% from the $372.8 billion in the same period last year, and up 30% over full-year 2009 levels, according to Thomson Reuters LPC. Although refinancing activity has driven roughly 70% of U.S. loan issuance this year, the pickup in activity in the third quarter has been dramatic. At $226 billion, 3Q10 volume is up 131% from 3Q09.
While lending has been stepped up, 63% of senior buyside and sellside lenders surveyed by Thomson Reuters LPC said constraints to get deals done remain as financings are still getting done selectively. Only one-quarter of respondents believe there are now few barriers to getting deals done, and a meager 12% said risk aversion runs high at their institutions and they are somewhat constrained.
After slowing to a crawl in May and June, the high yield bond and leveraged loan markets made a strong comeback in 3Q10. As investors regained their footing, many sought refuge in fixed income. High yield bond issuance surpassed 2009′s full-year record of $146.5 billion, with $173 billion in volume through Sept. 29. Investors followed the relatively attractive yields and bond fund inflows recovered after the dramatic pullback in the spring on the back of the Eurozone debt crisis and fears of a U.S. double dip recession.
2010 mutual high yield bond fund flows (including funds reporting monthly as well as funds reporting weekly) stood at +$7.681 billion, through late September, according to Lipper FMI, a Thomson Reuters company. Just as investors voted with their feet with $4.6 billion in outflows in the spring, there have been over $8 billion net positive inflows since mid-June.
With record inflows and bond issuance, it is noteworthy that nearly 40% of bond proceeds were used to pay down loans this year. While this virtuous cycle came to a halt, with less than $4 billion in monthly paydowns in May, through July, bond-for-loan takeouts climbed to the $9 billion range in August and September. With this extra cash from pre-payments to reinvest back into loans, CLOs made a slow comeback (albeit with recycled liquidity) and secondary loan bids began to climb, and continue to grind higher.
At the end of 2Q10, the SMi100 average bid was down over 2 points, while gaining 2 points in 3Q10. However, investors continue to be somewhat selective. Loans originated post-crisis (i.e. 2008 to present) remain higher bid relative to the 2006-2007 vintages. In fact, roughly 70% of 2010 vintage loans remain bid between 98-100, thanks to bells and whistles like call premiums, Libor floors and OIDs.
With these names already highly bid, investors began to focus on the primary market in hopes of a lineup of new issue. And after Labor Day, they got just that as the institutional pipeline doubled in size, deals were launched one after the other and many were oversubscribed. All told, leveraged issuance reached $75 billion in 3Q10, up 50% over 3Q09 volume on the back of new issue, which was $43.37 billion.
Equity sponsors became increasingly active, pursuing dividend recaps and financing a number of large LBOs. As a result, sponsored issuance reached $41 billion, with $16.5 billion in the form of LBO financings. There was a smattering of covenant-lite deals and nearly $5 billion in dividend recap financings in 3Q10, spread across 11 deals – a sign that arrangers were ready to test risk appetite again. However, the $12.5 billion total volume of dividend recaps done so far this year is on par with what was done in a single quarter in 4Q06 and 2Q07. Lenders expect this trend to continue with recent announcements for Metaldyne, Angelica and Euro-Pro.
New deals have been successful in attracting a range of investors and yields have begun to recede, with $15 billion in facilities flexing down in 3Q10 (versus $6 billion in upward flexes). On average, issuers saw primary yields (including Libor floors, contractual spread, and OID amortized over four years) come down to 6.95% in September from 7.67% in August.
Although loan yields are coming down in the primary, they remain attractive – and not just to CLOs. Crossover investors are increasingly active in the space and loan mutual fund inflows have surpassed well over $6 billion this year. Investors plowed money back into the funds, with the largest one-week inflow of $480 million recorded in September. With strong demand, hefty oversubscriptions and downward flexes, the institutional pipeline, which stood at roughly $13 billion by press time on Sept. 30, is up significantly from where it was in August and nearly double the level in early September. Today’s pipeline is still lower than the $16-18 billion highs seen in April and May, but it is widely expected to grow heading into 4Q10.
While all signs point up in terms of new issue in the leveraged loan market, lenders are not sitting back. Demand, driven by loan paydowns via the bond market, remains volatile. With unpredictable fund flows and moves in equities, which in turn move the bond market, the virtuous cycle remains fragile.
With a surge in new CLOs not expected any time soon and existing CLOs slowly going static as their reinvestment periods come to an end over the next couple of years, lenders are concerned about the financing gap and their ability to address the refinancing cliff. But, for now, issuers continue to rely on the bond market for relief and lenders hope the virtuous cycle will continue in the short term.
Meanwhile, investment grade lenders grappled with Basel III and its possible implications for the loan market. Under Basel III, revolving credits, which make up the bulk of the investment grade market and are largely undrawn, are currently included in the “liquidity coverage ratio” that requires banks to hold liquid assets equal to 100 percent of all undrawn credit lines used for liquidity purposes. Under this scenario, revolving credits would become prohibitively expensive. In turn, borrowers could bypass loans altogether and go straight to the bond market, or draw down revolving credits and repay them immediately, or borrow via term loans and reinvest the cash. However, it is possible that revolving credits could be instead classified as credit facilities that would attract a lower 10% liquid asset coverage ratio.
With the implementation period pushed back, nearly 60% of senior lenders surveyed by Thomson Reuters LPC said they expect some impact on investment grade lending in the short term, although more clarity is needed around which category revolvers will fall under and nearly 40% said they don’t anticipate any impact.
3Q10 investment grade lending was up 140% over 3Q09 at $78.76 billion. Although the investment grade loan market has seen an increase in volume recently, issuers continue to rely on the bond market and corporates continue to sit on excess cash. But volume was not anemic just due to a lack of jumbo M&A transactions. This has been coupled with issuers’ reticence to return to market to refinance existing debt. And when they do come to market, many are downsizing. More recently, however, lenders note that as spreads have tightened, more issuers are considering coming back to the market ahead of any regulatory changes. As a result, the refinancing pipeline for 4Q10 is building.
Will issuers opt for longer tenors? Lenders say clients are just not interested in that incremental duration (or the costs that come with it) as they have confidence that they can refinance as needed, especially as demand for the investment grade asset continues to outweigh supply. Still, while three-year revolvers have increasingly become the norm, a four-year revolver market is emerging as well.
Looking ahead, lenders expect that investment grade lending in 4Q10 will be up dramatically over 4Q09′s anemic levels. However, much of this will be driven by refinancing activity rather than M&A financings. Lenders expect spreads to come down across the board, given the strong demand and the absence of event-driven transactions. Already, over $100 billion in facilities have been structured with market-based pricing (MBP) this year, which has surpassed the $96 billion logged in 2009 and many anticipate this mechanism will remain in place going forward. Nevertheless, lenders note that pricing may not have found a floor because lenders are eager to put money to work and meet budgets as year-end approaches.”
Four years after its buyout, HCA, the largest hospital chain in the United States is preparing for an IPO that could raise as much as $3 billion for KKR and its investors. HCA has over 160 hospitals and 105 outpatient-surgery clinics in 20 states and England. The IPO would help the firm pay down some of its $26 billion in debt. The company is very well positioned to benefit from health care reform. According to Analysts, this specific IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion…A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007. HCA has fared much better than other mega-buyouts from 2006/2007, and is only levered at 4.8x trailing EBITDA.
According to Bloomberg, “HCA Inc., the hospital chain bought four years ago in a $33 billion leveraged buyout led by KKR & Co. and Bain Capital LLC, is preparing an initial public offering that may raise $3 billion, said two people with knowledge of the matter.
HCA plans to interview banks to underwrite the sale in the coming weeks, according to the people, who asked not to be identified because the information isn’t public. The sale, slated for this year, may fetch $2.5 billion to $3 billion, the people said. HCA’s owners, which include Bank of America Corp. and Tennessee’s Frist family, may seek $4 billion, said another person familiar with the plans.
The stock offering would be the biggest U.S. IPO in two years and help HCA pay off debt, the people said. The hospital operator may profit from the health-care legislation President Barack Obama signed into law on March 23 that provides for coverage for millions of uninsured patients, said Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut.
HCA is “extremely well-positioned to benefit from health reform because their hospitals tend to be concentrated in significant markets” including Denver, Dallas, Houston, Kansas City, Missouri, and Salt Lake City, Skolnick said yesterday in a telephone interview. “Health reform was very important to this decision.”
Kristi Huller, a spokeswoman for KKR, and Alex Stanton, a Bain spokesman, declined to comment, as did Jerry Dubrowski, a Bank of America spokesman. Ed Fishbough, a spokesman for HCA, didn’t immediately respond to a phone call and e-mail seeking comment.
Private-equity firms spent $2 trillion, most of it borrowed, to buy companies ranging from Hilton Hotels Corp. to Clear Channel Communications Inc. in the leveraged-buyout boom that ended in 2007 and are now seeking to cut that debt before it matures.
U.S. IPO investors have been leery of companies backed by private equity this year. In the biggest offering so far, Bain’s Sensata Technologies Holding NV sold $569 million of shares last month at the low end of its estimated price range. In February, Blackstone Group LP’s Graham Packaging Co. and CCMP Capital Advisors LLC’s Generac Holdings Inc. were forced to cut the size of their offerings.
HCA may file for the IPO with the U.S. Securities and Exchange Commission as early as next month, said one of the people.
The IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion. HCA would be the biggest IPO of a private-equity backed company in the U.S. since at least 2000, according to Greenwich, Connecticut-based Renaissance Capital LLC, which has followed IPOs since 1991.
HCA’s owners put up about $5.3 billion to buy the company, according to a regulatory filing, funding the rest with loans from banks including Bank of America, Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. The IPO would lower HCA’s debt load rather than allowing owners to reduce their stakes, said the people.
The hospital chain’s purchase in 2006 shattered the record for the largest leveraged buyout, held since 1989 by KKR’s acquisition of RJR Nabisco Inc. HCA’s record was eclipsed by Blackstone’s acquisition of Equity Office Properties Trust and again by the 2007 takeover of Energy Future Holdings Corp., by KKR and TPG Inc., for $43 billion including debt.
Later that year, the global credit contraction cut off the supply of loans necessary to arrange the largest LBOs. A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007.
$25.7 Billion Debt
HCA, the largest U.S. hospital operator, had about $25.7 billion of debt as of Dec. 31, about 4.8 times its earnings before interest, taxes, depreciation and amortization, even before HCA’s owners tapped credit lines in January to pay themselves a $1.75 billion dividend. Tenet Healthcare Corp.’s ratio was 4.4 and LifePoint Hospitals Inc.’s was 2.85 at year- end, according to data compiled by Bloomberg.
Health-care companies have fared better than the average private-equity investment during the economic decline. KKR said in February that its holding in the company had gained as much as 90 percent in value as of Dec. 31, while stakes in Energy Future Holdings Corp. and First Data Corp. were worth less than their initial cost.
Hospitals will probably be “net winners” in the health- care legislation, said Adam Feinstein, a New York-based analyst at Barclays Capital, in a March 26 note to investors. HCA, Dallas-based Tenet and Brentwood, Tennessee-based LifePoint may gain because the legislation will reduce hospitals’ losses from providing charity care to the poor and uncollectible bills.
HCA has 163 hospitals and 105 outpatient-surgery clinics in 20 states and England, according to the company’s Web site.
The company was founded in 1968, when Nashville physician Thomas Frist Sr., and his son, Thomas Frist Jr., and Jack Massey built a hospital there and formed Hospital Corp. of America. By 1987, the company had grown to operate 463 hospitals, according to the company’s Web site. Thomas Frist Sr. is also the father of Bill Frist, a physician and the former Senate majority leader.
HCA went private in a $5.1 billion leveraged buyout in 1989, then went public again in 1992, according to the company Web site. In 1994, HCA merged with Louisville, Kentucky-based Columbia Hospital Corp. In the mid-1990s the company, then called Columbia/HCA Healthcare Corp., operated 350 hospitals, 145 outpatient clinics and 550 home-care agencies, according to the company.
In December 2000, HCA agreed to pay $840 million in criminal and civil penalties to settle U.S. claims that it overbilled states and the federal government for health-care costs. It was the largest government fraud settlement in U.S. history at the time, according to a U.S. Justice Department news release on Dec. 14, 2000.
A credit-market rally has helped HCA extend maturities on some of its debt. HCA has sold $4.46 billion of bonds since February 2009 in a bid to repay bank debt and delay maturities, according to data compiled by Bloomberg. The company still has about $11 billion coming due over the next three years, according to Bloomberg data. It is also negotiating with lenders to amend the terms of a bank loan.
HCA offered earlier this month to pay an increased interest rate to lengthen maturities on $1 billion of bank debt, according to two people familiar with the matter. The amendment would allow HCA to move part of the money due under its term loan B to 2017 from 2013. Even after the refinancing and debt pay downs, the company will still have to access the “capital markets to address remaining maturities,” said Moody’s Investors Service Inc. in a note last month.
“It will be difficult for the company to meaningfully reduce the amount of debt outstanding through operations due to limited free cash flow generation,” Moody’s said.”
Here is an article from 4 years ago by the NY Times describing the mega-buyout:
“HCA, the nation’s largest for-profit hospital operator, said today that it had agreed to be acquired by consortium of private investors for about $21 billion. The investors will also take on about $11.7 billion of HCA’s debt.
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The overall deal, which the company valued at about $33 billion, would rank as the largest leveraged buyout in history, eclipsing the $31 billion takeover of RJR Nabisco in 1989 by Kohlberg Kravis Roberts & Company.
The group of buyers is led by the family of Senator Bill Frist, the Senate majority leader. His father, Thomas Frist Sr., and his brother, Thomas F. Frist Jr., founded HCA.
The other investors are Bain Capital, Kohlberg Kravis Roberts and the private equity arm of Merrill Lynch.
The deal appears to be driven by trends both on Wall Street and in the health care industry. For one thing, the private equity business — in which investment companies pool capital from investors in order to buy companies and then resell them or take them public — is swimming in cash. And private equity firms are eager to invest in a company like HCA, which generates a lot of revenue and, judging by its stock price, is seen as undervalued by investors.
Like many other for-profit hospital companies, HCA has seen its stock perform poorly in recent years. The whole industry has struggled with increasing amounts of bad debt, as more people fail to pay their bills because they do not have sufficient health insurance or any coverage.
Separately, various private equity firms have made a number of huge deals recently: Univision for $12.3 billion in June; $22 billion for Kinder Morgan in May; General Motors’ finance unit, GMAC, for as much as $14 billion in April.
Earlier this month, the Blackstone Group said it had lined up $15.6 billion in commitments for its latest buyout pool, forming the world’s largest private equity fund.
HCA was taken private once before, in the late 1980’s by the company’s management, which at the time thought it was undervalued. The move turned out to be a success, and HCA went public again a few years later.
Today’s deal promises to generate large fees for Wall Street bankers and lawyers, who have been toiling away on the transaction for months. Credit Suisse, Morgan Stanley and Shearman & Sterling are advising HCA; Merrill, Bank of America Corporation, Citigroup Inc., J. P. Morgan Chase and Simpson Thacher & Bartlett are financing and advising the buying group.
HCA is the nation’s largest for-profit hospital chain, with 2005 revenues of roughly $25 billion. Based in Nashville, Tenn., the company operates about 180 hospitals and nearly 100 surgery centers.
After merging with Columbia Hospital Corporation in 1994, HCA became the subject of a sweeping federal Medicare fraud investigation; it agreed to pay $1.7 billion to settle the matter. Thomas Frist Jr., who had left HCA’s management before the fraud charges arose, eventually returned as chief executive in 1997. He stepped down as chairman in 2002, but he remains on the company’s board of directors.
Senator Frist’s ties to the company have drawn criticism over the years, as he has been active in the Senate on a variety of health-care initiatives that have the potential to affect the large hospital company. Last fall, the Securities and Exchange Commission began an investigation into his decision to sell stock, once estimated to be worth more than $10 million, which was held in a trust.
Mr. Frist sold the stock in June 2005, just as the price of HCA stock peaked and shortly before it fell the following month; the sale was disclosed in September. He has said that the timing of the sale was a coincidence, the result of a decision to divest his holdings in the company, and that he is cooperating with the investigation.
Under the terms of today’s deal, the consortium of investors would pay $51 a share for HCA’s outstanding common stock, roughly 15 percent more than the company’s trading price early last week, when word spread that the negotiations had faltered. Today, HCA’s stock rose $1.61, or 3.4 percent, to close at $49.48 on the New York Stock Exchange.
The investor consortium is expected to borrow about $15 billion to finance the deal. But with the high-yield bond market tightening, raising that amount could be a challenge.
There is also the possibility that another group could emerge with a rival offer. HCA has included a provision in its deal with the investor consortium that allows it to actively seek a higher offer. Firms like the Blackstone Group and the Apollo Group, as well as rival hospital operators, could try to bid.”
After meeting two managing directors from PrinceRidge in Boston, I can definitely vouch for the fact that it is a very respectable firm with great people. They will continue to grow in this market because of their expertise in high yield issuance, restructuring, and trading. ICP is a solid acquisition because of its focus in structured products and asset management.
According to Ms. Shenn of Bloomberg, “PrinceRidge Holdings LP, run by former UBS AG executives John Costas and Michael T. Hutchins, is taking over the capital-market operations of ICP Capital, the broker and asset manager focused on structured products.
ICP Capital, majority owned by Chief Executive Officer Thomas Priore, will become one of six senior partners that own PrinceRidge and the combined business will operate under the PrinceRidge name, Costas said today in a telephone interview. Both firms are based in New York.
ICP, which has 60 employees in the units in New York, Chicago, Los Angeles, London and Copenhagen, is teaming with PrinceRidge after losing the head of its trading and investment- banking business, Carlos Mendez. PrinceRidge is attempting to position itself to capitalize on a “once in 50-year opportunity” to create a sizable “boutique” securities firm, as it expects only four or five of about 180 smaller competitors to grow into mid-size rivals to Wall Street’s “mega-players,” Costas said.
“There will be a tremendous consolidation and a shaking out among these 180 players, and the conclusion we clearly came to is we are stronger together, and can increase the probability of us being one of the winners,” he said.
PrinceRidge Chairman Costas, 53, and CEO Hutchins, 54, last year reunited to start their firm after running UBS’s hedge fund Dillon Read Capital Management LLC, which the Swiss bank wound down in 2007 as the credit crisis began roiling debt investors. Costas earlier led UBS’s investment bank.
PrinceRidge now has 85 employees, Costas said. ICP, which was founded as a Bank of New York affiliate in 2004 and became independent in 2006, has about a dozen workers in its separate asset-management unit, said Priore, 41.
Mendez left ICP after a “shouting match” with Priore last month, industry newsletter Asset-Backed Alert reported March 5. Mendez confirmed his departure in a telephone interview today and declined to comment further.
Priore declined to comment on Mendez’s departure, saying his company could have explored other options including raising capital.
“We chose this route because we think it really speeds up our evolution by a couple of years,” Priore said.”
Junk bonds have returned over 65% since the fall of Lehman Brothers. Has credit quality improved since? Not so much, but investors have become more aggressive and do not wish to earn zero or negative returns after inflation from U.S. Treasuries. Even corporate bonds are not returning as much, since benchmark rates are so low. As the Fed’s asset purchases stop in March, this could change. Mortgage rates have also been kept artificially how. Low spreads of about 6% on these bonds have helped risky companies refinance. High yield issuers have already issued $42 billion in the first quarter, a record.
According to Ms. Salas and Mr. Paulden of Bloomberg, high-yield, high-risk bonds are beating investment-grade debt for the first time this year as confidence in the U.S. economic recovery gains strength.
Speculative-grade securities have returned 1.93 percent this month, bringing year-to-date gains to 3.63 percent, according to Bank of America Merrill Lynch index data. That compares with a 0.07 percent loss this month for investment- grade bonds and a 2.32 percent return in 2010. The junk-bond index is being led higher by Freescale Semiconductor Inc. and Energy Future Holdings Corp., formerly known as TXU Corp.
Lenders to the neediest borrowers are accepting the lowest relative yields since January as confidence in the global economy spurs Morgan Stanley to boost its growth estimate for 2010 to 4.4 percent from 4 percent. Speculative-grade credit rating upgrades by Moody’s Investors Service are poised to outpace downgrades for the second consecutive quarter, the first time that’s happened since 2006, according to data compiled by Bloomberg.
“It’s a yield grab,” said Jack Iles, an investment manager at MFC Global Investment Management in Boston who helps oversee $4 billion in fixed-income assets.
The extra yield investors demand to own high-yield bonds instead of Treasuries has narrowed for nine straight days to 6.15 percentage points, the longest streak of spread tightening since August, Bank of America Merrill Lynch data show. The spread had widened to 7.03 percentage points on Feb. 12 from 6.39 percentage points in December on concern that Greece’s budget deficit, Europe’s biggest in terms of gross domestic product, would slow the global economy.
‘Bit of a Stumble’
“Risky assets took a little bit of a stumble from January to mid-February and that was by and large wrapped up with concerns over sovereign debt,” said Christopher Garman, president of Orinda, California-based Garman Research LLC. “Those concerns seem to have more or less faded.”
Elsewhere in credit markets, Fannie Mae sold $6 billion of debt, its biggest offering of benchmark notes since April, as the company boosts borrowing and cuts holdings to fund about $130 billion of planned purchases of delinquent loans from the mortgage securities it guarantees. The 3-year debt from the mortgage company under government control yields 1.803 percent, or 31 basis points more than similar-maturity Treasuries, Washington-based Fannie Mae said in a statement.
U.S. commercial paper outstanding rose $11.2 billion to $1.14 trillion in the week ended March 10, after declining by $20.4 billion in the previous period, the Federal Reserve said on its Web site. Commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent.
Central clearing of derivatives including credit-default swaps will come under scrutiny as part of efforts to safeguard the European Union’s financial system. At a meeting on March 22, EU nations and the European Commission will examine ways to cut the risk in the event that one of the parties to a derivatives contract can’t meet its obligations, according to a document obtained by Bloomberg News.
Clearinghouses for swaps transactions should be open to any firm that wants to process trades in the $300 trillion U.S. market, according to Commodity Futures Trading Commission Chairman Gary Gensler.
“Clearinghouses should not be allowed to discriminate between or amongst the trades coming from one trading venue or another,” the chairman said in prepared remarks at the Futures Industry Association conference in Boca Raton, Florida.
The cost to protect against corporate bond defaults in the U.S. rose as the Markit CDX North America Investment Grade Index, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 0.5 basis point to a mid-price of 83.5 basis points, according to broker Phoenix Partners Group. The gauge typically increases as investor confidence deteriorates.
In London, the Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings, rose 1.5 basis point today to 75.75 basis points, the highest since March 5, JPMorgan Chase & Co. prices show.
Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.
Signs that the U.S. economy is improving are bolstering demand for speculative-grade securities, according to Martin Fridson, chief executive officer of money manager Fridson Investment Advisors.
“There is a healthy appetite for risk,” Fridson said. “There is a fading of concern over Greece and more upbeat economic numbers.”
Morgan Stanley expects “above-consensus global GDP growth,” raising the projection from December, “despite growth downgrades in Europe,” a weaker first quarter in the U.S. and “recent softening” in a China manufacturing index, the firm’s economists said March 10.
The Organization for Economic Corporation and Development said March 5 its leading indicator, which signals the direction of the economy, reached the highest in almost 31 years in January.
The measure increased by 0.8 point to 103.6 from 102.8 in December, the Paris-based organization said. January’s reading was the highest since May 1979. Gains on the month were led by Japan, the U.S., Canada and Germany, the OECD said.
Spreads to Narrow
High-yield spreads will narrow to 4 percentage points by year-end as defaults plunge, according to Garman. Moody’s predicts the speculative-grade default rate will decline to 2.9 percent by the end of 2010 from 11.6 percent in February. The rate fell from 12.5 percent in January.
The worst-rated bonds are performing the best this month. Securities ranked CCC and lower have gained 2.77 percent while BB rated notes, the highest junk tier, have returned 1.81 percent, Bank of America Merrill Lynch data show. High-yield securities are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.
Bonds of Freescale, the computer chipmaker bought by firms led by Blackstone Group LP, have climbed 5.36 percent on average and debt of Energy Future, the power producer taken private by KKR & Co. and TPG, has returned 4.27 percent, Bank of America Merrill Lynch data show. Austin, Texas-based Freescale is rated Caa2 by Moody’s and B- by S&P. Dallas-based Energy Future is rated Caa3 and B-, respectively.
The bonds are rallying in part because the thawing of the new issue market has given the riskiest companies the ability to refinance their debt, said MFC Global’s Iles.
Speculative-grade companies have issued $42.5 billion of bonds in 2010, already a record first quarter, Bloomberg data show. Junk bond sales totaled $11.8 billion in the first three months of 2009.
“The reopening of the new issue market was huge for these guys,” Iles said. “The ability for companies like TXU to restructure even part of their balance sheet is much better than it was even six months ago.”
Lisa Singleton, a spokeswoman for Energy Future and Freescale spokesman Robert Hatley declined to comment.
Among high-yield borrowers selling debt this week were GMAC Inc., which sold $1.5 billion of 8 percent, 10-year bonds, and McLean, Virginia-based Alion Science & Technology Corp., which issued $310 million of 12 percent payment-in-kind notes that can pay interest in the form of added debt.
Insurance companies were the best performing industry in the Bank of America Merrill Lynch U.S. High Yield Master II Index with gains of 6.63 percent this month. Bonds of American International Group Inc., once the world’s largest insurer, have risen to the highest levels in 18 months after the New York- based company said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion.
Financial service company debt, the second-best performing sector, gained 3.64 percent and restaurant company bonds followed with returns of 3.13 percent, index data show.
JDA Software has issued $250M in a private offering (qualified institutional buyers) in Sr. Notes. The company plans to use the proceeds in order to fund a $434M acquisition of i2 Technologies (NASDAQ: ITWO).
JDA provides inventory management software for retailers. i2 technologies is in the business of supply chain management and offers software applications and SaaS.
This will be JDA’s second attempt to acquire i2 technologies after a failure in financing this past November. JDA had entered a $346M deal which provided special provisions to allow the buyer (JDA) to terminate the agreement in case of inability to raise financing. In most cases in the past, the use of this provision leads into further negotiation of the purchase price. However, when JDA attempted to lower the price, i2 refused, and instead JDA was forced to pay a $20M termination fee.
In addition to JDA’s debt offering, the company will fund their acquisition with a $120M loan and a $20M revolver from Wells Fargo.