A group of banks led by Deutsche Bank AG sold a $550 million leveraged loan Thursday to support Bain Capital Private Equity’s acquisition of Brazilian restaurant chain Fogo de Chão, according to a person familiar with the matter, a sign that the public markets are making a comeback.
(Bloomberg) — A group of banks led by Deutsche Bank AG sold a $550 million leveraged loan Thursday to support Bain Capital Private Equity’s acquisition of Brazilian restaurant chain Fogo de Chão, according to a person familiar with the matter, a sign that the public markets are making a comeback.
Pricing on the seven-year loan offering tightened and concluded earlier than originally planned, underscoring how investors piled into the debt. The sale comes after the biggest buyers of leveraged loans — in the $1.3 trillion collateralized loan obligation market — have been starved for new loans for months, with banks barely bringing any debt forward. Some CLO managers are now opening new lines of credit to buy junk-rated corporate debt and repackaging it into securities of varying risk and size, betting on a market recovery.
“It really shows that the CLO market has been starved of new issue. The market is hungry,” said Jeff Boswell, head of alternative credit at Ninety One, in an interview. “CLO managers are willing to selectively buy some cuspier stuff, as there’s been so little to choose from.”
CLOs have been cautious around buying B3 rated debt — such as the Fogo de Chão loan, which carries that grade from Moody’s Investors Service — as they are already fully stuffed with it.
But given the absence of new issues, some CLO managers may be willing to lend for this type of buyout debt even though they’re closely monitoring their exposure to both B3 and CCC loans. Managers face guidelines that can constrain them from buying debt in the CCC tier, the lowest grade that commonly trades.
To be sure, this may not happen again if other similarly rated loans come to the market, according to Boswell. “If a whole wave of B3 debt comes, I doubt all of it will get done,” he said.
Read more: Refinancing is Harder in Loan Market, King Street’s Choi Says
The risky loan sale also marks a shift in the leveraged finance markets, showing how banks can still get deals done as opposed to direct lenders taking them on. That’s partly because banks have been selling hung debt they were saddled with last year into the high-yield rally. For instance, in August they unloaded $3.1 billion of junk bonds and leveraged loans for Apollo Global Management Inc.’s buyout of autoparts manufacturer Tenneco Inc., Bloomberg reported.
“It shows how private markets are going to have more competition for this type of paper from large companies, and pricing will eventually compress,” said Milwood Hobbs, head of sourcing and origination at Oaktree Capital Management, in an interview. “Banks have cleared out the majority of the hung debt and have more capacity to underwrite risk.”
The financing comes roughly a month after Bain agreed to buy Fogo de Chão, a restaurant chain founded in Southern Brazil in 1979 that specializes in churrasco, or roasting meats over an open flame. The chain has had several owners and a stint as a publicly traded company in its lifetime. Private equity firm Rhône Capital took the company private in 2018 through an all-cash transaction that valued the steakhouse at $560 million.
–With assistance from Michael Tobin.
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