Felix Salmon

Leverage datapoint of the day

By Felix Salmon
September 22, 2009

Remember the crazily-leveraged acquisition of Procter & Gamble’s drugs business by Warner Chilcott? Well, it turns out that demand for all that Warner Chilcott debt is even stronger than the bankers had anticipated. To the point at which they’re seriously considering giving up the loan part of the deal in order to bump up the bit of it designed to be sold to — wait for it — CLOs.

Vipal Monga has details of the deal, which comprises a $250 million credit line, a $1 billion A loan, a $1.5 billion B loan, and a $1.4 billion bridge loan. The bridge loan will ultimately become a high-yield bond, while the A loan will be kept by the banks. The B loan, says Monga, will be syndicated mainly to collateralized loan obligations. And appetite is super-strong:

Such is demand for Warner Chilcott’s institutional loan that the banks may merge the $1 billion A loan — which the banks themselves generally keep — with the B loan and offer it as a single $2.5 billion package.

If that happened, and if the expected high-yield bond comes on schedule, then the banks putting together the $4.1 billion financing would be left, at the end of the day, with nothing but a $250 million credit line — and a lot of very fat fees. This is the originate-to-distribute model coming back with a vengeance, and it’s being used to lend Warner Chilcott $4.1 billion towards a $3.1 billion acquisition: the buyer is putting no cash whatsoever towards the deal, and indeed is getting $1 billion cash back.

It really seems as though we’ve learned nothing from the crisis. CLOs are chomping up billions of dollars in leveraged loans like it’s 2006 all over again — and there’s nothing that any regulator seems to be able to do about it. There’s proof for you, if proof were needed, that it’s pretty much impossible to force the financial markets to deleverage. The only way to do that is to get rid of the tax advantages given to debt finance, and that ain’t going to happen.

3 comments so far | RSS Comments RSS

Wildly leveraged??? Press reports have total debt covenant on the WC trade at 4.75x and closing leverage out of the blocks is well below that. Healthcare median leverage last 10 years is 5x and default rate is tiny. TLB is priced at L+375, 98 OID, 102 call ie very cheap. CLO’s have lots of cash because their supposedly horrible and oversold investments have been prepaid with bond offerings and IPO’s. LOL on removing tax deductibility on debt, that House bill triggered the 1987 market crash!!!

Posted by Flex | Report as abusive

My understanding was that this was likely a relative safe deal, that’s why everyone wants in. It may be somewhat risky, but a lot less risky than many alternatives.

The real scandal here is that these taxpayer-supported banks are making a lot of money on a deal where most of the future upside comes from tax arbitrage, i.e., they will be able to move more tax liabilities to Ireland, where corporate taxes are substantially lower.

But given that Ireland has its private parts in a vise and just took on dodgy CRE debt equal to 50% of GDP, the joke could be on them if the tax rates jump substantially in the next few years.

Posted by Bob_in_MA | Report as abusive

the buyer is putting no cash whatsoever towards the deal, and indeed is getting $1 billion cash back.

This is factually false: they are not receiving $1B in cash, they are simply simultaneously refinancing existing debt. To insinuate otherwise is incorrect.

Posted by right | Report as abusive

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