Advertisement
UK markets close in 5 hours 43 minutes
  • FTSE 100

    7,960.57
    +28.59 (+0.36%)
     
  • FTSE 250

    19,817.81
    +7.15 (+0.04%)
     
  • AIM

    742.51
    +0.40 (+0.05%)
     
  • GBP/EUR

    1.1691
    +0.0022 (+0.19%)
     
  • GBP/USD

    1.2617
    -0.0021 (-0.17%)
     
  • Bitcoin GBP

    55,937.92
    +419.34 (+0.76%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    82.13
    +0.78 (+0.96%)
     
  • GOLD FUTURES

    2,231.20
    +18.50 (+0.84%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,505.21
    +28.12 (+0.15%)
     
  • CAC 40

    8,251.74
    +46.93 (+0.57%)
     

All eyes on PetSmart's buyout financing, as regulators circle

By Natalie Harrison and Michelle Sierra

NEW YORK, Dec 4 (IFR/TRLPC) - Bankers are watching an auction for pet supply retailer PetSmart (NasdaqGS: PETM - news) like hawks after a heated meeting with regulators about the implementation of leveraged lending guidelines raised questions about whether the deal will be derailed by an absence of financing.

Regulators took a hard line at the meeting with bankers, which took place in New York just before the Thanksgiving holiday. They said that 10 out of 18 leveraged buyout loans they had sampled over the summer were considered "special mention", sources familiar with the matter said.

That means the loans would fall foul of guidelines spelled out in March 2013, which say that a loan can be criticised or considered special mention or "non-pass" if a company cannot amortise or repay all senior debt from free cashflow, or half of its total debt, in five to seven years.

ADVERTISEMENT

Leverage over six times is also seen as problematic.

"More than half the deals that were sampled were deemed non-pass, and yet there were no details given on what those deals were. It has caused total confusion," one of the sources said.

Although Petsmart was not one of those 18 deals, its sale now looks uncertain as banks may be nervous about providing the necessary financing.

The company's board first explored a sale in late summer after coming under mounting pressure from several shareholders led by activist investor Jana Partners.

Petsmart's stock price has increased by about 25% in the past two months - meaning would-be buyers might need to pay more, and are also likely to need to borrow more to meet the higher valuation.

"It will be interesting to see if PetSmart actually happens, and if it does what the capital structure will look like," the source said.

"Will the board still be willing to sell?"

PetSmart declined to comment.

RIPPLE EFFECTS

Bids for PetSmart are due on Friday, the sources said, although there are many moving parts. One put the debt size at around US$6bn.

A number of suitors are in the running, including private equity groups Apollo and BC Partners, while KKR and Clayton, Dubilier & Rice are considering a joint bid.

"The sponsors are evaluating. They are still looking for feedback [on what can get done]," said another source.

Banks close to the financing for Apollo's bid include Bank of America Merrill Lynch, Barclays (LSE: BARC.L - news) , Citigroup (NYSE: C - news) , Credit Suisse (NYSE: CS - news) , Morgan Stanley (Xetra: 885836 - news) and RBC (Other OTC: RBCI - news) . Other banks are also circling the deal.

"Everything is moment to moment. The sands are constantly shifting with some gearing up to do the deal, while others are fading," the first source said.

Another person with knowledge of the matter said that "some banks were struggling to get there".

Regulators have turned up the heat on over-aggressive lending in recent months. Credit Suisse received a warning in the summer for flouting the guidelines, and regulators subsequently stepped up their scrutiny of banks' loan books.

They are now auditing the loan books of Wall Street banks on a monthly basis in a major push to curb aggressive underwriting, and to give banks quicker feedback on whether their lending is acceptable.

The ripples from the clampdown are being felt across the market.

Private equity group Onex is backing its buyout of Swiss packaging company SIG Combibloc with a debt multiple of around 6.5x - around one turn less than that originally offered in the staple financing provided by Goldman Sachs (NYSE: GS-PB - news) .

"These days it's all about leverage and balancing what sponsors want versus what banks think the market will buy and what the regulators will allow," said the first source.

Asked whether the pre-Thanksgiving meeting would make lenders more careful about backing the SIG Combibloc financing, the first source said: "Well, they are going to be more careful about leverage." (Reporting by Natalie Harrison and Michelle Sierra; Editing by Tessa Walsh and Matthew Davies)