Taking the cake
In a year when high-yield borrowers struggled with a retreat in CLO demand and an excruciating rise in interest costs, Hub International showed other issuers a way to tackle the pricing challenges that so dominated discussions during a volatile 2023.
Its US$2.175bn secured seven-year bond dramatically lowered funding costs on a US$7bn financing package designed to take out looming debt maturities and keep its acquisition strategy intact.
Like many sub-investment-grade issuers, the private equity-backed insurance broker had to contend with how to refinance floating-rate loans taken out on the cheap before the US Federal Reserve began its aggressive hiking spree in March 2022.
Not only would any new debt come at a significantly higher cost, but demand in the loan market was weaker. That is because managers of collateralised loan obligations, which had long supported the leveraged loan market, were hitting constraints on their ability to buy new assets, particularly those farther down the ratings spectrum.
To add to its difficulties, the highly leveraged, Single B credit wished to refinance US$6.4bn of term loans due in 2025, but in a way that would allow it to continue an acquisition spree which was integral to its growth strategy.
“The question was: how do we address that refinancing risk in a way that wasn’t going to impact the significant growth trajectory that this company had been on?” said Wissam Kairouz, co-head of North America leveraged finance origination at Morgan Stanley, lead-left on the bond.
The solution revolved around introducing secured notes for the first time into Hub’s capital structure and combining that with loan financing to raise around US$7bn to attend to the maturities and have some left over for acquisitions too.
The key to the transaction’s success was how tight leads could drive pricing on the bond at a time investors were keen buyers of secured bonds and the yield curve remained inverted.
Against that backdrop, Hub could back the bond with a similar collateral package as the floating-rate loan but come at a cheaper rate.
“The pitch [to bond investors] was the scarcity value,” said Cody Gunsch, managing director, North America leveraged finance syndicate at Morgan Stanley. “They are issuing secured bonds [for the first time] because of what is going on in the loan market, but I am not going to have this supply for you in a year from now.”
Leads tested the waters with price talk of the 7.375% area but landed the bond tight to that level to yield 7.25%.
Not only did the US$2.175bn size make it the largest high-yield bond tranche in the financial services space since the global financial crisis, according to Morgan Stanley, but pricing came 250bp tight to the accompanying US$4.75bn loan, which was sold at SOFR plus 425bp for a current yield of 9.75%.
“That spread should have been 150bp; that is what the swap market was saying,” said Gunsch. “But we drove it 100bp tighter. H&F, the sponsor, was so excited with the outcome, the next day they sent us 100 cupcakes."
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