Leveraged loan volume has been dominated by refinancing in 2013, but the notable pickup in issuance by food and beverage companies this year has been driven by another factor: buyouts.
A number of large companies have been acquired by private equity firms attracted by the sector’s steady growth and recession-resistant nature.
U.S. marketed food and beverage sector syndicated loan volume stood at a record high for the year-to-date through Aug. 26 at $55.5 billion via 84 deals in 2013, according to data provider Dealogic. That represented an increase of 17% from $47.3 billion during the same period of 2012.
The average deal size for food and beverage loans is also at a record level. It stood at $661 million for the year-to-date through 2013, up 22% from an average deal size of a $544 million average from the same point last year.
Of course, the largest U.S. food and beverage loan transaction on record helped to finance HJ Heinz Co.’s $28 billion buyout by Berkshire Hathaway and 3G Capital Management, which closed in June. The $13.6 billion loan portion was a four-tranche facility via JPMorgan Securities, Barclays, Citigroup and Wells Fargo Securities.
“The food and beverage sector lends itself naturally to leverage finance transactions,” said Richard Farley, a partner at the law firm Paul Hastings.
He added that if one looks at the revenue and earnings growth of the firms in the food and beverage space as a whole, they don’t grow more over time versus GDP, it has been pretty stable “The businesses in this segment have more stable cashflow and are quite recession-resistant. And if you’ve got a brand name and good market share, it’s most likely not an equity story, but it’s a very good story for issuing debt,” Farley said. “There are exceptions and outliers like the Starbucks of the world, but as a whole, it is not an industry of huge growth similar to the technology sector.”
Paul Hastings participated in the July Smithfield Foods transaction in which the company sold $900 million in a two-part bond offering to help it finance its $4.72 billion purchase by Chinese food supplier Shuanghui International. The deal was originally sized at $800 million.
The Smithfield, Va.-based pork processor issued $500 million in 5.25% senior notes due 2018 and $400 million in 5.875% senior notes due 2021. Morgan Stanley was the sole bookrunner on the offering. The 2018 notes have a two-year non-callable period and the 2021 notes have a three-year non-callable period.
The ﬁnancing also included a $750 million asset-based revolver that served as a backstop as the issuer looked into amending its existing asset-based revolver with a syndicate that was led by Rabobank, a $1.65 billion term loan, and an unsecured bridge loan of up to $1.5 billion.
Deal Activity Up
U.S. deal activity comprises 69% of total global food and beverage volume at $80.2 billion year to-date, increasing from 47% in 2012 year-to-date, and the biggest percent share since 1997 year-to-date at 79%.
Standard & Poor’s in an April 10 report said that it expects U.S. consumer food, beverage and durables firms, generally, to shift their use of cash from operations away from debt reduction. Instead, these firms are likely to focus on capital investment, acquisitions or shareholder-friendly initiatives.
Analysts added that some of these firms will use debt to finance these activities. These companies will also take the refinancing route, considering the continued low interest rates. The agency projected debt maturities in 2015 for the firms it rates in these sectors to total $20.8 billion. They think that the share repurchase transactions in 2013 will be close to 2012 levels, although companies could still scale back given a deteriorating economy.
There have been some notable deals during this year that illustrated S&P’s point.
Pinnacle Foods Finance, a wholly-owned subsidiary of Pinnacle Foods, has obtained a financing commitment for an incremental term loan worth $550 million from Bank of America Merrill Lynch to support its purchase of Wish-Bone’s salad-dressing business.
The parent company entered into an asset purchase agreement with Conopco, which is a New York-based company and a unit of Unilever.
Dole Food Co. is in the process of financing its buyout by its CEO David Murdock with an increased bid that valued the company at $1.6 billion, which includes debt, that was recently approved by the food distributor’s board of directors.
In early April, Dole also sought $775 million in loans. The debt comprised a $150 million five-year revolver, a $500 million seven-year senior secured term loan B, and a $125 million seven-year senior secured delayed draw term loan.
The Westlake Village, Calif.-based firm recapitalized its balance sheet by repaying its existing debt and replacing its previous bank facilities with the new debt, Moody’s Investors Service said on April 3.
“The overarching theme in terms of activity in the food and beverage sector within the speculative grade companies has been transaction-driven,” said Jean Stout, a director in corporate ratings in S&P’s consumer team.
An example of this is Atlanta-based bottled water and beverage provider DS Waters of America that came to market with deals in both the leveraged loan and bond markets in mid-August. The company was in the market with a $435 million credit facility led by Barclays and priced an offering of $350 million in 10% second-lien senior notes due 2021 to help finance its buyout by private financial sponsor Crestview Partners.
“Issuers in the segment took advantage of the favorable market before the expected interest rate hike given what the Fed is going to do with its bond program,” said Bea Chiem, director in corporate ratings in S&P’s consumer team in a phone interview.“These companies saw that window before the Federal Open Market Committee meeting to do their transactions in the food M&A and LBO debt markets before the window closed again.”
Stout added that food and beverage companies with onerous financial covenants also made a big push for refinancings. “Typically that speculative grade and sponsor-owned single-B rated firms tried to tap the debt markets to improve liquidity over the past few months, to obtain interest cost savings and to do away with restrictive covenants. That’s why covenant-lite deals have come back for companies with very high leverage liquidity concerns,” she said.