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.

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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.

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