Billionaire Tilman Fertitta announced a US$2.5bn junk bond and leveraged loan deal this week to help pay for his eye-watering purchase of the Houston Rockets, a storied US basketball team.
Fertitta, owner of high-end steak chain Morton’s and the Golden Nugget hotel and casino franchise, is buying the Rockets for US$2.2bn - the most ever paid for an NBA club.
The financing package is part of a complex business reorganisation for Fertitta, who tried to buy the team for US$81m in the 1990s but got beat out by another US$85m offer.
Because the NBA’s current team debt cap is US$250m, Fertitta is consolidating his restaurant and hotel businesses and raising a chunky dividend to make the purchase conform to league rules.
Some proceeds of the US$2.5bn financing will refinance debt, but US$1.65bn of it will be funneled as a dividend to Fertitta’s holding company - which will help pay for the NBA franchise.
“The magnitude of the dividend that is being taken is enormous,” one veteran high-yield investor told IFR. “It may the largest dividend deal we’ve ever seen.”
GAME RECAP
The buyside usually frowns on loan and bond sales to pay dividends, known as dividend recapitalisations, because they add debt to pay to shareholders rather than fund new investments.
But many investors are bullish on Fertitta, who has a strong track record and was once dubbed The World’s Richest Restaurateur by Forbes magazine.
“He is a fantastic operator,” said Jon Stanley, a portfolio manager at Newfleet Asset Management, who owns some of the bonds issued by Fertitta’s restaurant holding company Landry’s, which will be combined with the Golden Nugget entity.
“You are adding these two businesses together and creating an entertainment juggernaut.”
The transaction will bring the vast majority of Fertitta’s restaurants and casinos under the same roof.
But as proceeds from the debt sale will be distributed to his main holding company, the financing will layer more debt on existing businesses while offering investors little in return.
During his investor presentation, Fertitta downplayed concerns that the Rockets - and their showcase Houston stadium - would be out of the reach of creditors if things go sour.
“It all belongs to one person,” he said. “(The Rockets business) is not in your credit, but you have its money.”
Richard Handler, the CEO of lead underwriter Jefferies, kicked off the marketing of the deal himself this week, calling it a “monumental transaction”.
TAKING A SHOT
The bond portion of the financing will include a US$745m reopening of a 6.75% unsecured note due 2024 that was issued by Landry’s almost a year ago.
A US$670m subordinated note maturing in 2025 is also part of the junk-bond financing.
Jefferies is sounding out investor appetite for the two tranches at a cash price of 99-100 and a yield of 8.5%-8.75% respectively, sources told IFR.
Another US$1.1bn will be raised by increasing the amount outstanding on the company’s term loan.
While Fertitta will contribute additional assets into the new entity, total leverage is still expected to increase by a full turn to 6.5 times after the transaction is completed.
That is based on a calculation of Ebitda in the offering’s documents that allows the company to annualise the performance of restaurants and hotels open for less than a year, or that are still under construction.
Without those adjustments, however, total leverage would be higher at about seven times, the bond documents show.
Citigroup, Rabo Securities, Key Banc Capital Markets and Citizens Capital Markets are other bookrunners on the financing, which is expected to price next week.
