By Tessa Walsh and Jonathan Schwarzberg
NEW YORK (LPC) - The $5.05 billion (3.81 billion pounds) term loan for Envision Healthcare is the third massive leveraged loan to hit the market since September and also looks set to benefit from huge institutional demand which has already seen multibillion buyout loans for Thomson Reuters’ F&R business, Refinitiv, and Akzo Nobel’s Specialty Chemicals business successfully placed.
Envision’s loan will bring the total of jumbo loans syndicated since early September to US$20.7bn, in addition to the US$9.25bn loan for Refinitiv and Akzo Nobel’s US$6.44bn loan. All three deals have accompanying high-yield bonds, which brings the total debt financing for the trio to US$28.3bn.
Although the commitment deadline for Envision’s loan is October 1, the deal is already fully subscribed and is expected to tighten in line with the two previous jumbo deals, bankers said. Positive momentum on Envision’s loan also bodes well for the company’s upcoming US$2.15bn senior notes issue, which brings the overall debt financing to US$7.2bn.
Envision was bought by KKR in June for US$5.57bn as the private equity firm builds its healthcare portfolio. It is one of the biggest US providers of physicians to hospitals and also owns AMSURG, an ambulance business.
The seven-year term loan was launched with price guidance of 400bp over Libor with a 0% Libor floor and a discount in the 99-99.5 range. The loan will have six months of soft call protection at 101.
Envision’s loan launched with lower price guidance of 400bp in light of the overwhelming response to Refinitiv and Akzo’s loans, which were both launched at 400-425bp. Pricing on Envision is expected to tighten, bankers said.
“The loan will probably print at 375bp over Libor,” said a banker, who said demand for Akzo and Envision was strong after many investors were not able to buy as much of Refinitiv as they would have liked.
Credit Suisse (SIX:CSGN) is leading Envision’s loan with joint arrangers Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), Barclays (LON:BARC), Goldman Sachs (NYSE:GS), Jefferies, UBS, Royal Bank of Canada, Societe Generale (PA:SOGN), HSBC, Mizuho, BMO, SunTrust, Credit Agricole (PA:CAGR) and KKR Capital Markets.
Envision was underwritten at 300bp over Libor with 125bp of flex language, which allowed banks to price the deal up to 425bp over Libor without cutting into their fees, the banker said.
TECHNICAL SUPPORT
As with Refinitiv and Akzo, investors seem willing to overlook Envision’s relatively high leverage levels and complicated credit issues in return for the opportunity to lend to large, liquid deals.
Envision is a market leader but the deal has high leverage of around 7.0 times total debt and 4.9 times through the first-lien, an investor said. Leverage was 4.5 times prior to the buyout.
S&P cut Envision’s corporate rating to B+ from BB- due to its calculations of higher leverage of 7.5-8.0 times post buyout, which is expected to drop to 6.5 times in 2019. It also gave the company a negative outlook due to operating in a competitive sector, the possibility of losing medical reimbursements and the prospect of further acquisitions.
Envision’s emergency room staffing business is tied to hospital volume and the company has been hit by lower patient admissions at hospitals, which resulted in disappointing third quarter results last year.
Moody’s gave the company a B2 corporate rating and put leverage at 7.2 times, which it expects to fall next year, barring debt-backed acquisitions or dividends.
In addition to high leverage, the buyide may have reservations about the sector and asset sales, said a banker close to the deal. The financing has been structured to give KKR flexibility to sell AMSURG, a higher margin business. Dividend payments also remain a concern, according to Covenant Review.
"It impacts what assets are left in the business and investors may question this,” the banker said.
The unsecured bond is expected to be US$2.15bn in size, and US$500m has already been pre-placed with one investor, another banker close to the deal said.
The bond is expected to offer higher yields than both the Akzo and Refinitiv US dollar unsecured bonds which offered yields of 8% and 8.25%, the first banker said.
One pricing comparable will be the 6.375% 2025 bond of healthcare staffing company TeamHealth, which helped finance its buyout by Blackstone (NYSE:BX) last year. That US$865m eight-year non-call three has since fallen in value to a cash price of around 87 to yield 9.1%, according to Thomson Reuters data.
Citigroup is leading the bond sale.
Despite reservations, investors say that Envision has a substantial equity cushion and the underlying business has been stable and growing modestly with good cash generation and limited capital expenditure as it is partnering with hospitals.
The company has also borrowed before and has an existing syndicate as a large part of the loan refinances an existing term loan B. Envision added another US$500m to its term loan in June 2017 after raising a US$3.495bn deal in November 2016 to finance its merger with AMSURG.