RLPC: Pre-cap loans a moveable feast for sponsors
By Lisa Lee
NEW YORK Jan 4 (Reuters) - Bull markets produce innovation. The latest novelty in U.S. leveraged loans is a pre-capitalisation or pre-cap financing, which allows companies to keep existing financing and capital structures in place if they are sold.
Pre-cap loans reappeared in 2012 after debuting in 2005. Six were completed in the U.S. last year and they look set to remain a feature of 2013.
The structure is good for private equity buyers and sellers which save paying a new set of fees. Change of control provisions are not triggered, which usually prompt an expensive refinancing.
The portable pre-cap structure is less popular with investors, which are wary of losing control over who they are lending to.
Pre-caps remove a happy dilemma for private equity firms - whether to refinance and take a dividend from a portfolio company or wait and sell the business later - by allowing them to do both.
"It's very compelling for a private equity sponsor who has been in an asset for a while, who wants to monetise but is not ready to sell yet," said Jeff Cohen, co-head of U.S. loan capital markets at Credit Suisse, which pioneered the structure and completed five deals last year.
Credit Suisse led a $1.06 billion credit, a $660 million term loan B and a $350 million second-lien loan for Atlantic Broadband in March 2012 to refinance existing debt and provide a $345 million dividend to owners ABRY Partners and Oak Hill Capital.
A few months later, Atlantic Broadband was sold to Canadian cable company Cogeco Cable for $1.36 billion, which used the $660 million term loan B to fund part of the purchase. Continued...