TRLPC: Banks’ technology exposure mounting amid heavy U.S. M&A

Reuters News
Posted: Nov 06, 2015 1:25 PM

By Jonathan Schwarzberg and Lynn Adler

NEW YORK (Reuters) - U.S. investors’ exposure limits for the technology sector are being tested after three loans totaling U.S.$13.8bn hit the market in recent weeks, with another massive deal looming to finance computer titan Dell’s US$67bn acquisition of EMC Corp.

The transactions include a US$7.5bn loan for chipmaker Avago Technologies and a US$3.6bn deal backing the buyout of data storage provider Veritas which are in the market, while a US$2.7bn loan for Dutch chipmaker NXP Semiconductors has recently closed.

The deals are expected to push technology loans to around 15% of loan indexes by year-end, from around 9% previously, a senior banker said. The concentration will be further boosted by Dell.

Dell is arranging a US$49.5bn financing package to back the biggest-ever technology acquisition, but has some time to work on the deal structure as the takeover is not expected to close before May 2016.

While the current surfeit of technology loans will test banks’ and investors’ sector appetite and exposure limits, lenders are expected to make room for larger, higher-quality more liquid deals that will make up a bigger percentage of indexes.

“Any time you have this much capital committed to any one sector it obviously raises concerns about whether investors feel they need more diversification,” said Craig Packer, managing director, finance group at Goldman Sachs.

Placement of the challenging late run of technology loans will, however, be helped by a general lack of new supply of deals from other sectors.

“It’s not like there’s so much else away from this to compete, but it’s going to be a bit of a logjam,” Packer said.


The US$13.8bn of technology loans launched in recent weeks join US$37.6bn of leveraged loans for the sector that were completed in the first three quarters, bringing the total for the year to date to US$51.4bn, according to Thomson Reuters LPC.

Technology loans made up 7% of the US leveraged loan market at the end of the third quarter. This share will rocket in the fourth quarter with the addition of NXP, Avago and Veritas loans, before Dell even taps the market.

NXP’s US$2.7bn term loan was first to market, and the positive reception to the deal bodes well for other technology loans.

The company managed to cut the spread on its loan to 300bp over Libor with a 0.75% floor, from 325bp, narrow the discount to 99.25 from 99 and pull the commitment deadline forward by one day to Nov 4.

Investors are reshuffling existing portfolios and are setting money aside for the upcoming tech loans while selling other loans to make room for the new deals.

“We do know that a lot of guys have cash that they are hoarding in anticipation of some of these deals. And they will sell out of names that are trading well to make room for this, other double-B names,” said Jeff Cohen, head of loan capital markets at Credit Suisse.

A higher share of technology in loan indexes will also increase demand for the deals as portfolio managers have to buy the loans to match index performance.

“A lot of the fee calculations for portfolio managers are based on performance versus the index, so if they don’t play in large deals ... they’re basically betting they do poorly, which is a tough bet to make,” Cohen said.


Avago’s US$7.5bn term loan, which backs its US$37bn acquisition of fellow chipmaker Broadcom, followed NXP to market and was launched ON Tuesday. Pricing is being guided at 325-350bp over Libor with a 0.75% floor and a discount of 99. Commitments on the deal are due Nov 12.

The company has already arranged a US$4.25bn Term Loan A and a US$500m revolver to support the acquisition. If Avago’s Term Loan B remains at the current size, the company will still need to raise US$3.75bn to finance the buyout, which could be done by increasing the senior debt, or issuing unsecured debt, depending on the market’s response to the loan.

Veritas’ US$2.45bn term loan, €760m (US$837.8m) term loan and a US$300m five-year revolving credit are also in the market with a commitment deadline of Nov 12. The deal backs the company’s buyout by private equity firm Carlyle Group and Singapore’s sovereign wealth fund GIC Special Investments.

Veritas may be more difficult to place, given investors’ preference for stronger credits in volatile markets. With a B2/B credit rating, Veritas is rated lower than Avago, which is rated Ba1/BB+ and NXP, which is rated Ba2/BB+.

Guidance on both the dollar and euro tranches is 450-475bp over Libor/Euribor with a 1% floor and a discount of 98-99.

The volume of technology loans has raised some concern that banks may not be able to underwrite new deals, particularly given recent market volatility.

Three bankers said that their institutions are still actively underwriting, albeit with better terms around flex language and pricing which allows them to boost returns to investors to avoid getting stuck with tightly-priced loans that they cannot sell.

“We’d rather write commitments right now for good credits than earlier this year when terms were so tight,” the senior banker said.  

(Editing By Tessa Walsh and Jon Methven)