Thin dealflow to help PetSmart's buyout loan

Wed Feb 11, 2015 2:45pm EST
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By Jonathan Schwarzberg

NEW YORK (Reuters) - A slow start to the year in the U.S. leveraged loan market is expected to ensure that a $4.3 billion highly leveraged loan backing pet retailer PetSmart Inc's PETM.O private equity buyout will find buyers, despite a three-notch downgrade by S&P immediately before launch.

S&P downgraded PetSmart's corporate rating to B+ from BB+ on Monday following BC Partner's $8.4 billion buyout. The $4.3 billion, seven-year term loan B, which is the biggest U.S. leveraged loan to launch this year, was rated BB- and a proposed $1.9 billion note offering was rated B-.

Although the post-acquisition downgrade was expected, S&P said that higher leverage stemming from the acquisition debt would lead to weaker credit protection; $6.2 billion of the $8.7 billion buyout is being financed with debt, giving pro-forma leverage of about 6.2 times.

This is just over the threshold of 6.0 times leverage which U.S. regulators outlined as acceptable last year, under leveraged lending guidelines designed to clamp down on riskier lending, along with the ability to repay debt.

Moody's put the deal's lease-adjusted leverage higher at 7.2 times, compared with 2.5 times before the acquisition, and rated PetSmart B1 and the term loan Ba3. Investors said that their analyses fell between the two agencies' estimates at just under 7.0 times.

Arranging banks and investors have become wary of lending to highly leveraged loans to avoid incurring regulatory wrath, although both camps are prepared to make exceptions for relationships and return respectively.

Citigroup is leading PetSmart's loan and is a joint arranger with Barclays, Deutsche Bank, Nomura, Jefferies, Royal Bank of Canada and Macquarie. Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, RBC and Wells Fargo passed on the opportunity to arrange the deal in December due to high leverage.

"I suspect at these leverage levels everyone went into this responsibly with their eyes open and with a clear view of the ability to sell this in the market," said Jay Ptashek, a debt financing partner at Kirkland Ellis LP, adding that flex should be sufficient to deal with any potential issues.   Continued...

The Petsmart store in Westminster, Colorado is seen November 18, 2014. Petsmart Inc is to release its Q3 2014 earnings November 18, 2014. REUTERS/Rick Wilking