February 8, 2019 / 6:01 PM / a year ago

Pre-marketing begins on US$10.2bn Johnson Controls financing

NEW YORK, Feb 8 (LPC) - Banks looking to pre-market approximately US$10bn of financing to support private equity firm Brookfield Business Partners’ buyout of Johnson Controls International’s power solutions unit have started conversations with investors, two banking sources said.

The deal is expected to launch for full syndication in late February or early March, the sources said. This will be the largest buyout of the young year by far and a test of the strength of the leveraged loan market, which has seen liquidity erode in the last three months.

Investors have pulled US$19.5bn from retail loan funds in the 12 weeks since November 22, according to Lipper. December set a new monthly record of US$15bn of outflows, according to LPC data, amid volatility in credit and equity markets while a growing chorus of regulators identified the leveraged loan market as a possible systemic risk in a late credit cycle environment.

The Johnson Controls unit buyout financing was expected to tap the market on a later date as the buyout is not slated to close before the end of June 2019. But banks are looking to take advantage of a window of opportunity in the leveraged loan market and will launch sooner, one of the bankers said.

Deals are flowing back into the market after sharp volatility in both credit and equity ground the new issuance of leveraged loans to a halt in December.

“The thinking is that you want to take advantage of the way the loan market has reacted,” the banker said.

The deal includes a US$5.2bn dollar-denominated term loan, a US$3bn-equivalent euro-denominated term loan and US$2bn of unsecured notes, the banker said.

However, this structure could change, the second banker said.

As investor interest has shifted to bonds from loans over the last several months with the Federal Reserve taking a more dovish stance on raising interest rates, bankers involved in the deal said there is a chance the financing could shift toward bonds with the possibility of adding a tranche of senior secured notes.

The first banker said the documents do not currently allow for this but that the issuer may consider this option to take advantage of pricing in the market.

Brookfield’s US$13.2bn acquisition of the business, which makes car batteries, was announced on November 13, 2018.

The sponsors lined up 13 banks to syndicate the financing. The banks are Barclays, Credit Suisse, JP Morgan, Bank of America Merrill Lynch, BMO, CIBC, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Royal Bank of Canada, Scotiabank and TD Securities.

As LPC’s index of heavily traded secondary loan prices fell in December to a multi-year low of 94.57, bankers mentioned that they were worried about how a deal of this size would perform.

However, secondary prices have bounced back and were as high as 96.88 on Thursday, giving a boost to banks.

In addition, banks have been able to sell other large transactions such as health information technology company athenahealth’s US$3.66bn term loan backing its buyout and a US$3.2bn loan backing telecommunications equipment maker CommScope’s acquisition of set-top box maker Arris.

“I think the market will be there for Johnson Controls now,” said the second banker.

Brookfield Partners did not immediately return a request for comment. (Reporting by Jonathan Schwarzberg; Editing by Michelle Sierra and Lynn Adler)

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