In an attempt to slash debt and avoid a downgrade in their credit ratings, some U.S. companies are opting for term loans.
According to Reuters, long-term debt from major mergers and acquisitions (M&A), as well as slow repayment of that debt, has led to a number of downgrades — with some companies reaching the lowest investment grade ratings or even meeting junk status. In fact, there were 19 fallen angels in 2018 — an increase from 12 during the previous year.
“You’ve got asset-hungry banks that are willing to put term debt out there, and that has not wavered one iota, even with the capital markets’ volatility in the fourth quarter” of last year, said Steve Woods, EVP and head of corporate banking for Citizens Bank. “The pro rata market has been very strong, and I expect continued strong M&A activity as we get into 2019.”
Just this month, Fiserv agreed to a $5 billion term loan. In addition to $12 billion in notes, this “will replace a temporary bridge loan” needed for its $22 billion acquisition of First Data. The move, according to the companies, “should allow rapid debt reduction over 24 months,” and let Fiserv keep its investment-grade ratings of Baa2, which is one step above the lowest rankings.
“Fiserv publicly disclosed that they have in the range of [$3.5 billion USD] in free cash flow projected, and plan to use that to prepay that term loan debt,” said Woods. “We have seen a lot of that, and I think we will continue to see a lot of very healthy companies take their excess cash flow and repay or prepay their debt at banks.”
In addition, Keurig Dr Pepper is signing up for a $2 billion term loan to refinance a larger term loan due to the merger between Dr Pepper Snapple Group and Keurig Green Mountain. Also, American Tower Corporation has a new $1.3 billion term loan that will replace a $1.5 billion loan taken out last March.
“Most of the deals have been oversubscribed, and for high-grade loans, the demand has been there, with deals clearing well,” according to a senior banker.