Q: Vik, since the beginning of this year, Blackstone has executed multiple refinancings on companies owned by the funds that it manages for investors. Why now and why is this a good thing?
A: I will answer the second question first. Blackstone takes a very active role in counseling the companies owned in its funds on behalf of its investors. We are not passive investors. So this means that we apply our expertise in several ways to make companies stronger, and this includes debt structures. We are in the markets frequently, which gives us an excellent pulse on what is happening day to day. When there are opportunities to strengthen the companies’ balance sheets and to create more value, we want to seize those. And quickly! A reduction in the cost of borrowings or in total borrowings is a good thing for our investors and their returns.
As to why now, the markets have seen large, ongoing cash inflows into leveraged loan and high yield funds as investors struggle to earn acceptable risk adjusted returns in a very low interest rate environment. At the same time, there has been a relative dearth of new companies looking to access the loan and high yield markets. As a result, the cost of borrowing for good companies in our markets is favorable and even better than it was 6-12 months ago, even 3 months ago.
For investors in leveraged loans, there is some added benefit of a hedge against inflation since they are floating rate, meaning that they move with interest rates. Investors also have the benefit of buying loans that are secured by the assets of the borrower (vs. unsecured bonds). It should end up as a win-win for the buyer and seller.
Q: We hear that covenant-lite is back. What is that exactly and what is driving its return?
A: Simply stated, borrowers are benefiting from the supply/demand imbalance that I mentioned earlier. Covenant-lite means that there are fewer restrictive clauses in the loan agreement, so that the company has greater flexibility, if needed. Companies that are able to get covenant-lite financing, or loan agreements that do not contain the usual financial maintenance covenants demanded by lenders, typically are seasoned, with an investor base that understands the company’s story. “Cov-lite” borrowers are also generally larger with more liquid trading in their debt; so investors are generally more willing to forego traditional covenants given the “safety valve” afforded them by better secondary market liquidity.
Q: In what ways do these refinancings benefit borrowers?
A: Refinancing a company’s debt can create greater operating flexibility, can be accretive to the bottom line by reducing interest expense, and can also give a company a longer time to successfully execute its strategy.
Q: What are some of the best practices for negotiating a refinancing?
A: It is essential for borrowers to move quickly. At Blackstone, we make sure there is a group of banks that already know the company, understand the credit and have relationships with existing lenders. Having a direct and regular dialog between the borrower and large existing lenders, as well as a good understanding of the long-term goals of the company and what changes -- aside from lower interest expense -- will be beneficial for the investment are all critical to achieving the best refinancing for the company.
Q: What is the current state of the refinancing market and what might alter that?
A: Right now the refinancing market is very active, and we expect it could remain fairly robust. Exogenous shocks are always a threat to market stability, but absent that, our key concerns would be around inflationary pressures and/or a dramatic rise in treasury yields. At the moment, for example, we are monitoring the potential impacts of the situation in the Middle East and the spike in oil prices. We see less risk in leveraged loans than in high yield debt given their floating rate nature.
Q: Can you talk about some of the companies with the funds Blackstone manages that have refinanced debt recently? And what are the results?
A: So far in 2011, we have refinanced AlliedBarton, The Weather Channel and SeaWorld Parks & Entertainment. The results are lower interest expense, more flexible covenants and longer maturities. This is all good for the investors.
To give you a clearer sense, I will take you through the three. For AlliedBarton, we refinanced the bank loans and mezzanine debt. This created an annual interest savings of approximately $20 million by reducing the weighted average cost of debt to 6.0% from 9.5% and extending maturities from 2015 to 2018. In addition, substantially loosened financial covenants provide the AlliedBarton management team with greater operating flexibility.
In the case of The Weather Channel, we refinanced bank loans and mezzanine debt to reduce the weighted average cost of debt to 4.5% from 7% and extended maturities by two years. This new debt structure produced annual interest savings of approximately $40 million per year.
Finally, at SeaWorld Parks & Entertainment we refinanced bank loans, reducing the cost from 5.75% to 3.9%, extended the maturities by a year and at the same time, increased size of revolver and included a term loan ‘A’ due to strong demand from commercial banks.
Unlike passive investors, we get involved throughout our ownership in an effort to strengthen the companies and create lasting value.